How can we create a better contract?

Contracts are used to control conduct, usually with incentives and penalties to ensure the desired outcome.

Penalties and incentives place the focus on the desired outcomes, rather than what might make the best practical sense to serve the best interests and circumstances of those involved.

For example, contracts that provide incentives for volume or higher prices, rather than quality or value, may lead to unintended deceitful behavior that causes harm.

Focusing on the penalty is often the advised option for contract enforcement, rather than seeking an alternative solution that could be better for all parties involved. Corrective action is often necessary under a contract; and penalties and rules may hinder parties from making adjustments to work through unexpected challenges.

Instead of penalties and incentives that incentivize bad behavior, it would make a heck of a lot more sense for parties to establish a system for managing the unknowns that might arise during the relationship. To create a truly constructive common-sense agreement, parties could, as a first step, identify their values, prioritize interests, and needs. Of course, rules with limitations may be necessary, but the declared needs and motivations will allow for a more constructive path to decision-making when rules don’t make practical sense.

So with your next negotiation, instead of focusing only on the transactional aspects of an agreement, consider providing space for a discussion on core values, needs, and vision.  Such an investment is likely to provide a more secure and valuable relationship.