The Blackwell Encyclopedic Dictionary of Organizational Behavior

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Page 107
greater importance in organizational literature in the light of increased reliance on economic-based
theories of organization such as TRANSACTION COST ECONOMICS and AGENCY THEORY. As
contract's roots are embedded in law, a brief review of its legal elements will be helpful in
understanding the varied ways in which it is being used in improving our understanding of
organizations.
If they are to be legally enforceable, contracts must involve an agreement between competent persons.
Whether the parties are competent may be evident from the COGNITIVE PROCESSES they employ
and their cognitive styles. If they are not competent, their participation in the exchange governed by the
contract is not voluntary.
One of the cornerstones of our definition of organizations, however, is that those who join them do so
on a voluntary basis. Discussions of the JOINING-UP PROCESS frequently are built on explicit
assumptions of voluntary action, but always voluntary behavior is an implicit assumption in research on
relationships between organizations and their employees. For example, the reciprocal expectations and
obligations that underlie the PSYCHOLOGICAL CONTRACTS between organizations and those who
join them are premised on an unstated assumption of voluntariness. Thus, competence to contract is a
necessary, but by itself, not sufficient condition of organization.
Legally enforceable contracts also require consideration, which can be defined as a right, interest,
profit, or other form of benefit that accrues to one party; or, some detriment, disadvantage,
responsibility, or loss assumed by the other party. Consideration reflects a promise (or a set of
promises) to do or not to do something. To a large degree, the organizational literature describing
psychological contracts focuses heavily on issues related to consideration. Needless to say, a substantial
literature has evolved out of the need for consideration if a contract is to be legally enforceable.
Theories regarding pay (see PAY AND PERFORMANCE) and MOTIVATION, extrinsic REWARDS,
or PERFORMANCE RELATED PAY, to name but three of the many cited elsewhere in this text, all
stem from the need to provide consideration in employee contracts.
A case can also be made that consideration defines the minimal (if not the complete) authority and
command system requirements of an organization. That is, all employees of an organization promise
not to act in certain ways without consulting others, or cede the right to act independently to an
individual (the CEO) or to some other governing group (the Board of Directors) (see GOVERNANCE
AND OWNERSHIP).
The requirements of COMPETENCY and CONSIDERATION mean that legally enforceable contracts
are reasoned and the products of free and rational agents; that is, the parties are possessed with
AUTONOMY. These conditions are consistent with a third legal requirement in the design of a
contract: it is essential that both parties agree to the same thing in the same sense and that they enjoy a
meeting of the minds on the essential terms and conditions of the contract. This mutual consent must be
evident in the language that the parties employ, or from their words or actions.
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