Let’s look at the definitions.
1: of or relating to law
2a: deriving authority from or founded on law: de jure
b: having a formal status derived from law often without a basis in actual fact: titular <a corporation is a legal but not a real person>
c: established by law; especially : statutory
3: conforming to or permitted by law or established rules
4: recognized or made effective by a court of law as distinguished from a court of equity
5: of, relating to, or having the characteristics of the profession of law or of one of its members
6: created by the constructions of the law <a legal fiction>
1: of or relating to ethics <ethical theories>
2: involving or expressing moral approval or disapproval <ethical judgments>
3: conforming to accepted standards of conduct <ethical behavior>
Based on the definitions, something can be legal but unethical.
Legal relates to the law. The law is a man-made, abstract set of rules, and laws can be used to create something that is fiction, but legal. Look at item #6 for legal: “created by the constructions of the law <a legal fiction>.
Legal fiction? Logisticians and supply chain managers use legal fictions in the form of Foreign Trade Zones. A Foreign Trade Zone is an area that, for the purpose of legal trade, is not within the United States. Goods that move into the trade zone are exempt from state inventory taxes and are not subject to import duties and taxes until they leave the zone and enter the jurisdiction of the United States.
I think that a Foreign Trade Zone is both legal and ethical. The zone is actually a benefit to the people in the area around it because the activity inside the zone creates jobs that put wages into the local economy, which in turn helps other businesses, increases tax revenue, and supports the general welfare of the area.
Ethics are all about morals. Any given action is right or wrong, from a moral standpoint. Is it ethical to hire your son to work as a manager in the company? Yes, if your son is qualified to do the job. Is it ethical to have a romantic relationship with a subordinate? No, as a past president demonstrated. Congress did not vote to impeach President Clinton because he had sex with an intern, they voted to impeach because he lied under oath about it.
Some laws are outgrowths of ethical theory, based on ethical judgment, supporting ethical behavior. Thou shalt not kill is an ethical and moral rule. Murder is against the law. Killing someone in self-defense is not against the law, nor is it unethical.
Dipping into a hot button topic, abortion is legal, but some people question the moral and ethical issues associated with it. People who support abortion dance around the "killing others" issue by declaring that the unborn fetus is not yet a person, or holding that the rights of a woman who has an unwanted pregnancy are more important than the potential rights of the unborn child. People who disagree with abortion hold that an unborn baby's life is just as important as that of the mother. The issue gets stranger when the law considers acts of violence involving a pregnant woman. Thirty-eight states will charge a suspect with double homicide in the death of a pregnant woman when the unborn child dies as a result. New Jersey is the latest state to consider fetal homicide laws.
The disparity between laws and ethics crosses national borders and cultural boundaries. The recent Charlie Hebdo terrorist attack in Paris draws a sharp contrast between the voices of liberty and the French Government’s crackdown on speech. While people in the United States enjoy strong protections of free speech and assembly, people in other countries only dream of such freedoms. Just to the north in Canada, so-called "hate speech" was illegal under that country’s Human Rights Acts (a law that was upheld by the Canadian Supreme Court), until a new bill passed the Canadian House of Commons, setting aside the contentious section of the law.
Contracts Creating Mischief
Laws exist to regulate the behavior of individuals and organizations, like businesses.
Legal terms and conditions surround us, attempting to regulate our behavior and protect business entities. There is even a terms and conditions page for this website, which is necessary to define the legal rights and responsibilities of the publication, the writers, and readers.
Contracts can lead to behavior that is legal but unethical. An old business manager I know uses a rule of thumb when it comes to contracts: “If you need a magnifying glass, a dictionary, and a pad of paper to figure out a contract, expect that the other party will use that piece of paper to try to screw you.”
Let's look at an example of how a contract can be legal, but executed without ethics.
Prime and Sub
Two companies enter into a Prime Contractor and Subcontractor agreement. One company—let’s call them Prime—hires the other company (let’s call them Sub), to install machines and other materials provided by Prime. Prime sold the project to a large and rich customer. The project is worth tens of millions of dollars.
Prime makes special equipment, which it integrates into large and powerful systems that can help make the large and rich customer even larger and richer. Prime designs the system, integrating equipment it makes with equipment made by others. Prime buys other materials, the equipment made by others, and hires companies like Sub to provide the skilled labor to assemble all the equipment and materials into the massive system that will make lots of money for the large and rich customer.
If you think I am describing a complex material handling system, you could be correct. It can be a building, a manufacturing line, a building automation system, or anything in the supply chain. Contracts on contracts on contracts, defining complex relationships between companies involved in building these large and complex systems.
Prime creates a contract. Actually, they create two different contracts. The first contract, called the Installations Services Agreement, is 21 pages of two-column, eight-point type. The second contract is a Project Subcontract Agreement, which can be over 30 pages in length.
The Installation Services Agreement, also known as the ISA, defines a generalized scope of work: the performance of work, progress and schedule, submittals and substitutions, quality and compliance issues, payment terms, changes to the work, subcontractor delay and execution, dispute resolution, risk management, safety and security, default and termination and miscellaneous items. The ISA is a blanket agreement, covering the consistent terms and conditions that define Prime’s expectation of how Sub is supposed to behave.
The Project Subcontract Agreement, also known as the PSA, defines in detail a specific project, including the specific scope of work, the visions of duties and responsibilities, conditions and assumptions, contract documents, the sum of money involved in the contract, specific payment terms, the requirement of bonds, reporting requirements, and terms regarding the modification of work. The PSA typically includes other referenced contractual documents, including the main contract that Prime has with its customer, specifications and drawings, equipment lists and installation manuals.
