The Concept of Relational Contract Theory

Introduction

The term contract itself sounds to be formal, and indeed it is construed to be a formal or legal binding agreement. In today’s world we have witnessed the contracts and its evolving factors which are adding new aspects to the conventional understanding of the term contract.

There are different approaches to the concept of contract such as a private commercial engagements or a memorandum of understanding for achieving certain pre-determined objectives or a record of expressing the conduct with a specific intent or a relational contract.A normal , prevailing definition is adopted:

“Relationship contracting is depends on recognition of as well as striving fin in the area of mutual benefits and win-win situation via more cooperative relationships among the parties. Relationship contracting emphasis and underpins number of approaches, like partnering, alliancing, joint venturing, and other collaborative working arrangements and much better risk sharing mechanisms Relationship contracts are generally long-term, develop and changes over period of time, and contain substantial relations among the parties.”

Hence, the researcher would evaluate and express the approach of Macaulay’s and Macneil’s research in the context of relational contract theory and its implications of court in the case of Byrne v Australian Airlines Limited by refusing implied terms in a contract.

Byrne v Australian Airlines Limited, [1995] HCA 24.

Though the contract is a formal undertaking, it has a flavor of relationship based on trust. Irrespective of whether contract being executed between Doctor-Patient, Lawyer-Client, Principal-Agent, etc. there is always an essence of trust involved in a contract. This trust makes one party to depend on the other, which might be for a longer or shorter period. Thus, the scholars had developed and are of the opinion that every contract plays an important role socially as well economically role, in the general context of social relations. There are few examples to the relational contract which are as under:

1. Agreement of Integrated Form, USA [Made effective for project related to sutter health in California and as well as by other healthcare service provider];

2. Agreement of alliances (Australia) [It is in process of finalization but still it is not final expected to be finalized vey soon ]; and

3. AIA C191-2009 Standard Form Multi-Party Agreement of Integrated Project Delivery.

Above are the apt examples to understand and find the relevance of relational contract theory in a broader perspective. Theory of relational contract is propounded through the work related to e empirical of Macaulay and Beale, Dugdale as well as by legal research related to theory of R. McNeil, who is accredited with the starting use of the contract of relation based on terms.

Macaulay express in his work that, generally in a pure traditional business, the parties to the transaction are not much concerned with the terms of the contract or the contract per se. Parties are more ambitious to do the business or not choose to stop the contract, however they would re-organize so as to make performance feasible and evolve the contract as relationship develops with the business in continuation . Thus, the dominance of a party in a transaction changes as the relationship evolves between the parties during the survival of the contract.

Examples of Relational Contract Theory

As per Macaulay, the presence of non-legal norms is much more vital than the terms and conditions of a contract or the contract law itself. He believes that, formulating a contract is always expensive and the essence of trust and relationship in a contract is more of relevance in a contract. Commonly shared norms are seen frequently law related to contract and statutory remedies were tried to be avoided or avoided as without flexibility.

Macneil’s core research is in relation to the environment in the contest of society and the rulws and regulation of behaviour that is prevailing in every guiding principal of exchange. He further elucidates that, every contract which is between the parties, irrespective of it being discrete transaction, it always has an essence of general environment of social relations, and accordingly he renamed his own version “essential contract theory”. According to Macneil, in the modern times parties to a contract have a chance to choose among position and behavioural standards as provided by the state. Thus any simple transaction could involve an essence of social and economic circumstances. For example, a relation between a customer and a seller or with a producer, in context of a particular product, for an instance, a customer who buys and drinks coke of a particular producer; he/she shall develop a certain relationship with the seller or producer though he/she might be purchasing coke for the first time from that seller. This is what a relational contract theory is.

Another important aspect covered up by Macneil is that, how to respond a breach coming out of a contractual relation? He by leaving back the traditional approach and by pursuing the maverick understanding shows the remedial response of adhering to the private relationship of parties to the transaction. This new approach was also adopted in European Draft Common Frame of Reference, where the remedial provisions sort its relevance in the relational contract theory.

The brief facts in the matter of Byrne v Australian Airlines Limited were that, the appellants were the employed as baggage handlers by the respondent. The services of the appellants were terminated on the grounds of pilfering baggage, which was negated by the appellants and contested their dismissal to be harsh, unjust and unreasonable. This unauthorized termination was argued to be in breach of clause 11(a) of the Transport Workers (Airlines) Award, 1988 and claim damages for the breach of the contract.

One question in Byrne’s case was about the difference in a statue and contract arising due to obligation clause as a result both become contrary . It was proposed by the appellants that the statutory rights/obligations are not needed to be embraced in the contract, as they are considered to be the part of every silent contract. But the court adjudicated that, firstly, there are specific pre-existed intention of the parties to the contract before they put their shoes into the contractual obligation. Secondly, Terms related to contract must be so exhaustive that it implicates a reasonable and equitable position to the parties of the contract. The court finally expressed its opinion by presenting its view that, in case of a contract being silent on certain important aspect which arise dispute in future shall not conjunct by an implied term. But an appropriate test is to be applied for understanding the intention of the parties or conduct of the parties through their past course of dealing or social and economic relationship are to be assessed. Even, in cases where there is no expressed connotation of a specific term in the contract which leads to a situation of dispute in future, then termination a contract by giving a notice would suffice. But, this does not means that we have to presume any alteration/amendment in the contract would be out of a proximate intention of parties to contract.

Macaulay’s Approach

Justice Dixon also elaborated in the context of the term “relationship”. He says there is always a distinction between a contractual relationship and other relationship amongst the parties to the contract. Further he illuminate by referring to the contractual relationship entered between the parties in the country itself, he says “, Wrong termination of employee, terminates the employer and employee relationship irrespective of the fact thatthe employee accepts the repudiation constituted by the wrongful expulsion and make an end to the contract.” Thus, here the question is not about the dismissal or breach of a contract but the question is about the conduct of the parties to the contract, whether the relationship between the parties has empowered so that they go beyond the contractual terms to achieve a fair play. Hence, the understanding of Macneil that, in the modern times parties to a contract have a chance to decide or select for position and standards related to behavioral as given and specified by the respective authority is proved to be right.

Thus, it is to be understood that the conduct of a contract is not only governed by the  clause containing terms ,conditions and obligation of the contract, however due to the intentions, past relations as well as demeanor of the parties to the contract. Hence, the High Court of the Australia dismissed the appeal of the appellants and gave a contemporary guise to the understanding of a contract.

Conclusion

The work of Macaulay and Macneil lays its very existence in today’s modern contracts. The commercial relationship between the parties entering into the contract, whether it is long term or short term, the significance of the intent and the approach/conduct of the parties shall determine the vivacity of the contract and shall not be prone to breach. Even, in the construction industry in Australia has adhere to the principles and prevailing norms of relational contract, where all three leveled namely the Inspector level, Engineer level and the Project Manager levels manages the issues on the basis of relationship, as the construction projects may suffer huge in case of breach/termination of a contract on minor or petty issues, which can be resolved through mutual understanding and negotiation irrespective of the contractual terms. Hence, it was observed that the “barrier which are proactive ” is spitted down between the parties then by the collaborative approach one can resolve the difference and difficulty without referring to the formal document which may end up in more complex situation then we were never before.

Further, I would like to accord the theories of B. Klein, that enforcement of contract must not be alternative under the guise of court enforcement or the private enforcement. Though, the earlier one may give an amount of rigidity and the later gives flexibility in the general context to the parties facing dispute after entering into the contract.

In finality what that matters is the ultimate object of the parties to the transaction. So, it is not that important to comply with the terms of contract while it at a death bed, but rather we should try to focus on its survival.