Cannabis Contracts – Emerge Law Group

The idea that “any contract is better than no contract” gets many new businesses into hot water. Small businesses, start-ups, and business partners eager to hit the ground running will skim over early documents or sign “temporary” agreements, intending to revisit the topic later or amend the agreements as the business grows. These hastily signed documents, however, can cause major issues if the parties get involved in future litigation. Here are some common and easily avoidable contract issues we’ve seen.

Signing “Placeholder” Contracts

When starting a business, some people will sign a “placeholder” or “temporary” contract, planning to draft a “permanent” contract later. Believe it or not, oftentimes the parties never get around to forming a definitive agreement.

“Placeholder” contracts are often valid contracts, though. Even if the parties have verbally discussed drafting formal contracts later, they may still be bound by the terms of the original placeholder agreement. This can be problematic during litigation because the signed agreement may contain provisions that the parties had not considered carefully before signing. For example, a “placeholder” operating agreement may have a mandatory arbitration clause that neither party realized was in the document, or may contain complicated terms about how and when the members may dissolve the company. This can make litigation increasingly expensive as the parties try to piece together the intended terms of their agreement after the fact.

Signing “Key Terms” Contracts

Some parties may try to avoid signing initial contracts by instead signing “preliminary” documents that summarize the main points or key terms of their overall business transaction. Unlike “placeholder” contracts, these preliminary agreements may provide a false sense of security by including provisions that state that the parties will draft and agree to additional formal business documents later.

But if a party takes action pursuant to a signed “key terms” agreement, they run the risk of binding all parties to the agreement’s terms. If the agreement has enough essential terms, a preliminary contract may still be legally binding, even if the parties see it as incomplete. A court may enforce such a binding agreement even if it has open terms or minor terms that the parties intended to address later. This is so even when the contract contemplates that the parties will negotiate and agree upon additional terms set forth in a “final” agreement.

A related issue is the agreement to agree. The problem with agreeing to agree to later terms or documents is that—surprise! —both parties will eventually have to agree to the later terms or documents. If the parties are unable to agree at the beginning, when they are both excited about the new business and eager to work together, the likelihood of being able to agree on those terms once the realities of business ownership set in will probably be much lower, especially in the event of a business dispute.

Who’s Signing This Thing?

Many business owners choose to form multiple entities that will each focus on one portion of their larger business plan. This makes it important to keep track of exactly who is signing because one misplaced signature can put unintended people and entities at risk.

The signature blocks on any corporate document should be clear regarding the entity that is party to the contract. One entity breaching a business loan contract, for example, could endanger the assets of other entities under the same business umbrella if the contract is not clear on which entity entered into the contract. Other companies not intended to be responsible for the loan may be named in a lawsuit along with the breaching entity and may incur significant costs trying to remove themselves from the lawsuit.

Inaccurate signatures can even expose business owners to personal liability. If the incorrectly named entity does not exist, but the managers signing the contract do, a court or arbitrator may hold them personally liable for debts of the nonexistent entity. This absurd result – and the significant legal fees that may be incurred correcting this result – might be avoided by simply cross-referencing the contract with the Oregon Secretary of State business registry prior to signing.

Look (For A Lawyer) Before You Sign!

Signatures—even on initial, preliminary, or placeholder business documents—can carry far more weight than parties realize or intend. Litigation issues over signatures like these can be avoided by consulting with an experienced business attorney at the onset of a business, rather than waiting until litigation disputes arise when it can be too late. And, once litigation proceeds, it is crucial that the parties provide any and all signed business documents to their attorneys, no matter how unimportant or inconsequential the documents may seem, so that any potential contractual issues can be resolved as quickly and smoothly as possible.

After the dust settles from a legislative session we are always left wondering what happened. Especially after this session which was crazy, fast-paced and chaotic. With the primary piece of legislation being House Bill 3400 there is so much to pull apart (and I will in a really long post). It feels as though the focus has been on big picture policy and not on the practical changes that have occurred. With that being said, tucked away in HB 3400 is this section:

PERSONAL AGREEMENTS

SECTION 83. Notwithstanding ORS 475.304 (7), a person responsible for a marijuana grow site may enter into an agreement with a registry identification cardholder under which the registry identification cardholder assigns, to the person responsible for the marijuana grow site, a portion of the right to possess the seeds, immature marijuana plants and usable marijuana that are the property of the registry identification cardholder.

The section is titled Personal Agreements and we have been waiting for something like this for a very, very long time. One of the biggest challenges of the OMMP is that the patient owns everything all of the time. That means they own the plant and the flower and the trim – everything. Even though the cultivator invests the money, does the work and likely distributes it to people other than the patient it all belongs to the patient and they can claim it at any time. You can see this reflected in statutory language and even in the dispensary transfer forms. While this ownership system might make sense under a purely medical program, under the commercial medical system it has made zero sense.

Section 83 is the fix. Think of it as the ability for the grower to claim their property interest in their product right out of the gate. Essentially a grower may now enter into a contract (yes that means a real document between a grower and a patient that all parties will sign) where the patient signs over their interest to the grower. Couple this with the fact that the Oregon legislature has removed the reimbursement language from the dispensary piece of the medical program and you have a system that actually looks and feels like a real commercial program.

We will post a sample version of a contract like this but remember this is a binding contract so it is important to think carefully about what goes in it and consider having a lawyer draft it or at least review it. Here are a few things that should be included:

patient and grower name, OMMP card number, date card expires
how much product is being released to grower
how much, if any, interest will the patient retain
what is the patient getting in return for the use of their card, if anything
is there any financial compensation being included for any party
what is the grower’s obligation to the patient
if there is medicine going to the patient how much and when
what happens if grower can’t perform and provide patient the agreed medicine or compensation
are there circumstances where the amount, either medicine or financial compensation, might change
what happens when it is time to renew, who pays and who has the responsibility to make sure that renewal occurs
how much access, if any, does the patient have to the garden or information about production
actual language that releases property interest

There are many more pieces that should go into a Personal Agreement. This list is absolutely not exhaustive. Each one of these documents should be commemorating the specific agreement between a patient and their grower. If you are establishing a medical garden or participating in the system now it is time to get your agreement in place. Think of it as progress.

As a side note – look carefully at the statutory language in Section 83 and you will see something new. The term “person responsible for a grow site”. This is also a new concept for cultivators but is pulled from the dispensary program. The OHA will be making rules around this term so stay tuned.

Posts Tagged:Cannabis Contracts

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