Contracts Don’t Signify a Lack of Trust
Updated: Feb 11
This is the first in a series of articles on contract management.
It explains how commonly held negative views of contracts can prevent them from serving their intended beneficial purpose.
The patron saint of contracts is Rodney Dangerfield. Or at least he should be, because, like Rodney, contracts "don't get no respect." Indeed, many business people view contracts as at best a necessary evil and at worst an unnecessary evil - something they would prefer to do without. This attitude is understandable, but unfortunate, because an effective contract management system can be the key to profitability for your business.
Here are some of the negative attitudes business people have about contracts:
“Contracts are only to protect you from people you don't trust.”
“We don't want to destroy our good relationship by getting into nasty contract negotiations.”
“We don't need a separate contract since the basic terms of the deal were spelled out in our proposal.”
“We can't afford the time or expense of having a lawyer write a contract on every deal.” (We will deal with this issue in a later article describing contract management systems.)
“What good is a contract full of legalese that no one reads or understands and that has little or nothing to do with the business deal anyway?”
Why do so many business people feel this way? One of the main reasons is their misconception of the proper role of contracts in the business world. Contracts are often viewed only as a means of preventing the other party from taking unfair advantage or refusing to honor its commitments. If the other party is trusted, however, a contract is thought to be unnecessary. Contracts are thus seen as a substitute for trust, rather than as a means of reinforcing the trust that is necessary for a successful working relationship.
Another major reason business people dislike contracts is that bad prior experiences with them reinforce their misconceptions. People who assume that contract negotiations are necessarily adversarial are understandably concerned about destroying their initial good working relationship. Because aggressive, self-serving bargaining tactics undermine goodwill and breed mistrust, they forego contract negotiations, hoping that they will be able to resolve any problems or misunderstandings that might arise during the course of the transaction or business relationship. This of course leaves them wide open to all sorts of problems. They fail to realize that the contract is an essential tool for preventing misunderstandings, by clarifying the terms of the transaction, and for reinforcing the trust that is required for a successful business relationship.
A third reason many business people avoid contracts whenever possible is the time and cost assumed to be required to produce them. In-house production of contracts is often found to be difficult and time-consuming, while the use of outside counsel to prepare a contract for every transaction is thought to be too expensive and slow. If the other party has already accepted a proposal that contains the basic elements of the transaction, a separate contract is therefore often seen as an unnecessary duplication of effort. This view is simply wrong. An effective contract management system can make it relatively painless to prepare standardized, yet customized, contracts for each transaction. To use a document as both proposal and contract, furthermore, often creates the worst of both worlds. The proposal becomes an ineffective selling tool when it is loaded up with off-putting legal provisions and using the proposal as the contract leaves it dangerously vague on important issues.
A final reason for the low regard in which contracts are held is that they often do not produce the desired result. They frequently fail to prevent misunderstandings, cost overruns, schedule delays, inadequate performance, and payment problems. This is because they lack clear provisions dealing with these potential issues.
In view of the factors described above, it is no wonder that contracts are underappreciated. It needn't be this way. Well written contracts can greatly minimize the above problems.Your contracts can and should be the means by which your company effectively communicates with your clients and customers. By integrating your contracts with your business operations and administrative procedures, as part of an overall contract management system, they can make your sales force more effective, your operations more efficient, and your company more profitable. Future articles in this series will attempt to explain how this can be accomplished.