The decades old agreement that began in 1998 between Starbucks and Kraft Foods to sell its packaged ground and whole bean coffee reached a pricey demise during arbitration according to a November 12, 2013 New York Times on-line story. The $2.75 billion payment from Starbucks will be made to Mondelez, a Kraft’s spin-off. An original offer of $750 million from Starbucks to Kraft Foods back in 2010 to terminate the contract got the legal battle brewing. Interpretation over the right to terminate was the focus of arbitration.
The contracting process serves as the mechanism to legally bind all parties to honor obligations documented under an executed agreement—the Ts (terms) and Cs (conditions). Breaches by either party are subject to penalties related to performance as defined in the contract. Prior to contract execution, various departments should be presented with the opportunity to validate performance criteria or identify additional protective language to minimize risk. It is at this time that stakeholders either agree to proceed for signature or request further negotiation. Neglecting to garner all players buy in during this process can lead to future heartburn. This is why including the right representatives in the internal contract review process is crucial.
Who should be included in the process? Participation, on some level, should come from business, legal, subject matter experts, finance, and last, but certainly not least, procurement. The main purpose for these reviews is establishing acceptable risk tolerance associated with contract performance. Groups that should be included:
- Business – Company’s resident experts and customers impacted-as business terms are negotiated this team is in the best position to confirm whether or not terms can be met as contracted
- Legal – Owner of contracting document templates (e.g., master agreement) and contract language (e.g., clauses (primary and alternative) with responsibility to provide counsel on associated risk related to modifying language in those sections such as applicable state law, rights for termination, or arbitration
- Subject Matter Experts – Any other groups that provide insight related to an area of expertise like required insurance coverage or technical requirements for securing data
- Finance – Provides internal approval for complex deals with financial implications to validate business case as well as ensure accurate financial terms (e.g., payment terms)
- Procurement – Co-author of business terms and sole company purchasing agent responsible for shepherding all parties through the contracting process to secure a mutually agreeable contract
Any decision to terminate a contract presents potential risks regardless of the process. However, that decision can be less costly if a sound contract review process is followed. Something to perk upon before you ink your next agreement.