3 things every good partnership agreement should have

My brief for this morning was to speak to you about how to negotiate a contract that provides you with protection, contains flexibility, is future proofed and best manages risk.

All in 15 minutes.

What I’m going to do is concentrate on the 3 things every good partnership agreement should have – which things, I think, meet the brief I’ve just outlined.

Here they are

1.       Measurable targets for what a successful partnership will look like at the end of the first term, together with measures of progress and waypoints to review and evaluate progress.  In my remarks I will refer to that as being clear about expectations

2.       An ability to exit the relationship on notice without there having to be a breach. I will refer to that as commitment

3.       A mechanism to resolve disputes. Let’s call that resolving disagreements

 

First let’s start by making a very important distinction between two types of contracts. In a transactional-type contract the relationship between the buyer and seller is not really that important.  What is important is usually defining the price, defining the object that is being sold and being clear about what happens at the point of exchange. Examples of this include buying a house, buying a car, even buying a newspaper.

 

But there is a different type of contract, often referred to as a relational contract. That’s a contract whose effect and success is based upon a relationship of trust between the parties. Typically, these are long-term contracts (at least when compared to buying a newspaper).  Long-term supply contracts, partnership agreements and sponsorship contracts are good examples of where relational contracts are appropriate.

 

So, we know now that partnership contracts and sponsorship agreements are examples of relational contracts where the relationship between the parties is really important.

 

So, let’s think then about relationships in our daily personal lives and consider what makes a successful relationship. There are many things but I’d suggest to you that those three things I’ve already mentioned, are very important

·         being clear about expectations

·         commitment

·         finding ways to resolve disputes

It should not come as any surprise to you therefore that in business contracts that are relationship based, these are also important issues.

 

Let’s talk about the concepts in a little more detail now.

 

First, being clear about expectations

In any relationship of a year or more I’ve always believed it is vital for the parties to the arrangement to clearly define what success looks like, to set measurable targets for themselves and then waypoints at which you measure progress.

I like to use an aviation analogy to illustrate this concept. Say you want to fly to Los Angeles by a certain date. That’s your target. You know you’ve got there when you can see the Hollywood sign on that date. That’s your measure of success. Flying over Fiji and Hawaii at certain times are measures of progress towards your target

You will know how expensive it is to find new partners if you can’t make the existing partnership work.  So, it makes sense to keep the partner happy, so that renewal is an easy decision.

 

The best way to do this is to clearly define in your contract what are the measures of success - in other words if you look back at renewal time, have you both achieved what you set out to do?

 

In my experience many parties find this very difficult to do. I’m not sure why. People seem happy to include tangible measures such as, in the context of sponsorship agreements, signage - but are much more nervous about building in less tangible measures. The reality is that everything that is of value and that can be observed, is capable of being measured, no matter how intangible. And if you don’t believe me I invite you to read the book “How to Measure Anything – Finding the Value Of “Intangibles” In Business” written by Douglas W Hubbard. For a New Zealand text try "Performance Measurement Advice and examples on how to develop effective frameworks" developed by the State Services Commission and the NZ Treasury.

 

If you can define what success looks like at the end of the term of the contract then equally you should build in review periods and measures of progress throughout the term of the contract. In this way you can use these review periods to assess whether you need to undertake a course correction to give you a better chance of achieving your targets at the end of the contract term. Otherwise you run the risk of having an indifferent and uncommitted partner at the end of the term.

 

Some contracts I have worked on attach financial models to reflect the outcomes the parties seek then build in flexibility using regular forecasting to help them measure progress.

 

I also observe that both partners need to be committed to this process and if you find that your potential partner is not committed to defining success in a measurable way, together with measures of progress and agreed waypoints then you probably have the wrong potential partner.

Final tip on this subject:  make sure you only sign up to measures you can either influence or control.

 

Then there’s the question of commitment.

 

Like in any relationship, parties to a partnership agreement should not have to continue in the relationship if they don’t want to and shouldn’t be allowed to continue in the relationship if they’re not committed to it.

In contracts a lot of effort is put into defining termination events often by reference to breaches of contract or insolvency events.

But with relational contracts which are built on trust and confidence you should consider including a provision that allows either party to walk away - with an adequate period of notice of course - from the contract if they are not happy - or for the other party to terminate the contract if they don’t feel that the first party is committed to the relationship.

So, for example let’s assume that your counterparty has committed to providing funds to your venture and starts to talk about new priorities, budgetary concerns or other difficulties in securing the funds. In those circumstances you should have the ability to terminate the relationship if you’re not satisfied that that party is committed to making a relationship work.

And the earlier you do that the better. You can build in a suitably lengthy notice period to allow for a transition, a dignified exit and for you find an alternative partner.

In the past I have also built in rights to have advertising pulled if a public controversy arises over it. Of course, that does then invite a discussion about compensation if the advertising is otherwise legally compliant.

 

Finally let’s turn to resolving disagreements.

 

All partnership agreements should have built-in means by which you can resolve disagreements   -which are inevitable in any long-term relationship.

 

Remember that if you don’t provide for a means to resolve disagreements then one of two things will happen. Either the golden rule will apply or you’ll end up in court.

Some of you will be familiar with the golden rule which is that she who has the gold, rules. If that’s not you, you do not want to be the person that is dictated to by the person with a large purse. Nor do you want to ever end up in court if at all possible. It’s too expensive, it takes too long and the outcome is often too uncertain.

 

That means that you should turn your mind to how you should resolve disputes as and when they arise.

Should you use an expert who comes in, hears what each of you has to say and then makes a decision?

Should you use a mediator whose job it is to help you and your partner work together to hopefully resolve your differences – they are effectively a facilitator.

Finally, there is an arbitrator who is an independent third party - usually legally qualified - who hears what each of you has to say and then makes a decision.  Think of this as a private court - much more formal than an expert determination -  which can take time and can be expensive.

Bear in mind that one size need not fit all. In other words, you can in your contract specify that some disputes should be resolved by an expert, some should go only to mediation or some should go to arbitration.

I spent much of the years between 1986-1996 helping to resolve seemingly intractable disputes between two parties. Were it not for dispute resolution clauses built in we would never have picked our way through it and reached a settlement agreement.

Equally I’ve spent the last 4 years working with a small organisation trying to manage a long term set of relationships with a much larger organisation. There are no dispute resolution provisions in the contract.  So, we have had to use various tactics to get the other larger party to the table to agree, as they have now, to add dispute resolution provisions in.

 

So, there it is -  the three things every good partnership agreement should have

1.       Measurable targets for what a successful partnership will look like at the end of the term, together with measures of progress and waypoints to review and evaluate progress. 

2.       an ability to exit if there is a lack of commitment

3.       mechanisms to resolve disagreements

 

Finally, if there are topics on partnerships negotiations and contracts you’d like me to blog about, simply email me at peter@peterstubbs.co.nz.

 

Peter StubbsComment