Lack of contractual enforcement costs Starbucks $3 billion

Many New Jersey business owners have dealt with contracts and know that the costs of not abiding by them can be astronomical. Coffee giant Starbucks and Kraft Foods agreed on a deal several years ago, but things started to go downhill in 2011 when Starbucks terminated the contract early. Now an arbitrator has made the decision to force Starbucks to pay more than $2.7 billion in damages, interest and attorney fees to Kraft.

In 1998, the two companies made a deal that allowed Kraft to sell bagged Starbucks coffee in stores. Starbucks prematurely ended that deal in 2011, causing a battle between the companies. Both pointed fingers, accusing the other of breach of contract. Starbucks claimed that Kraft breached the contract by mismanaging the brand. Kraft demanded that Starbucks pay the company a fair amount for the business. The deal was bringing Kraft $500 million in revenue each year.

Starbucks disagrees with the arbitrator's decision and believes that Kraft did not honor its responsibilities with regard to the Starbucks brand. The company has no regrets about taking control of its bagged coffee from Kraft.

As seen in this case, contract disputes can be cost a lot of time and money. When companies enter a contract, it's important that both sides fully understand what is expected of them. The language in the contract should be clear and not ambiguous. What happens when one party wants to end the contract? Terms should be fully explained before signing. Businesses that believe they have been wronged may want to explore the legal options for contractual enforcement. As Starbucks learned the hard way, an early termination can cost big bucks.

Source: USA Today, " Dispute with Kraft costs Starbucks $2.7 billion," Bruce Horovitz, Nov. 13, 2013

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