Cannabis businesses of all sizes need to understand contract basics
Article By: Hilary Bricken
In the 21st century of cannabis, cannabis businesses of all sizes still ignore some contract basics. Whether it’s a cannabis distribution agreement, a cannabis intellectual property licensing agreement, or some form of cannabis M&A, the contract basics listed below need attention.
Date the agreement
This seems obvious and trivial, but a lot of companies skip this extremely basic step. If there’s any dispute between the parties, you may be impaired by the lack of this essential documentation. Just make things easy on yourself and define the “Effective Date” of the agreement as the date on which all of the parties sign.
Get your recitals straight
Lots of cannabis companies think that contract recitals don’t matter. This isn’t true. Recitals can be crucial where they give context to the agreement, describe the parties’ intent and history, and may be incorporated as enforceable provisions into the agreement itself.
Get your changes in writing
Most agreements contain boilerplate provisions requiring that all enforceable changes be made in writing and signed by all parties. Of course, the parties are also free to agree on enforceable verbal changes, creating a multitude of messes during the agreement. Just get your contractual changes (amendments) in writing to keep everyone honest.
Define the term
Many cannabis contracts are needlessly open-ended. This is a mistake. Good contracts define the term of the agreement so that the parties know when their obligations to each other end. Define a term accordingly and include provisions for renewal if you’re looking to re-up the terms and conditions after the term ends.
Revisit your agreements on a regular basis
Lots of changes occur in the life of a cannabis business. Changes to cannabis regulations, alone, can wreak havoc on a cannabis contract. This means that companies should be revisiting their lucrative contracts on a regular basis to ensure that they’re not breaching those agreements and/or to see if the agreements need to be updated or changed in accordance with changing laws and regulations.
Keep capitalized terms consistent
There aren’t many things more frustrating for a transactional lawyer than to see the inconsistent use of capitalized terms. I see this misuse in most cannabis contracts to this day. Capitalized terms should be defined and they carry major weight in a contract as a result. To use those terms incorrectly can muck up the contract’s interpretation and enforceability.
Governing law matters
When parties to a contract are happy, governing law of the agreement is an afterthought. However, when a dispute arises, governing law becomes a top priority. I see lots of cannabis contracts coming to my clients from Canada and more often than not the governing law is Canadian law. Clients don’t typically realize the implication of Canadian law governing their conduct under the agreement. If you get one of these agreements, make sure the governing law is that of the state in which you’re operating.
Good contracts clearly quarterback what happens between the parties in the event of a dispute. Failure to include a dispute provision (or to include a poorly drafted one) leads the parties directly into court without any kind of mandatory alternative dispute resolution options. Going straight to court may sound good to some parties, but in reality it will take a significant amount of time and money to resolve issues that way. A solid dispute provision will incentivize the parties to work together (before taking the gloves off) to overcome their issues.
Correctly fill in notice provisions
I cannot tell you how many times I’ve seen blank notice provisions or notice provisions that aren’t updated with properly designated addressees. A notice provision is often overlooked as inconsequential, but it matters a lot if the parties fight. Why? Because this provision dictates things like effectiveness of the parties’ communications between each other for things like service of legal process, termination, and payment.
Ignore the regulatory at your peril
To save themselves some dollars, cannabis companies still seem to DIY on their legal agreements, which means many are pulling their major contracts from google or “frankensteining” previous agreements they receive from past attorneys. None of those contracts seem to competently take into account the cannabis regulatory situation posed by state and local law. That failure will have detrimental implications for the parties in that the agreement may be altogether unenforceable, nonsensical, or immediately put one or more parties in breach.
Source: Canna Law Blog