Side selling and side buying are common challenges for farmers and buyers alike. It can be frustrating when you hope to secure a reliable market or supply of raw material and your partner fails to uphold their end of the bargain. It is often tempting, especially when you depend on a partnership or struggle with a low trust context, to formalise the agreement through a contract and hope that its legal nature will secure commitment.
The strength of a contract’s binding power is often more limited that people assume. You might find that a contract setting out specific quantities of raw material doesn’t result in reliable supply. There can be many factors contributing to this, including power imbalances, price volatility and discrepancies in measuring units. What you really want to cultivate is genuine trust and loyalty, but this takes time. The good news is: a contract can contribute to building a reliable partnership if its formulated well.
If you want a contract to succeed and contribute to a business relationship built on trust. In this Expert bite, you will learn how to design a contract that effectively incentivises compliance and leads to a win-win business arrangement.
5 contracting tips for building loyalty
Here are our five tips for designing a contract that will both be stuck to and cultivate loyalty.
1. Co-creation
Start contracting discussions by putting mutual interests and perceived risks on the table. Rather than prescribing contractual terms, this process will help you understand the other’s business and lay the foundations for trust in your business relationship.
2. Financial incentives
To ensure a contract is kept it must be financially viable and logical for both parties. There are different ways to integrate economic incentives into your contract:
- Make a competitive offer: your contract won’t be attractive to a partner if your rates are equal to the open market. You could offer a higher price to incentivise loyalty. Another option is to offer a more attractive package deal by making other terms more favourable.
- Provide pre-financing: your partner might struggle to make the investments required to generate the volume or quality you hope for. By offering pre-financing you can share the risks and eventually the rewards of investing in technology or inputs.
- Enable access to alternative markets: providing access to premium markets for high quality good or alternative markets for lower quality materials you reduce risks and increase reward for your partner.
3. Non-exclusivity
Jumping into exclusive formal agreements might not reduce side selling/buying as you might assume. It can reduce your partner’s flexibility and increase the risk they are taking. If you instead offer favourable terms and demonstrate trust and reliability you are more likely to earn loyalty.
4. Plan for dispute resolution (informally)
Contracts are formal but conflict resolution doesn’t have to be. You can incorporate informal conflict resolution strategies into your contract to show you have reasonable expectation and can adapt to your partners’ approach. This could include setting communication procedures explicitly or allocating third parties to moderate discussions.
5. The right to terminate
Make it simple for your partner to terminate your agreement with fair notice. This will cultivate trust. You can also encourage regular reflection and adaption on your agreement to equalise power distribution and mediate challenges before termination become a serious option.
Written by Lauren May with input from our Kenyan partner Gerald Mutua.
