Relational contracting – What is it?

Relational contracting has grown in popularity since the 1960’s, particularly in the government sector.

A ‘relational contract’ is, as its name suggests, a contract that governs a relationship between two or more parties. While sounding like any other contract, relational contracts contain a number of express requirements that are intended to assist the parties to have an enduring and productive relationship over a long-term period. These contracts encourage the parties to focus on their relationship, rather than only the transaction between them.

For example, some regional councils enter into relational contracts with public transport companies for the provision of long-term public transport in their region.

To conceptualise relational contracts further, they sit at the opposite end of the contracting spectrum to ‘transactional contracts’. Transactional contracts focus on ‘one-off’ exchanges between the parties, for example agreements for sale and purchase of property.

What are the benefits of relational contracting?

If the circumstances are right, relational contracts can provide significant and long-term benefits to both parties. Under a good relational contract, the parties will have clear roles and will be able to focus on what they do best, while being able to draw on the knowledge and expertise of the other. This should result in the parties being able to operate more efficiently.

To achieve this, good relational contracts include a number of key characteristics, including:

• Being more flexible and allowing for some initial “trial and error”;

• Requiring the parties to commit to common goals/outcomes;

• Requiring the parties to collaborate closely and maintain open communications (including sharing sensitive information);

• Encouraging the parties to rely on the each other’s expertise; and

• Requiring the parties to share in the risks and rewards generated under the contract.

When should relational contracts be used?

Relational contracts work best for organisations that rely on key suppliers or business partners for the critical and on-going functions of their operation.

They also work well for organisations wanting to achieve long-term goals in industries that are complex and subject to frequent change, for example, long-term public transport services or infrastructure maintenance services.  This is because relational contracts prioritise the continuation of the parties relationship rather than enabling a party to terminate the agreement at the first sign of trouble.

Conclusion

Relational contracts can provide significant long-term benefits for both parties if the conditions are right.

If you are presented with a relational contract (or are interested in using a relational contract), it pays to get good legal advice early on to ensure that it will operate as intended.

For more information on when relational contracts fail (and what you can do to reduce the chance of this happening) see our related article: ‘When relational contracting goes wrong’.




Claire Tyler