Contracts versus Covenants in Family Business

Contracts versus Covenants in Family Business

Contracts versus Covenants in Family Business

 Comparing and contrasting words has always been something that I’ve enjoyed doing.

As I just wrote that sentence and looked at the title I chose for this post, I wondered how often I’ve used the word “versus” in a blog title.

I’ll save you the research, there are already eight, making this the ninth time.

 

Blog Post Inspired by a Blog Post

Something that I don’t do as often, is writing a post that was inspired by someone else’s post.

A few weeks ago I was looking at my LinkedIn feed and noticed a post from a colleague and acquaintance, Roy P. Kozupsky.

I like Roy and I know that we share many beliefs about the kind of work we do with families, so I began reading his piece “Random thoughts while travelling”.

 

A Lawyer and a Rabbi Walk into a Bar 

His post is really worth reading and I recommend you do so, especially if you get something out of the subjects I write about here.

I want to concentrate here on a couple of contrasting terms that were highlighted in one of the quotes he used.

He features the words from Rabbi Jonathan Sacks at length, and I want to take a couple of snippets from those quotes to share here.

But before I get to his words, a bit more context is in order.

 

Contracts are Legally Binding

The word “contract” has a legal definition, and lawyers and the court systems spend a great deal of time arguing the interpretations of the definition every day.

In no way am I suggesting that a family business should ignore contracts or try to find ways to substitute covenants in their place.

 

Covenants are Morally Binding

Perhaps this subhead is a bit of foreshadowing, but that’s my interpretation.

If the lawyer is comfortable with the contract, the rabbi may be more at home with the covenant.

 

In Rabbi Sacks’ Words

Without further ado:

Contracts are about “Me” and “You”;

Covenants are about “Us”.

I think you can see why this quote felt particularly à propos to me from a family business perspective.

The business aspect may cover things between the company and its suppliers and customers via contracts, but the intra-family stuff should be more about “us” and therefore covered by covenants.

 

And Furthermore

“…framing a covenant will help keep

people together, without any side

claiming victory or defeat”

Once again, it just feels so much more appropriate to me for families to think about how they interact and work together to be focused on “keeping people together”.

When there is any sort of conflictual issue in a family, finding a resolution that works for the entire family should be more important than seeing one side or another “claiming victory”.

 

One Final Snippet

 The whole quote is good, and so is Roy’s post, and I bet Rabbi Sacks’ book is too.

But here’s one last part:

A covenant lifts our horizon from

self-interest to the common good.”

When you’re dealing with family members, the tendency of some people to be more concerned with their own self-interest rather than the common good of the group can be the biggest source of conflict.

 

Definitions and Synonyms

When you look for definitions, “contract” usually mentions something about “enforceable by law”

When you search for “covenant” you’re more likely to see references to the Bible, to God, and words like “promise”.

A search for synonyms of covenant gives results like:

pact, compact, promise, arrangement, deal,

agreement, commitment, contract. 

So Now What?

 You may be thinking, “thanks for the vocabulary lesson, but so what?”

Well, writing these posts is a way for me to think through issues, much like people who “think out loud” by talking (I do that too).

This post is a perfect example of that.

 

Covenants BEFORE Contracts

My “A-Ha” moment writing this, and my conclusion is this:

The family should work on its covenants first,

and only then

should they turn those covenants into contracts

I have been saying it in less elegant ways for years.

Families should figure out what they want the future to look like for their family, first.

Once they know what they want, then they should turn to professionals (lawyers, accountants, trustees, tax experts) to turn those ideas into legally-binding structures and agreements.

Too often, they do it “Bass-ackwards”.

Somehow the idea of “Covenants BEFORE Contracts” hadn’t come to me yet.

Feel free to use it, and share it.

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