NEW YORK (

TheStreet

) -- Both

Kraft

(KFT)

and

Starbucks

(SBUX) - Get Report

have been in the red Monday morning as the former challenges the latter's decision to terminate their 12-year coffee distribution partnership.

Kraft maintains that the contract remains in effect indefinitely, subject to "certain limitations and protections," and that Starbucks can't just walk away from their deal.

"Starbucks unilaterally and unjustifiably declared in public statements the agreement's termination, needlessly risking confusion among customers about the agreement's status," said Marc Firestone, Kraft's executive vice president, corporate and legal affairs and general counsel.

Under the protections of the indefinite agreement,

Kraft

needs to be given sufficient adjustment period to deal with the end of their partnership and must be compensated with the fair market value of the Starbucks business partnership, plus, possibly, a premium of up to 35% of that value, the company said.

Kraft argues that it helped Starbucks build its retail grocery coffee business significantly over the years, from $50 million in annual revenues in 1998, when their partnership was formed, to $500 million today.

"In effect, Starbucks is trying to walk away from a 12-year strategic partnership, from which it has greatly benefited, without abiding by contractual conditions. Kraft reasonably expected Starbucks to honor the contract," Firestone declared.

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Starbucks shares have fallen 2.1% to $30.48 in morning trading, while Kraft shares are sliding 1.3% to $29.91. The losses are in line with the market's overall downward trend on the day.

-- Written by Andrea Tse in New York.

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