Principles of Contracts: Self-Interest

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Previous Chapter: The Narrowness Principle
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All business deals are based on trust, and it’s a trust backed up by a trustworthy legal system. Without trustworthy courts, high trust between people in a culture, and an environment characterized by trust and reciprocity, business is impossible.

“Trustworthy! Dan, what country are you living in?” I hear some of you cry. “The American courts are kangaroo affairs stripping us of our civil rights, legislating from the bench. The Judiciary is a racist, corrupt tool of criminal violence against the underclasses, and nothing more than a puppet of the special interests and elites in this country.” I hear some of you say that (every day, all around the blogosphere), but I also can’t help but notice that you’re reading a blog series about best practices for contracts, and that upwards of 80% of you reading it live, work, and do business in the United States. This isn’t a coincidence.

A well-functioning economy works because the trust quotient is high, and the reason isn’t too difficult to see: If I can’t trust you to live up to your end of the deal, and you can’t trust me to live up to mine, then why in the world would we do business together?

Oh, and that financial meltdown and credit freeze we just had? That was caused by an erosion of trust.


Negotiation and Personality

Different people come in different personality types. Some of you reading this, maybe the majority of you, are decent people who would rather make a bad business deal than hurt someone’s feelings. Others are sharks-in-the-making who think “Greed is good” is a perfect motto as a way to do business. And the rest of you might be neither of those, but sit somewhere on the spectrum between.

Even if the only contract you ever sign is a rental agreement, you’re going to run across a fair few contracts in your life. When you sit down at the negotiating table, the person across from you will, like you, sit at some point on the nice guy/shark spectrum. Unless you’ve dealt with them before, you’ll have no idea where on that spectrum they sit. You have to make some assumptions about their motivations in order to proceed. They’re going to be making similar assumptions about you.

Depending on who you’re sitting opposite, your natural inclination can work seriously against you. As a nice guy, you are at serious risk of being taken for a ride. As a shark, you’re at risk of scaring off the other party. As someone in the middle without much experience, you’re likely going to be dancing on a tightrope between a whole set of conflicting emotions, none of which are productive, and all of which can incline you to screw up the deal. Despite the adversarial nature of negotiations, your enemy at the negotiating table is often not the other party. It is almost always yourself. In my experience, I’ve rarely seen someone get taken advantage of for any reason having to do with the other party. It has almost always happened due to the person’s failure to understand their own interests in the matter.

Different Sorts of Self-Interest

It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest. -Adam Smith, The Wealth of Nations

Anyone who’s been through an Econ101 class has read the Adam Smith quote above – most of the rest of us have too, at one point or another. The sentiment it embodies is in a bit of popular disrepute at the moment, due to the recent real-estate and banking crises. After all, saying that self-interest, looking out for number one, etc. is a good thing for society seems a bit like saying “Greed is good,” doesn’t it? And greed and selfishness are bad, aren’t they? They caused the oil spill in the gulf, the financial collapse, and all other manner of social ills, right?

Not exactly. Self-interest is a graduated scale, with narcissism on one end and ego-free transcendence on the other end. If you’re ego-free, you’re probably meditating somewhere. If you’re in business, or even if you have a job, you’ve got a healthy stake in your own interest, and recognizing that doesn’t make you a selfish bastard. It also doesn’t mean that the way you’re dealing with your self-interest is productive or effective.

A successful negotiation depends on having the right priorities. If you’re in the game for your ego (for example, if you’re a writer with your first publishing contract), you’re likely to fail to ask for enough money. If you’re desperate, you’re likely to make concessions you can’t live with. If you’re in it for approval, you’re likely to do things to please the other party that foster resentment later on.

On the other hand, if you’re greedy, you’re likely to focus too much on the moment, to fail to consider contingencies, and to fight for concessions you don’t need (sometimes, such concessions make the deal untenable for the other party). Greedy thinking fosters a short-term mindset, leading to ill-advised high-risk behavior. After all, if you’re expecting to take the money and run, you’re unlikely to think about what might go wrong, because you won’t be around to bear the consequences.

Self-Interest, and Ethics, and Trust

“The universe is run by the complex interweaving of three elements: energy, matter, and enlightened self interest.” -G’Kar, Babylon 5

Enlightened self-interest is the middle road between being greedy and being a sap. You know what you want, you know what you can bend on, and you know what your deal breakers are. You approach business deals with a long view, you consider possible unforeseen (or unforeseeable) consequences, and cover for them as best you can. You treat the parties in your contracts as partners, and you create a deal where your interests line up. You trust that they can state and defend their own interests, and you treat them like adult parties by allowing them to take responsibility for their mistakes.

In a healthy business relationship, it’s good for everyone when you defend your turf with an eye toward preserving the deal. You get what you want out of the negotiation, and you do your best to concede what you can to the other party so they find dealing with you profitable and pleasant.

This is a different kind of ethics than the ones we employ with family and friends, where the rule of mutuality and self-sacrifice dominate. When dealing with contracts, mutual benefit and self-interest are the rules of the game, and when considered together they are compatible. The trick is that, if you want the business relationship to work in a way that makes your partners honorary friends, you must fight hard for the things you need when you’re structuring the deal.

Business and contracts are not a zero-sum game. They are a positive sum-game. You get what you want, I get what I want, and everybody wins. But for that to happen, you have to know what you want in the first place, you have to understand how the thing you want works, and you have to be willing to do a deal, trade, and compromise to make it happen. All legal business relationships are consensual – nonconsensual business relationships are called “slavery.” Approach your dealings as if you’re entering into a consensual relationship and you’re likely to get farther than if you believe you or the other party has no choice.

Negotiation need not be an unpleasant process, but it is always an adversarial one in some measure. Expect that. Roll with it. And stick up for your interests.

After all, if you don’t stick up for what you want, who will?

Next time: An Interlude: Current Events Show Why Contracts Matter

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2 Comments

  1. I’m glad you pointed out that enlightened self-interest does not mean “screw the other guy.” My experience has been that enlightened means seeing that the other party gets a fair deal.

    The worst example of unenlightened self-interest I have encountered occurred during an unfortunate tenure at a property management company.

    At every staff meeting, management announced another plan for growth, which was forgotten in the coming week.

    Had management focused on encouraging long-term tenancy and developing skilled staff, the company could have expanded greatly.

    Instead, through myopic focus on short-term returns, there was a constant churning of tenants, property owners, and staff.

  2. Pingback: Principles of Contracts: The Narrowness Principle at Literary Abomonations

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