A trucking company entered into negotiations with an organisation to provide long-term services. The organisation provided the trucking company with a ‘relational contract’ to record the negotiated arrangements (for more information on what a ‘relational contract’ is, see our related article: “Relational contracting – What is it”).

Shortly after signing the contract, the organisation began to exercise its right to closely monitor and audit the trucking company and its performance. Following the audits, the organisation began issuing numerous notices requiring ‘improved’ performance.

The trucking company not only considered the notices unwarranted, but it struggled to find the time and resources to comply with the dispute procedures required to be followed under the contract.

This began a downward spiral in the relationship. The organisation became increasingly distrustful and critical of the company, and the company became increasingly bogged-down with the requirements of the contract.

However, because the services were intended to be delivered over a long-term period, the contract made it difficult to simply exit, even though the relationship had effectively broken down.

While the parties were right to use a relational contract, the trucking company was not fully aware of its obligations under the contract which meant that its performance was compromised and the parties lost trust in each other.

How can you improve your chances of a relational contract working for you?

When the parties fundamentally lose trust in each other, it can be difficult to bring the relationship back on track. Accordingly, the best ‘remedy’ is often prevention.

A significant cause of dispute and distrust between relational contracting parties is misunderstanding the contract. A party that has failed to fully understand the risks and obligations under the contract can inadvertently cause significant, and unnecessary, dispute and tension between the parties. For this reason, good legal advice and due diligence at the negotiation stage of a relational contract can be crucial.

As in the example above, parties with significant bargaining power will often instinctively push as much risk as possible away from themselves, and closely monitor and exert control over the other party. This rarely builds a trusting relationship. For a relational contract to work effectively, a change in mentality is required – parties are required to relinquish some of their control, rely on the other party to an extent, and share the risks and rewards.

Furthermore, acting courteously and in good faith (which is often a contractual requirement) when dealing with the other party can go a long way.

Conclusion

Relational contracts can provide significant long-term benefits for both parties, provided that the parties are able to develop and maintain a trusting relationship. However, in the event that the relationships deteriorates, it can be difficult to get the relationship back on track. Accordingly, it pays to get good legal advice early on, before entering into relational contract, to increase chances of the relational contract operating as intended.

Kirsten Ferguson
Commercial Lawyer
Wellington