When Umbrella Agreements Spring Leaks in Dispute Resolution

By — on / Dispute Resolution

Negotiators tend to want the best of both worlds. When reaching an agreement, they want to nail down parties’ respective rights and responsibilities, but they also want to retain the flexibility to deal with ever-changing business conditions.

One solution to this apparent dilemma is to craft umbrella, or framework, agreements. (The term umbrella is more commonly used in the business world, while framework is more widely used in legal and diplomatic circles.) Such agreements set out general principals that will apply to more specific give-and-take contracts in the future. An umbrella agreement between a soft-drink company and a grocery chain, for example, would typically cover issues such as exclusivity, invoicing, confidentiality, and termination. Subsequent short-term contracts would set prices and promotional allowances for specific products.

In theory, working on these two different levels benefits everyone, as it allows customers and suppliers to create stable relationships even when market changes are largely unpredictable. However, marketing lecturer Stefanos Mouzas at the University of Bath’s School of Management in England cautions that the stronger party may be able to increase his advantage by insisting on favorable terms in the umbrella agreement that limit the other side’s ability to win when the parties subsequently try to hammer ou dollars-and-cents deals. For example, suppliers often complain that they are held hostage by the general terms imposed by “big box” stores like Wal-Mart. Then again, some retailers grumble about manufacturers whose attitude seems to be “My way or the highway.”

Mouzas concludes that the virtue of umbrella agreements is that they give parties room to adapt to changing business conditions. When such contracts are one-side, however, they can tilt the bargaining table in future negotiations. Ground given up in an umbrella agreement may never be regained.

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