Executive Briefings

3PLs Take Note: Relational Contracting Is on the Rise

Analyst Insight: Anyone doing business in today's economy knows that "business happens." The dynamic pace of business means the contract you sign today may not be the right contract for tomorrow. This is why academics, lawyers, and judges are starting to argue for more relational contracts where good ethics are embedded into the overall intent and framework of a commercial contract. When that happens, relational contracting could become a welcome "new normal." - Kate Vitasek, faculty member of the University of Tennessee's College of Business Administration, and principal author of six books on the Vested business model and methodology.

3PLs Take Note: Relational Contracting Is on the Rise

Chances are you've been involved in a tough negotiation at one point or another in your career. Everyone is usually glad to get the deal "done." But when things change and the situation no longer favors one of the parties, it is easy to forget about ethics, honesty and integrity.

Recent court cases have underscored the importance of ethics and honesty in buyer-supplier contracts and commercial management practices through more flexible “relational contracts” that emphasize embedded ethics and integrity into contracting practices.

In fact, landmark court cases are giving companies (and governments) pause to think about where these principles fit into their own contracting practices. Close to home is the Supreme Court of Canada ruling (in Bhasin v Hrynew 2014 SCC 71) in which the court declared that it is “appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.”

But what can be done to embed integrity in the contracting process?

Attorney David Frydlinger, an authority on relational contracting practices with the Lindahl Law Firm in Stockholm, says the problem is that “business is dynamic and we get tempted with opportunistic behavior, and that is when integrity lapses.” He continues: “In relational contracts the contracting process and the contract itself embeds ethical social norms in the commercial relationship. This is why it is essential that businesses that enter into longer term strategic relationships begin to adopt relational contracting practices such as those embedded into the Vested Outsourcing methodology.”

But are “relational contracts” needed for supply chain deals? According to Justice Leggatt from the High Court of the United Kingdom, the answer is a clear “yes.” In a 2013 ruling (Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), Justice Leggatt referred to a distribution relationship between the parties as a “relational contract.” He ruled that relational contracts “require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which…are implicit in the parties' understanding and necessary to give business efficacy to the arrangements.”

Tim Cummins, CEO of the International Association of Contract and Commercial Management thinks the time has come to put theory into practice. In fact, he thinks it about time that the law “is catching up with commercial reality.”

The Outlook

The integration of relational contracting terms into 3PL commercial contracts is a reality whose time has come, spurred by growing interest in the legal profession and by courts in relational agreements. I look forward to the day when relational contracts for strategic 3PL deals is the “new normal.”

Chances are you've been involved in a tough negotiation at one point or another in your career. Everyone is usually glad to get the deal "done." But when things change and the situation no longer favors one of the parties, it is easy to forget about ethics, honesty and integrity.

Recent court cases have underscored the importance of ethics and honesty in buyer-supplier contracts and commercial management practices through more flexible “relational contracts” that emphasize embedded ethics and integrity into contracting practices.

In fact, landmark court cases are giving companies (and governments) pause to think about where these principles fit into their own contracting practices. Close to home is the Supreme Court of Canada ruling (in Bhasin v Hrynew 2014 SCC 71) in which the court declared that it is “appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.”

But what can be done to embed integrity in the contracting process?

Attorney David Frydlinger, an authority on relational contracting practices with the Lindahl Law Firm in Stockholm, says the problem is that “business is dynamic and we get tempted with opportunistic behavior, and that is when integrity lapses.” He continues: “In relational contracts the contracting process and the contract itself embeds ethical social norms in the commercial relationship. This is why it is essential that businesses that enter into longer term strategic relationships begin to adopt relational contracting practices such as those embedded into the Vested Outsourcing methodology.”

But are “relational contracts” needed for supply chain deals? According to Justice Leggatt from the High Court of the United Kingdom, the answer is a clear “yes.” In a 2013 ruling (Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB), Justice Leggatt referred to a distribution relationship between the parties as a “relational contract.” He ruled that relational contracts “require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which…are implicit in the parties' understanding and necessary to give business efficacy to the arrangements.”

Tim Cummins, CEO of the International Association of Contract and Commercial Management thinks the time has come to put theory into practice. In fact, he thinks it about time that the law “is catching up with commercial reality.”

The Outlook

The integration of relational contracting terms into 3PL commercial contracts is a reality whose time has come, spurred by growing interest in the legal profession and by courts in relational agreements. I look forward to the day when relational contracts for strategic 3PL deals is the “new normal.”

3PLs Take Note: Relational Contracting Is on the Rise