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The cost of poor contracting: a case study

December 4, 2013

I am sure that Starbucks did not expect to face a $2.8bn settlement when they decided to terminate  their distribution agreement with Kraft. In their minds, there had been ‘material breach’ – and indeed, based on subsequent performance, it does appear that Kraft was not doing a great job.

But this case study shows the importance of being clear about business objectives and, in any long-term agreement, the need to periodically review and update them. It also illustrates a need for effective governance and performance management principles and clarity over their enforcement, as well as the extent to which they contribute to ‘materialism’.

There is an excellent summary of this recent dispute in a recent edition of Inside Counsel and it can be accessed here. Of course, it is easy to point to issues with contract drafting, or perhaps the judgment that led to unilateral termination (always a risky decision). But in the end, was it really legal issues at fault, or the absence of adequate contract and relationship management? Why did issues either build up or fester in such a way that the communications between the respective CEOs became so hostile? was there a robust contract and performance management regime and if so, was it followed?

The legal issues around material breach and rights to terminate are critically important, but it is the operational aspects of the relationship that will determine whether issues are resolved amicably. Contracts provide the framework and good contract management ensures that framework is followed, and also that it is updated and maintained. it also ensures that problems are identified early, addressed collaboratively and, when necessary, escalated to relevant executives in a timely manner.

i have no idea how much this was happening at Starbucks or Kraft. But at least for Starbucks, it has been an expensive lesson.

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