Monday, May 9, 2022

Pandemic Fallout: Legal Questions About Relational Contracts

In a recent article, I offer a description and critique of the utility of "formal relational contracts" when the going gets rough for businesses.  That article, The Potential Legal Value of Relational Contracts in a Time of Crisis or Uncertainty, 85 Law & Contemporary Probs. 131 (2022), was published as part of a symposium volume focusing on "Contract in Crisis" (co-edited by Temple Law's Jonathan C. Lipson & Rachel Rebouché).  The table of contents for the entire volume can be found here.  The abstract for my article follows.

A co-authored October 2020 Harvard Business Review (“HBR”) article promotes the use of “formal relational contracts” as a means of obviating or limiting opportunistic behaviors by contracting parties, including parties contending with cataclysmic events or factors in or outside the business that place significant financial stress on the business and its relations with others. The HBR co-authors note that the uncertainties exposed by and emanating from the ongoing COVID-19 pandemic are formative to their proposition. They specifically focus their attention on supply contracts, although their ideas may have broader application. This article preliminarily inspects the claims made in that HBR article from the standpoint of U.S. legal doctrine and lawyering and suggests avenues for future research, with the limited goal of offering legal commentary on a broad-based contract design idea that responds to the need for business operations flexibility in a pandemic or in other times of systemic or individualized crisis.

Many of us in business law watched as the pandemic raised significant questions about supply agreements, distribution agreements, merger/acquisition agreements, insurance contracts, and more.  I found it interesting to inquire, investigate, and contemplate whether any type of contract design fares more or less well in circumstances of crisis impacting businesses.  Over a period of months, in sessions with many of the authors of work in this symposium book, I had the opportunity to do that and to write up some of my thoughts.  As many readers may realize, I do not publish pure contract pieces often.  But I was inspired and encouraged to research and write this one.

Contracts, Joan Heminway | Permalink


"Relational contract" has always struck me as an oxymoron.

Posted by: Jeff Lipshaw | May 10, 2022 11:14:01 AM

You are not alone in that, Jeff. I actually have come to find the labeling useful, even if no contract is wholly relational. But the term certainly does present definitional challenges.

Posted by: joanheminway | May 10, 2022 11:28:56 AM

Joan, that is fair. I guess it would be shorthand for "a business relationship conducted over time, primarily governed by non-legal social and business norms, but documented in a contract to which the parties may resort for purposes of setting negotiating positions or which rarely serves as the basis for litigation." But that is unwieldy.

It's similar to the oxymoron of "void contract", given that the R2K defines a contract as a promise or set of promises for the breach of which the law gives a remedy. Thus, if it's void, it can't be a contract. I tell students it's shorthand for the following expression: "an agreement taking the form of an otherwise enforceable contract, but dealing with a subject matter that makes it legally unenforceable by either party."

Posted by: Jeff Lipshaw | May 14, 2022 7:34:21 AM

Sorry for the late posting of your comment and this reply. Somehow, your comment got caught up in my travel last weekend and was neither posted nor addressed. Mea culpa.

To some extent you have it right. What you describe, if I understand your definition properly, is a more pure form of relational contract than may exist in my conception. I have come to think of a relational contract as a legally valid and binding agreement for a particular purpose that unambiguously sets forth the core objective (and related essential terms) of the exchange between/among the parties while addressing many of the attendant foreseeable and unforeseeable aspects of the relationship through behavioral standards, generalized processes, and dispute resolution mechanisms. Does that conception resonate with you in any way?

Posted by: joanheminway | May 22, 2022 9:13:51 PM

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