This two-part structure is normal in complex integrated systems contracting. A prime contractor qualifies the subcontractors it hires. This structure simplifies the contracting process for the prime contractor (though some may find it hard to agree that it's simple). The ISA defines the terms that are consistent across all projects while the PSA defines the terms that are specific to that individual project.
Up to this point, the story that I will tell you about prime and sub sounds kind of boring. And it would be boring if it were not for ethical issues that arise in the relationship between these two entities. However, real life is seldom boring, as we shall see in the next section, Contracts.
Contracts are nothing more than written agreements. Two people can decide to do business with each other, orally define the terms and conditions that structure their agreement, spit in their palms, and shake their hands. If both parties trust each other and maintain ethical integrity, the handshake can be more than sufficient. However, if the parties don't trust each other, or either party has trouble maintaining their ethical integrity, the handshake is worthless.
Too many times the handshake has failed to maintain...
The contracting behind modern, integrated material-handling systems is becoming as complex as the systems themselves. Perhaps the contracting is becoming too complex for the underlying systems. This complexity may be a sign that the material-handling industry is maturing, or it may be a sign that companies are attempting to avoid risk by assigning that risk contractually to the lower levels of the industry.
The complexity of contracting may...
The development of contracting practices for material handling projects evolved with the development of the industry, and the complexity of the equipment and systems. To understand where the industry's contracting practices are today, it helps to understand the industry’s past, and the problems created along the way.
In the early days of modern material-handling systems, clever engineers and operators in the end-user enterprises did most of the innovative application work. These trendsetters...
Complex material handling systems are, simply put, a collection of component equipment assembled into a system.
The components include structural elements, like platforms, racks, and shelving. The component list also includes the handling equipment, like conveyors, lifts, chutes, palletizers, robotic arms, and guided vehicles. The machines need...
Many general contractors in the US build large industrial buildings. There are also a few developers, who as owners also act as the GC for their projects, building large industrial properties to lease to end users. However, only a few GCs build a majority of the industrial space in the US. These specialized GCs have developed a routine, a set standard, a process, and they have developed relationships with the subcontractors the GC needs to ensure successful construction of the buildings on budget and on schedule....
I have never seen a Gantt Chart survive first contact with a project. If Mr. Murphy (if it can go wrong, it will go wrong) is an optimist and Mr. Sod (it always goes wrong) is a realist, the contracts that define the business relationships between the different entities in a project have to address the risks of things going wrong. In some cases, the parties assume the best will happen, and that they will be able to work out who pays for what when it is all over. It is not just new or naive players who fall into the “work it out” trap; experienced companies do too. That is why the contracts for complex Material Handling Systems become complex—because the parties involved know...
Picking up from the last case study, the contractor now faces a dilemma. The customer wants to switch the projects, and now demands that the contractor move a retrofit forward and a new construction project backward.
Beyond the “make-to-order” manufacturing structure followed by the contractor’s factories, other major component systems that the contractor buys from suppliers present scheduling and sequencing problems. Custom engineered and manufactured projects require the "make-to-order” process, so outside purchase items like equipment platforms, welded conveyor, chutes, and maintenance catwalks all add to the scheduling complexity. Not only does the contractor have to juggle manufacturing schedules in its plants, the contractor also has to persuade...
There are hundreds of systems integrators in the US alone. The total global count is well into the thousands. Each company has its own way of managing the projects it sells. Moreover, you will see variance among projects, as both the customer and the individual project manager influence the execution of a project. Very few integrators can demonstrate consistent, disciplined execution performance across projects because of the infinite number of variables....
No real problem has a solution.
Because the solution to a problem changes the nature of the symptoms of the problem, not the problem itself. The real problem is hidden from sight.
If we look closely at the key elements of what happened in the example of Opportunity Contracting from the last article, we may not see the real problem. The solution did not change the nature of the problem; it only changed the symptom, compounding the problem into even more problems....
To learn from your mistakes, you must first realize you are making mistakes.
Failure can be an unforgiving teacher. However, in order for failure to affect behavior, we must be able to understand the relationship between the failure and the behavior.
Imagine you are visiting another country. You need to go to the bathroom. You approach somebody who looks like they know where they are and like they may speak English. You might try to ask them where the bathroom is. Or if you're smarter, you might ask them....
How does it feel when your expectations meet reality?
Imagine why Field Marshall Helmuth Karl Bernhard Graf von Moltke, Chief of Staff of the Prussian General Staff from 1857 to 1888 said, “No plan of operations extends with any certainty beyond the first contact with the main hostile force.” It is the same reason that Dwight Eisenhower said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”
Consider the intentions of the different parties in this case study....
When project contracting goes sideways, as it did in this case study, it takes a great deal of effort to get things back on track. When a Prime Contractor alters the core intent of a deal, converting time and materials deals into fixed-scope and price agreements, you might think that they are doing so in order to cap costs. True, capping the monetary payment helps control the risk cost overruns. Capping the deal pushes the risk of overrun down onto the shoulders of the subcontractors.
Is this fair?
If you discover that a deal is bad, how do you get it fixed?
The answer is obvious, fix the deal. While you may think that fixing the deal is the obvious answer, many managers elect to continue with a deal they know is bad. Why?
Myself, I work with the counterparty to rework the deal. A bad deal is bad for both parties and bad for the rest of the project. As long as this bad deal remains in force, it poisons the relationship between the two parties. The poison spreads beyond that single relationship and into other relationships throughout the project network.