LEGAL VIEWPOINT Starbucks & Kraft Arbitration by Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib. Legal Counsel, Bahrain

Best negotiated agreements arising out of business are sometimes liable to collapse, failure and dismay. A good example is the acute dispute between the famous food giants, Starbucks and Kraft companies. A three-year dispute between Starbucks and Kraft started over distribution of Starbucks packaged coffee in groceries. Negotiations failed, and dispute was only resolved when an arbitrator decided that Starbucks breached the agreement with Kraft and ordered the company to pay the food giant $2.75 billion. This signifies the basic role played by arbitration in final effective settling disputes.

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Originally, there was an agreement wherein Kraft began selling Starbucks packaged coffee through groceries. However, after some time Starbucks decided that it may lose coffee markets for competitors, in case the deal with Kraft continues. Based on this unilateral assumption, Starbucks offered Kraft a big amount of money ($750 million) to end their agreement.

Starbucks wanted greater flexibility to sell the single-serve coffee pods that were taking-off very rapidly in the market. The terms of the agreement with Kraft limited Starbucks to selling pods that worked in Kraft’s machines. Thus, Starbucks could be in danger of being left behind in a race for market share against other marketing systems.

Kraft objected to Starbucks points that could lead to termination of the contract between them. In the meantime, before reaching an amicable solution, Starbucks broke-off the business relationship, irrespective of Kraft contrary views.

Later, for Starbucks, the share of the single-serving pod market grew up according to statistics from the market. Moreover, because of no longer sharing profits with Kraft, Starbucks made remarkable profits from its grocery store products.

The parties’ disputes over Starbucks termination of their partnership moved to arbitration when the two sides were unable to settle on their own.

This dispute illustrates how fluid marketplace trends can reach and can cause business agreements to become undesirable over time. In their original agreement, Kraft and Starbucks could have been wise to agree on set of times for renegotiation, during which they may recheck the terms in the face of changing economic and industry conditions.

An arbitrator, ruled that Starbucks should pay $2.23 billion in damages plus $527 million in pre-judgment interest and attorney fees to Kraft.

Kraft only initiated the arbitration proceeding after failing to stop Starbucks to terminate the agreement that both companies entered to market and distribute Starbucks brand coffee in grocery stores. This action was so successful that later both companies expanded their partnership to include new brands.

The contract was set to renew automatically for successive 10-year periods with no expiration date. One way not to renew the contract was a valid termination. The only other way that can get Starbucks out of this agreement was by taking over the business by paying Kraft the fair market value of the business along with, in certain instances, a premium.

The relationship was smooth and very successful for about 12 years. After that, Starbucks showed its intentions to go away from the partnership and made an offer to buy the business and Kraft rejected due to disagreement about the compensation. Later, Starbucks put an end the contract citing breach of contract as the reason and accused Kraft of breaking the terms of their deal. Following this, Kraft immediately initiated the arbitration proceeding to challenge Starbucks’s attempt to end the agreement and the arbitration award took place to end this bitter dispute. Starbucks was not happy; however, they paid the award money. Result was successful acceptance to the arbitration award.