Relational contract

A relational contract is a contract whose effect is based upon a relationship of trust between the parties to which it pertains. The explicit terms of the contract are just an outline as there are implicit terms and understandings which determine the behaviour of the parties.

Relational contract theory was originally developed in the United States by the legal scholars Ian Roderick Macneil and Stewart Macaulay. According to Macneil it offered a response to the so-called “Death of Contract” school’s nihilistic argument that contract was not a fit subject for study as a whole; each different type of contract (e.g., sales, employment, negotiable instruments) could be studied individually, but not “contracts-in-gross”.[1][2]

Macneil explains that this is only one of a number of possible relational theories of contracts, and accordingly renamed his own version “essential contract theory”.[3]

Relational contract theory is characterized by a view of contracts as relations rather than as discrete transactions (which, Macneil argued,[4] traditional “classical” or "neo-classical contract" theory treats contracts as being). Thus, even a simple transaction can properly be understood as involving a wider social and economic context. For instance, if A purchases a packet of cigarettes from a shop he has never been into before and will never enter again, that seems quite discrete. However, A will almost certainly have a loyalty to a particular brand of cigarettes and expectations about quality about which he would be prepared to complain to the manufacturer, although he has no contractual privity with the manufacturer. There is also an understanding that A will pay for the cigarettes, not simply run off with them, and that if he tenders a £10 note in exchange for the cigarettes which are priced at £6, the paper money will be acceptable and change of £4 will be given. None of this is explicitly stated between the parties, whose conversation is likely limited to “20 Marlboro, please” on A’s part and “That’ll be £6, please” on the part of the retailer. Thus, even the simplest transaction has a good deal that is unstated and dependent on a wider web of social and economic relations. How far outwards into that web one needs to investigate will depend on the transaction and on the purpose for which it is being examined.[5]

Although earlier writing[6] may be taken in places to suggest that the substantive rules of contract law need to be reframed to acknowledge the relational, non-discrete nature of contracts, this has not been subsequently pursued and current scholars have argued that it is neither possible nor necessary to reform the law of contract itself to work effectively with relationally-constituted contracts.[7]

Other characteristics of relational contract theory are that “contract” is understood to cover economic exchange in general, not just contracts that would be recognized as legally enforceable agreements by courts in any given jurisdiction, that relations are mostly held together by their own internal values and wider social/economic factors, and, at least in relational theory in the Macneil mould, that exchange relations are governed by a number of norms. This last is not to say that relational contract theory is normative in nature, setting out what ought to be the case properly, but rather that there are actual observable normal characteristics or factors at play in relations. Macneil’s essential contract theory offers some 14 norms.[8]

The English contracts scholar Richard Austen-Baker has more recently proposed an alternative version of relational contract theory, called “comprehensive contract theory”, which posits four “comprehensive contract norms” in place of Macneil’s 14, though Austen-Baker does not deny the validity of Macneil’s norms as a complex tool of analysis.[9] The Japanese scholar Takashi Uchida has proposed a version of relational contract theory inspired by Macneil, relating it to the Japanese situation.[10] Other notable contributions to relational contract theory have been made by Stewart Macaulay (U.S.), Lisa Bernstein (U.S.), David Campbell (England) and John Wightman (England).

Recent research from the International Association for Contract and Commercial Management, the University of Tennessee and Lindahl law firm takes the relational contracting theories expressed by Macneil, Macaulay and others and makes them relevant for contracting practitioners trying to craft strategic, collaborative relationships with their procurement and outsourced business partners.[11] The white paper, [12] outlines basic tenets that are foundational to relational contracting, including: communication, risk allocation, problem solving, no-blame culture, joint working, gain and pain sharing, mutual objectives, performance measurement and continuous improvement. The Unpacking Relational Contracting white paper also describes a five-step process for developing a relational contract:

1. Focus on the relationship, not the deal. This step is designed to help build the trust necessary to focus on the relationship. It includes ensuring alignment within the organization and using a process for choosing a partner that considers relational competencies in addition to service offerings, quality levels, etc.
2. Establish a Partnership instead of Arms-Length Relationship. This step is designed to explore and lay the foundation of trust, transparency and compatibility between the parties.
3. Embed Social Norms in the Relationship. This step is designed helps the parties jointly discover and formally agree to six guiding principles: reciprocity, autonomy, honesty, loyalty, equity, integrity.
4. Avoid and Mitigate Risks by Alignment of Interests. This step lays the foundation for continuously aligning interests, beginning agreement on a shared vision and strategic objectives for the partnership, specifying what joint success and value looks like.
5. Create a Fair and Flexible Framework. Establish a governance framework for continuous relationship management. The parties agree upon the contract clauses that are necessary to establish the more specific rules of the relationship, all of them aligned with the guiding principles.