An article in the Harvard Business Review discusses some of the benefits of formal ‘relational contracts’ in place of the traditional more adversarial approach to contracts, which seek to cover every possible scenario on paper with contractual rights, freedoms and remedies that are often totally impractical and unlikely to ever be invoked.
Relational contracts are based on relationships of trust and can have a significant impact on how a contract is interpreted as well as implying duties of good faith and integrity. Relational contracts can support parties to focus on shared risk and shared goals working in a collaborative manner throughout the contractual and commercial relationship. By aligning the parties interests it can help businesses adapt to changes throughout the life of the contract and exploit new opportunities together.
With the recent ruling in Bates v Post Office formally recognising relational contracts and forcing parties to consider them at the outset, I anticipate a continued increase in the use of relational contracts, especially with highly complex and long term relationships where commercial arrangements can change, unforeseen circumstances arise and relationships based on trust and mutual objectives become integral to a successful long term arrangement.
Written contracts that are legally enforceable (which is why we call them formal), they include many components of a traditional contract but also contain relationship-building elements such as a shared vision, guiding principles, and robust governance structures to keep the parties’ expectations and interests aligned.