Summary: Non Contractual Relations In Business

2. In the business world, firms tend to have large costs and therefore it would seem that firms are more likely to insure themselves of these perceived risks by signing onto contracts. However, it turns out that non-contractual relations are very common and subsequently, very important in business. In his piece, “Non-Contractual Relations in Business: A Preliminary Study,” Stewart Macaulay discusses why firms tend to engage in non-contractual relations. There are three main factors why firms engage in non-contractual relations; firms prefer non-contractual relations over contractual relations, issues that contracts address can be resolved much more easily without contracts, and the fact that there’s effective enforcement of non-legal sanctions …show more content…
Contracts, as a result, are likely to be an enticing ‘go-to” for business transactions, but firms still prefer non-contractual relations. The reason why firms avoid contracts, even when they seem like a valuable solution, is because many of the issues can be resolved much more easily without the need for a contract. For instance, firms have a general understanding of their primary commitments in a business transaction. However, there can be a misunderstanding between buyers and sellers, “So it is to have contracts, right?” The answer for many firms is still a no, because products can be standardized and if they aren’t, the buyer can explicitly state their expectations/tolerances for production. “But what about defaults, how can they be addressed?” Defaults for many firms are not likely to be catastrophic, even if there’s a high cost, because firms can prepare for defaults through risk avoidance and or risk spreading. For example, a buyer may place the same order among multiple suppliers so that production can keep …show more content…
Although, contracts may seem as the supreme method to ease transactions between firms; firms tend to engage in non-contractual relations for that very reasons. For most firms, non-contractual relations allow for flexibility in transactions. In addition to a more a cooperative environment between firms, non-contractual relations allow for the enforcement of effective non-legal sanctions and issues such as default are resolved much more easily without