The Importance of Understanding Both the Explicit Elements and Psychological Contract in Your Business.
As any business owner will tell you your commercial contracts are a vital tool for conducting business. They enable the establishment of a framework for the parties involved to understand their rights and obligations clearly. There are two elements to all commercial contracts, the explicit element and the implicit element. The problem is that everyone concentrates on the explicit elements and ignores the implicit elements.
Whilst the explicit elements of the contract, such as payment terms and delivery schedules, are essential in defining these obligations, understanding the psychological (Implicit) elements of a contract are vital for a successful contract delivery and an ongoing relationship between the parties.
Explicit Elements in Commercial Contracts.
Explicit elements in commercial contracts refer to the terms and conditions that are clearly articulated and agreed upon by the parties. These provisions form the foundation of the contractual relationship and typically include the following:
- Description of goods or services provided
- Payment terms, including pricing, invoicing, and payment schedules
- Delivery dates and milestones
- Warranties and guarantees
- Liability Limitations
- Termination clauses
Explicit elements provide a comprehensive framework for the parties to understand their respective rights and obligations, offering legal certainty and reducing the likelihood of disputes arising from ambiguous terms.
Psychological Elements in Commercial Contracts.
The psychological (Implicit) elements in commercial contracts are the subtle, often unwritten aspects that influence the behaviour and decision-making of all the parties involved. These elements can significantly impact the negotiation, performance, and enforcement of the contract. Some key psychological elements in commercial contracts include:
- Trust. Whether you like it or not, trust is a fundamental component of all business relationships. Trust between both parties will significantly increase the likelihood of the success of a contract. When trust is established, parties are more likely to collaborate, negotiate in good faith, and resolve disputes amicably. When either party feels a lack of trust in the other party then there is a tendency to fall back to the explicit contract and examine every single item in detail. This leads to a further breakdown in trust. Every communication is viewed with an air of suspicion.
- Communication: Clear, open, and honest communication is crucial for effective contract management. Poor communications lead to misunderstandings, unmet expectations, and disputes. By fostering a culture of open communication early on, parties can ensure that potential issues are addressed proactively, minimising the risk of conflict.
- Perception of fairness: Parties are more likely to fulfil their contractual obligations and maintain a harmonious relationship if they perceive the terms of the contract to be fair and equitable. Ensuring that the negotiation process is transparent and that each party’s interests are adequately addressed can contribute to this perception of fairness.
- Emotional intelligence: Understanding and managing emotions can be crucial in the negotiation and performance of commercial contracts. Emotional intelligence can help parties navigate challenging situations, such as high-stakes negotiations or contentious disputes, more effectively.
The Importance of Understanding Psychological and Explicit Elements.
Recognising the interplay between psychological and explicit elements in commercial contracts is essential for businesses for several reasons:
- Effective negotiation: Understanding the psychological factors at play during contract negotiations can help businesses to identify and address potential barriers to agreement, such as mistrust or perceived unfairness. This can lead to more effective negotiations, resulting in mutually beneficial outcomes.
- Conflict resolution: By being aware of the psychological elements that may influence the parties’ behaviour, businesses can develop more effective strategies for resolving disputes. This may include employing empathy and active listening techniques to better understand the other party’s perspective and identify potential solutions.
- Relationship management: Recognising and addressing the psychological aspects of a contractual relationship can help businesses to build and maintain strong working relationships with their counterparts. This can lead to increased collaboration, improved performance, and long-term success.
- Risk management: Understanding the psychological elements of a contract can help businesses to identify potential risks and implement strategies to mitigate them. For example, by fostering trust and open communication, businesses can minimize the likelihood of disputes arising from misunderstandings or unmet expectations.
There can be instances where the explicit elements of a contract are met, but the psychological elements are not adequately addressed. Here are two examples to illustrate this point:
Example 1: A software development contract.
To create a custom application, a business signs a contract with a software development company. The project scope, deliverables, payment terms, and deadlines are all specifically stated in the contract and accepted by both parties.
Over time, communications become sporadic and unclear between the two companies. A breach of trust occurs as the software development company begins to believe that the commissioning company does not appreciate their job. Although the company still complies with the explicit terms of the agreement, their motivation and dedication to the project are negatively impacted by the lack of trust and poor communication.
As a result, the quality of the final product suffers, and the relationship between the companies deteriorates. In this case, the explicit elements of the contract were met, but the psychological elements, such as trust and communication, were not adequately addressed.
Example 2: A supply agreement
A company is looking for a supply of raw materials for their production. They enter into a supply agreement with a new vendor. The exact terms of the contract, including the type and quantity of materials, the price, and the delivery dates, are all expressly stated.
Throughout their business relationship, the manufacturer routinely postpones paying the vendor without a good reason. Even though the manufacturer eventually complies with the agreed-upon payment terms, their actions give the vendor the impression that something is unfair about the manufacturer. This view damages the relationship’s credibility and raises conflicts between the two parties.
Despite the manufacturer fulfilling the explicit elements of the contract, the psychological element of perceived fairness was not addressed, ultimately straining the business relationship.
In both of these examples, the explicit elements of the contracts were met, but the psychological elements, such as trust, communication, and perceived fairness, were not adequately managed, leading to negative outcomes for the involved parties.
Conclusion.
In conclusion, understanding the difference between psychological (implicit) and explicit elements in commercial contracts is essential for businesses seeking to safeguard their interests and ensure the success of their ongoing relationships. Or to put it another way, if you want to keep your customers and clients then don’t ignore the implicit elements of your relationship.
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