Contracts: Tools of collaboration or weapons of enforcement

Posted on May 1, 2020

0


In a Twitter conversation regarding the benefits of contracts and what a force majeure clause means from a practical standpoint during a pandemic, I offered the following opinion:

“Contracts are important if they help the parties to navigate towards a solution. Otherwise, it is like being on the Titanic and arguing about what to have for dinner after hitting the iceberg. No one wins!”

My thinking is that depending on the mindset of a procurement organization, a contract can either be a tool to promote greater collaboration or become a weapon of enforcement.

During “normal” times, there is the tendency to look at contracts through the lens of ensuring or legislating performance to deliver an expected outcome while mitigating the risks should one party – usually, the supplier fail to deliver on their part of the deal.

There is considerable (conceptual and philosophical) debate on the role of contracts within either a transactional or relational framework. However, the coronavirus pandemic has made the issue real on a global scale.

The 90% economy that lockdowns will leave behind

Never before as the saying that a chain is only as strong as its weakest link been more accurate than it is today.

Even though everyone in procurement talks about the end-to-end visibility afforded us through the advent of digital supply chains, one wonders if all of us really see the big picture. If you haven’t already, read The Economist¬†article The 90% economy that lockdowns will leave behind. You will likely gain a broader perspective on what end-to-end means because it will remind you how pervasive procurement is in all facets of our every day lives.

If what The Economist is saying is true, then our supply chains are going to be altered significantly even beyond the pandemic. In this regard, what does it do to our existing contracts? In other words, the contracts may say we are right, but the reality of a new world like hitting an iceberg will mean something entirely different.

It is from this standpoint that our view of contracts and their impact on supplier relations will likely have to change. In short, they have to become less of a weapon of enforcement and more of a tool of collaboration for not only rebuilding our supply networks but managing them more effectively. In doing so, we will find not only higher returns but greater resiliency when the next crisis – and it will hits.

What are your thoughts? Share them in the comment section below

30

Posted in: Commentary