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If you are thinking of forming healthy and cooperative business relations, then consider a relational contract. Such contracts, increasingly popular, foster better collaboration and transparency while also legally binding the parties to match each other’s expectations and interests. These types of contracts are more challenging to execute. Creating a legally compliant contract without a lawyer can take hours of productive time and may even deliver an unfavorable contract.
As relational contracts become increasingly common, it’s time to learn why formal relational contracts are important and how to create them.
As the name suggests, a relational contract is a legal contract built to form a long-term relationship between two or more parties. It helps create better understanding and expectations between collaborators, along with mutual principles and goals. Commonly built for business partnerships, joint ventures or suppliers, relational contracts focus more on basic principles and combined goals rather than being a plain list of various specific obligations and outcomes.
Unlike a regular contract, a formal relational contract contains specific terms and conditions alongside the mutual principles and goals of the collaborators. The inclusion of some specific terms and conditions makes the formal relational contract more legally binding, thus providing collaborators with a higher sense of security and protection by the law.
A well-drafted and equitable formal relational contract can help businesses achieve greater trust, efficiency, and productivity by providing them with a legally backed framework hence, providing risk minimization and security for both parties.
Formal relational contracts are built to foster a healthy and transparent long-term collaboration between two or more parties. It has several different features that are common to relational contracts:
A transactional contract, evident by its name, is a contract of transactions usually used in short-term exchanges. In contrast, a relational contract is built to form a long-term relationship between two or more parties. Here are some more of their differences:
Used as a tool for forming long-term relations, each relational contract should include a series of components that are key for the success of business relations. Let’s discuss these components.
When entering a partnership or any other long-term business agreement, drafting and signing a formal relational contract will help you over time. Here are some of the benefits.
An official signing between two or more parties in this contract creates a strong sense of trust between both collaborators. Both parties understand that they are bound by a legal document that requires them to fulfill all expectations.
Signing a contract puts both collaborators in a legally binding position, where they are legally required to cooperate and adhere to the rules of the signed document. This massively improves coordination and increases overall business efficiency for all collaborators.
Business circumstances can change over time; therefore, long-term contracts such as the relational contract should allow amendments and adaptability to both parties. Examples include economic downturns, which force almost all companies to make amendments to their relational contracts.
Businesses take up years of fostering before they can finally be sustainable. Getting into formal relational contracts helps protect financial sustainability by ensuring strong trust and commitment towards your partners and clients.
Disputes and disagreements are common in businesses; therefore, formal relational contracts contain a detailed guide to resolving disputes. Strictly following the rules written in this signed document will help both parties reach a settlement and allow them to continue working together.
When drafting a formal relational contract, be mindful of various things:
Developing any contract requires coordination, trust, and importantly, flexibility, built for long-term collaborations. Consider automating certain processes of your contracts with CounselLink® Contract Lifecycle Management to achieve higher efficiency.
Set up a demo to learn more about relational contracts.
* The views expressed in externally authored materials linked or published on this site do not necessarily reflect the views of LexisNexis Legal & Professional.