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Crash Course on Vendor Agreements for Cannabis Operators

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April 25, 2019

From security contracts to agreements with others in your supply chain, the cannabis industry runs on legal documents.

Cannabis operators work with a wide range of partners, from delivery drivers to cannabis-specific accountants, distributors, testers, and other small business service providers.

In an industry as tightly regulated as cannabis, it’s imperative that each of these relationships be governed by an ironclad contract.

Here’s what to know about writing and signing vendor agreements in the cannabis industry.


Get an Agreement in Writing

This sounds like the most basic tip, but the cannabis industry isn’t federally legal – meaning some cannabis brands operate  in a grey area without contracts. There’s some debate over whether or not agreements are even enforceable, given the Cole Memorandum and general lack of federal protection for cannabis businesses.

However, most lawyers will say that having something in writing is better than nothing.

Should an issue ever arise with your vendors or partners, having a written agreement gives you something to go from. Depending on the type of contract, some lawyers will be able to argue successfully in court to defend your brand, even if cannabis is federally regulated.

And we know that many business owners work with friends and sometimes putting your handshake agreement onto paper can be a difficult conversation to have, but trust me it's worth it.  Further, any honest business operator would gladly cement terms they intend on following through on, so get the details of your arrangement in writing!

Know the Variations in Regulation by District and State

As cannabis operators are well aware, cannabis regulations can vary widely by a matter of miles. Crossing city lines can mean that an entirely different set of guidelines and restrictions apply. For this reason, some lawyers suggest writing your contracts with entities based in the same jurisdiction.

In a recent interview, a cannabis industry attorney explained that “if the state of jurisdiction has yet to legalize any commercial cannabis activities—like Wyoming—or is medical-only—like Delaware—your contract will likely be unenforceable in that state. And I can’t tell you how many times I’ve seen contracts with Delaware, or even worse, Wyoming, as the jurisdiction of choice.”

Pay attention to where your vendor is headquartered, and make sure the terms of the agreement match local regulations.


Don’t Use Generic Contract Templates

Templates may seem like a good shortcut, but industry lawyers warn against simply plugging in your name to boilerplate documents.

The reason for that?

The cannabis industry regulations often require contracts to have a significant amount of customization to be compliant. Contracts from one state won’t necessarily work in another; similarly, many contracts include provisions which can put cannabis operators in hot water.

For example, indemnity provisions come standard in many vendor agreements.

An indemnity clause is designed to act as an insurance policy where one party agrees to make good on a loss or damage of the other party. In an industry like cannabis, where diversion and theft can lead to shrinkage, this clause can present unnecessary liability exposure for cannabis operators.

Arbitration clauses are also ones to watch out for. Make sure your contracts don’t include any language that could increase your risk, and customize all the language to ensure it meets your local regulations.

We highly suggest working with a cannabis-specific attorney who can keep your contracts within the bounds of the law because regulations are evolving and maturing every year.


Write Your Contract for a Worst-Case Scenario

It's easy to get lost in your dreams of crushing it in the cannabis industry, but don't be fooled, there are many risks you will encounter as a cannabis operator.

In the best case scenario, a contract can protect your business. In the worst-case scenario, your contract will be completely disregarded by a judge in some vendor dispute. Therefore, it makes sense to try to create the terms of your contract to protect your business no matter what happens.

Whether you are making an agreement with a landlord, supplier, distributor, or business partner, make sure to consider the worst-case scenario should that relationship go south. Work with a lawyer to build in provisions addressing those issues before they happen.

Again, consider how the industry will evolve over time.  What would full federal legalization do to your agreement?

Include in your cannabis contracts the risk of regulatory change to protect your IP and competitive edge as the industry grows. Talk to lawyer who can advise you on the best way to shield your brand from risk and protect your cannabis business’s future.


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