The cannabis business, though unlike others in many regards, still requires thorough, thoughtful contracts.
By most relevant measures, Oklahoma’s medical-cannabis market is both the largest and fastest-growing on the planet. The industry is blossoming. Sophisticated businesses are taking root. Millions of dollars in business is being conducted. Even so, industry participants and ancillary businesses too frequently transact complicated business deals with inadequate understanding of the way contract law applies to those agreements, sometimes limiting their enforceability.
The consequences of entering into a business agreement without appreciating some of the basic principles of contract law can be disastrous. It might result in otherwise avoidable litigation over the terms of the agreement. It might result in an agreement that is entirely unenforceable, which might leave one party without any effective remedy to obtain the benefit of her bargain. To avoid these results, responsible business owners in any industry should understand the fundamentals of a contract and consult competent legal counsel with respect to any major business deals. The cannabis industry is no exception.
A valid contract requires offer, acceptance and consideration. Where one party makes an offer and the other accepts, a “meeting of the minds” has occurred. Naturally, this requires that the parties share an understanding of the terms of their agreement. Where one party is mistaken about a material term but the other party is not so mistaken — or where one party affirmatively misleads the other about a material term — there is no “meeting of the minds,” so no contract. Similarly, where the party to whom an offer has been made expresses a willingness to accept on any terms different from those of the original offer, there is no acceptance — there is a “counteroffer.” Sometimes, partial performance of a party’s anticipated obligations is construed as acceptance.
“Consideration” refers to an exchange of value and is necessary to support any contract. Consideration generally involves a benefit to a party or promise to a party by virtue of the other party’s agreement to do or not do something. Classic examples include cash or other property, a valuable act or service or the waiver of a right to sue. Where a party promises to do a gratuitous act — one not exchanged for anything of value — or an act that is legally required of that party, the promise is not consideration; there is no contract.
To be sure, where an oral agreement fully satisfies the requirements of a contract, it is usually enforceable, even though unwritten. That said, Oklahoma law — and that of most other jurisdictions — applies several exceptions to the general rule, requiring that certain contracts be memorialized in writing. These exceptions include contracts for the purchase or sale of real estate, contracts for the purchase or sale of goods exceeding $500 in value and contracts for services that cannot be completed within one year. Cannabis businesses will very likely have occasion to enter into agreements that are required to be in writing. For example, a contract for sale of cannabis products likely involves the exchange of property exceeding $500 in value. If a cultivator wants to get paid on such a contract, she should record the agreement. Similarly, many service contracts contemplate terms exceeding one year from their making. These contracts are invalid — and unenforceable — if unwritten.
Moreover, there are very good reasons to record even those agreements that are not required to be made in writing. Doing so clarifies the material terms of the contract and avoids the need to resort to additional evidence of the parties’ intentions. Absent such clarity, a party seeking to enforce the contract might be challenged to demonstrate its terms.
Perhaps most importantly, written contracts help avoid litigation between the parties. Usually, litigation takes considerable time — and extraordinary expense of resources and energy — even for the party that wins. So even a righteous party has good reasons to avoid protracted and expensive dispute, which often leads to compromises that a well-written contract might render unnecessary.
If you are drafting a contract that concerns anything of considerable value, you should consult a qualified attorney. Many businesses try to avoid legal fees whenever possible. This is unwise. A small investment in legal counsel at the outset of a business relationship might save you tremendous litigation expense down the road. Legal services are an absolutely necessary line item for any cannabis-business budget. So if you do not have a lawyer, you should get one. If you have one, you should use her.
You should not rely on pre-written, generic contract templates you might find online. Many of these cookie-cutter contracts are designed to comply with another state’s laws and, in any case, are not designed for your specific purposes. They usually include myriad clauses that will only complicate — not resolve — the terms of your intended agreement. There is a reason these agreements are available for free or minimal cost; they are not worth the paper they are printed on. You are better off writing your own contract than relying on this kind of boilerplate.
If you are taking a stab at drafting your own agreement, here are some tips to follow:
Clearly spell out all of the terms of your agreement. Do not leave any material matters to mutual unwritten understanding. Litigation occurs precisely because of uncertainty regarding unwritten terms. So if you expect services or payments to be made according to any particular schedule, record that understanding. If there are contingencies that might excuse a party from performing, write them down. Do not leave any matters to interpretation or assume that finer points will be worked out later — minor details often are the causes of major disagreements.
Describe the consideration. If money is changing hands, record the amount and date on which that has happened or is to happen. If services are rendered, describe those services in detail. Sometimes consideration takes the form of a promise not to do something — for example, a severance agreement with a departing employee usually contains a promise not to sue — and these promises should also be recorded in specificity.
Identify the correct parties. Legally, there is a difference between you and your business entity (e.g. LLC or corporation). Practically, that distinction might be of profound importance. Your business’s liabilities ordinarily only attach to your business’s assets. Your personal liabilities can attach to your personal assets. Protect the latter and make agreements on behalf of your business rather than yourself. Some business operations comprise multiple entities. Where this is so, be sure you clearly identify which entities are parties to the agreement. Again, this should help avoid a scenario in which the liabilities of one entity attach to another.
Finally, avoid “legalese.” Non-lawyers tend to think they have to sound like lawyers in order for their words to have legal force. That is not the case, and often, attempts to use legal language only confuse rather than clarify. So there is no need to use technical language. Just use the same words you would use in negotiating the agreement with the other party. Nothing more is necessary.
Cannabis businesses should consult legal counsel before entering into complicated or consequential agreements. Those agreements should be properly memorialized, and business owners ought to familiarize themselves with the fundamentals of contract law to ensure that their agreements are tailored to their specific circumstances and legally enforceable. When in doubt, call your attorney.
J. Blake Johnson
J. Blake Johnson is the founder of Climb Collective and a partner at Overman Legal Group. The preceding is intended to be generally informative but should not be interpreted as specific legal advice. If you operate a cannabis business or otherwise seek legal counsel, you should consult a qualified lawyer with whom you have an attorney-client relationship and who is familiar with your legal needs.