Ethical Contracts: How Can We Create Safe, Mutually Beneficial Contracts?

Ethical contracts are present in many facets of life, even outside of the economy. Everything from having a roommate, to lemonade stands, to buying a car, all might have some form of contractual agreement. A contract is an agreement between two or more parties that are beneficial to both parties. Those benefits secure the initial agreement that both parties consented to.The study of ethical contracts readily falls into the lexicon of peace finance. Positive peace creates benefits for both parties in an exchange, often through structuring ethical contracts, designing mutual benefit, and identifying difference boundaries. From our previous post, difference boundaries are [insert definition from other article].

Structure of an Ethical Contract

When developing a safe, mutually beneficial contract, it is important to clarify the different components of it and follow general guidelines. In an ethical contract, there are six main factors that should be identified in a sort of recipe. 

STEP 1: Establish who the lender and who the borrower will be.

In this case, we will refer to the lender as Person A and the borrower as Person B. For example, Person A could be a skilled piano player and Person B could be a musical novice.

STEP 2: Identify what behavior Person A will be doing.

This behavior is typically lending money or providing goods and services. In the example, Person A could teach Person B how to play the piano via one-on-one lessons.

STEP 3: Determine what the value of this behavior will be. 

For example, if Person A is providing 10 1-hour piano lessons to Person B, Person A could determine the value of these lessons to be $500. 

STEP 4: Agree on how Person B will repay that value. 

If Person B is comfortable paying back the $500 value in cash, but cannot afford the entire amount at once, both parties could agree to five payments of $100. If Person B cannot pay in cash, there are many other assets that could be exchanged like house cleaning services, teaching a language, or providing a product.

STEP 5: Create a schedule for Person B to follow in repayment. 

Following the example of the piano lessons, if these lessons were to occur on a weekly basis, Person B could pay for a month’s worth of classes at a time. 

STEP 6: Agree on a set of safety factors to account for unexpected problems.

In any contract scenario like this one, there is potential for unforeseen issues. Say Person B becomes financially unable to complete payments for these piano lessons. There should be safety factors established when the contract is written in order to prepare for any potential issues. The next section elaborates on how to define and draft safety factors.

Mutual Benefit and Safety

Legally, mutual benefit is a contract or agreement in which both parties gain some type of advantage or value. Under this definition any organization selling resources that another organization needs is mutually beneficial, since one party gets money that they value more than the resources they provided, while the other gets resources that they value more than the money they spent. The people and materials in the situation did not change, but value was created by identifying what one party needed that the other could provide. 

An important note: demand comes from the differences between the two parties' demands and backgrounds. In order to ensure both parties have their unique needs fulfilled, it is also necessary to ensure that the fulfillment does not put one party at disproportionate risk.

Guarantees and systems designed to mitigate risk are called safety factors. For instance, individualized safety factors are more effective, and increase accountability. Mutual benefits and safety factors are strongly informed by difference boundaries when making an ethical contract.

How Difference Boundaries Play Into This

Similar to how a conversation between friends is an episode of engagement, so too is the process of making a contract. The only difference is that when making a contract, the subject of the conversation is some sort of arrangement between two or more parties. However, with any episode of engagement, it is important to think about the differences between all parties involved, also known as difference boundaries. As mentioned earlier, one of the most important characteristics of an ethical contract is that it is mutually beneficial to all parties. Difference boundaries are essential to this because with different people come different needs and wants. 

In order to maximize the benefits of a contract it is important to know these needs and wants and negotiate with them. For example, Person A is taking out a loan from Person B, and Person A learns that Person B is unable to write computer code. Person A just happens to be a computer science major, so both parties can maximize the benefits of the contract if Person A teaches Person B coding instead of just paying back the loan over a period of time.

Difference boundaries not only offer solutions in ethical contracts, but also prevent issues that can arise. One such issue is conflicts of interest, in which someone involved in a contract can receive more or less benefits based on their personal background. Yet, if there is transparency between everyone involved and an understanding of where everyone comes from, the contract can create safety factors that address any issues that may arise. This mutual understanding of each other also protects the ethical contract from issues such as favoritism, anti-favoritism, and other forms of discrimination. Honesty is the best policy and it is easier to be honest with someone you know and understand. So get to know the people involved in your contracts and ensure you see eye to eye on boundaries you aren’t shoulder to shoulder with.

There is a history of contracts being unethical and unfair, but steps can be taken to change this point of view. Go into making a contract with the concept of a structured contract and a mindset of mutual benefits and safety for everyone involved. By learning about the other parties and understanding your differences, this process should be made easier and leave everyone feeling like they’ve gained something.

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Written and edited by: Catherine Quinn, Neil McNair Jr., David Gerstenfeld, Dieondra Garner, Raaghav Seth, Jake Lieberstein, and Inesse Hanna