Trusts entering into commissioning contracts with one another need to keep their eyes on the ball. John Deffenbaugh has a few words of caution

There is no such thing as a legally binding contract between foundation and primary care trusts.

This may sound like heresy given the prevailing wisdom of the new NHS marketplace. But think about it logically: we are not going to see foundation and primary care trusts going head to head in a courtroom. It simply does not make sense in the current market. A little local difficulty last year between the foundation trust and PCT in Bournemouth highlighted the potential absurdity of going down this route.

The NHS is adopting the mechanism of 'the market'. In its purest sense, this means buyers and sellers agreeing on specification, volume, quality, timescale and price. The process is superficially straightforward. But anyone who participated in the earlier NHS internal market can vouch for the complexity of contracting and the variability of successful outcome.

The public sector is adopting a mechanism of the private sector, as it has many times before, but is in danger once again of misinterpreting how it will work in practice. While there may be some benefit in thinking the legally binding nature of contracts will frame effective relationships between foundation trusts and PCTs, the danger is that this will become the default for organisations and leaders who cannot reach a successful deal.

The NHS operating framework reinforces this. It says: 'We are deliberately moving towards a much more rules-based system that will bring much-needed rigour and transparency.'

Contract types
The Department of Health helpfully reinforces this with the burgeoning guidance on model contracts. For an even earlier example of the use of complex legal documents to frame buyer-supplier relationships, look at compulsory competitive tendering - which some now blame for dirty hospitals and MRSA.

The anecdotal evidence about what is happening on the ground is not always good. Discussions are overheard at trust level about going to arbitration if necessary. They are overheard within PCTs about the benefits of open-book accounting to control foundation trust surpluses that could more beneficially be used to purchase services elsewhere.

This is not to say that the contract framework and its explicit accountability is wrong, or that alternative approaches used in Scotland, Wales and Northern Ireland, which emphasise partnership working, are right. The point is to get the contracting system to work properly.

Enter the economist John Kay who, in his book Foundations of Corporate Success, describes two types of contracting:

  • -classical contracts - explicit documents in the form of long-term legal agreements that contain detailed provisions as to how dealings between the parties will evolve as events unfold;
  • -relational contracts - implicit documents that are expressions of strategies for playing a repeated game. Its provisions are only partly specified and are enforced not by a legal process, but by the need of parties to go on doing business with each other.

Which type would you rather work to? Classical contracts are what drove the NHS to distraction in the pre-1997 internal market. The cost of contracting became a millstone around the NHS at that time, and we saw daft examples of excessively complex tendering. We are in danger of repeating past mistakes.

Relational contracts provide a way out. It is easier to default to a classical approach than make the relational one work. This is because, as it says on the box, it is about relationships. In other words it is about people, and some of them can be pretty awkward at times.

Keep lawyers at bay
You might think the private sector is just as bad, given the stalemate between Virgin Media and Sky over Sky's TV channels. But it just goes to show that even the private sector can fall into the trap. Somewhere near the top one or two people decided to play hardball. Who exactly gains from this?

Some key lessons for foundation trusts and PCTs come out of this. Involve people with the right attitude in the contract process, agree the broad principles, and share accurate information on which to base decisions.

You should focus on what is best for the customer not the organisation, recognise the need to change where appropriate, and be ready to invest in innovation. Finally, spend time on the issues that are the trickiest to solve, or give the best results, and keep the lawyers at arm's length.

Of course there will be fallout, issues to address and disagreements. Going to arbitration cannot be ruled out but beware that it will be a sign of failure, not just another step up the escalation ladder. And do either you or your customer stand to gain from that?