The problem of establishing trust in business relationships
Lawyers and business people talk about the need for parties to contracts to trust one another . It’s been said that trust appears to be generally eroding these days .
But there’s a problem: How to get parties to trust each other when they have little or no history together. After all, you can’t contract for trust, as Jeff Gordon, author of the Licensing Law Handbook, correctly notes.
Still, a contract can require the parties to take actions. And a joint commitment to take the right actions can help to build trust.
Trust can be nurtured by managing disputes professionally
Disputes happen. One crucial pillar of trust in a business relationship is a feeling that when they do, they’ll be managed professionally.
When you trust someone, you have a sense that, when a dispute does happen, the other side will be at least somewhat interested in preserving the relationship, and that they’ll make at least some effort to work with you in search of a win-win outcome.
In contrast, it’s hard to trust someone if you wonder whether, when a dispute happens, they’ll blow off your concerns with a curt “tough [beans]; if you don’t like it, sue us.” (And of course, the other side is wondering the same thing about you . . . .)
A one-page addendum to help disputing parties talk to each other
I’ve been putting together a set of dispute-preprocessing provisions with a view to promoting mutual trust in business relationships. You can download the one-page PDF addendum, and/or you can review each individual clause and its commentary by clicking the appropriate links below. (As always, don’t rely on the addendum as a substitute for legal advice from a licensed attorney; see the Cautions page for further warnings.)
In essence, the addendum’s provisions mostly just call for the parties to talk to each other — not aimlessly, but in specific, structured ways that can help to nip disputes in the bud, and/or to resolve disputes that have already arisen.
Simple status-review conferences upon request: To help identify and head off potential future disputes, the addendum commits the parties to holding status-review conferences, upon request and/or on an agreed schedule.
The standard agenda ‘framework’ for such conferences is to discuss —
- plans, and
— basically, “here’s where we are, here’s where we seem to be headed, and and here’s where we want to be headed” — with draft minutes optionally being circulated afterwards.
Escalation of disputes upon request: To try to keep disputes that do arise from getting out of hand, the addendum calls for escalation of disputes to more-senior management upon request.
(Escalation guards against the problem of the stubborn manager on the other side who refuses to budge but also refuses to get his boss to talk to your boss — with the addendum, that’s a contractual requirement.)
Early neutral evaluation upon request: To provide a sanity check if the parties can’t seem to resolve a dispute on their own, either party can ask for a non-binding, confidential, early neutral evaluation by a knowledgeable, disinterested outsider.
ENE is a standard case-management tool in some courts; there’s no reason not to invoke it even before a lawsuit starts, in the hope of avoiding litigation altogether.
Financial incentive to accept reasonable settlement offers: When disputes get too contentious, parties can get locked into their ‘principled’ positions by egos, internal politics, etc. That can make it hard for them to negotiate a settlement.
The addendum contains provisions to encourage each party to make reasonable settlement offers — and to think hard before rejecting a reasonable offer from the other side.
Under the addendum’s expense-shifting provisions, if a party rejects a properly-noticed settlement offer, but then fails to do better than the offer at trial or in arbitration, then that party must pay the other side’s post-offer attorneys’ fees and expenses.
The reasoning, of course, is that the other side wouldn’t have had to incur those expenses if the non-settling party had accepted the settlement offer instead of forcing a trial and doing no better than the settlement.
(These expense-shifting provisions are adapted from Rule 68 of the Federal Rules of Civil Procedure, but with more teeth, along the lines of a similar New Jersey court rule.)
What these provisions do not do
Importantly, these dispute-processing provisions do not:
- force any party to give up substantive rights or remedies in advance
- require the parties to shoulder any additional day-to-day burdens in their operations or contract administration
- commit the parties to alternative dispute resolution (ADR) systems that they might later regret having agreed to
No guarantees — but nothing to lose, either
There’s certainly no guarantee that these dispute-processing provisions will actually promote trust between any two contracting parties. No matter what a contract says, a party can always damage trust through thoughtless, greedy, or malicious behavior.
Still, it’s hard to think how there could be anything to lose by including this addendum in a contract. Neither party is obligated to actually do anything except to talk to the other side, and to be sensible when evaluating a properly-noticed settlement offer.
Just offering to commit to professional behavior can help to build trust
When a party proactively offers to commit to actions that appeal to the other side, it implicitly signals its (putative) trustworthiness. That can help get the trust ball rolling.
(UPDATED 8/25/09: Jeff Gordon has further thoughts along these lines.)
 While Dinesh Goel might be overstating the case a bit, certainly there’s food for thought in his claim that “the single most important ingredient in a successful arrangement is the level of trust both parties are able to create in their relationship. While a well written, flexible and balanced contract is also vital to the success of the contract, it is certainly not sufficient.”
In a related vein,venture-capitalist blogger Fred Wilson notes that his VC firm is able to quickly and inexpensively complete a first-round financing it’s currently doing because it trusts the portfolio company’s law firm and the law firm’s first-round contract forms.
 Tim Cummins, CEO of the IACCM, has got to be right in arguing that in the era of globalization, customers’ incessant pressure for low prices and one-sided contract terms (with their lawyers as enablers in the latter case) has seriously damaged trust in their supplier relationships. UPDATED 8/27/09: Tim has posted more thoughts at Building Trust in a Networked World.
Thanks to Tim Cummins and Jeff Gordon for their comments on earlier drafts of this post; I’m solely responsible for its contents, of course.