How to Prevent Your Contracts From Undermining Trust

The conventional wisdom is that contracts should be as firm as possible. Clear, comprehensive language and terms generally make contracts better for all parties.

But Deepak Malhotra, professor at the Harvard Business School, raises the idea that contract language can sometimes be too precise.

“Overly detailed contracts that codify every potential interaction can undermine trust by preventing spontaneous displays of good intention,” Malhotra concludes in his article, When Contracts Destroy Trust, published in the Harvard Business Review.

Little Opportunity to Provide “Free” Value

Contracts that are too specific can limit the building of good will. For example, if every action a service provider could possibly take is dictated and priced by contract, then there’s no chance to offer additional “no charge” services that will make the client feel appreciated.

If the service provider’s contract is too firm concerning services provided and resulting charges, clients may feel like they’re eating at a restaurant and being charged for napkins. Sometimes, it’s beneficial in a client relationship for a company to be able to provide a service without sending a bill for it.

This is not to suggest that the company should provide free services. Rather, it should anticipate a client’s needs, and then in the contract budget for that client, plan to provide some of the necessary services without line-item charging for them.

Limited Flexibility

Another problematic aspect of too-detailed contracts, which Malhotra points out, is that they don’t allow for easy adjustment if conditions change.

If a contract is being structured without all the information necessary to “firm up” some details, then those details should be settled later rather than rushed into. Of course, an effective contract protects all parties in any contingency, but it’s a mistake to formalize details that can be safely put off until more information is available.

Demonstration of Lack of Trust

Contracts are often made with important business partners, and while all necessary protections should obviously be included, there’s a point when being too specific about contract issues can appear to indicate a lack of trust in the other party, and that can damage the business relationship.

As an example, Malhotra cites Joe Torre and the New York Yankees. As the Yankee’s manager, Torre led the team to the playoffs each year and won four World Series in 12 years. So when his contract was up and the Yankees offered him a one-year contract for a low base pay but with huge incentives if he made the playoffs and the World Series, Torre scoffed. He saw this offer as a lack of confidence in his ability and left for the Los Angeles Dodgers for less than the Yankees had offered as base pay.

A Careful Balance

Clearly, contracts must be sufficiently detailed and precise enough to protect the interest of all parties. Ambiguous language is never wise, and necessary terms should always be included. But yet there seems to be a need for some maneuverability.

Contract management software can help in this balancing act between firmness and flexibility. Without the cost and time required for paper-based contract management, companies can analyze past performance and monitor ongoing performance to determine how to best negotiate contracts that benefit them, while also benefiting their contracting partner and demonstrating good will.

Takeaway

An automated enterprise contract management system can provide the continuous data that enables a company to determine in which areas it can relax contract terms and when it’s advantageous to do so. With this information, a company can loosen up its contracts just enough to keep its partners happy and allow for adjustments, without putting itself at risk.