Construction projects in the cannabis industry require an especially attentive degree of diligence to ensure compliance, given the unique standards and regulations that need to be adhered to in this evolving space. Contractors interested in getting involved in this space would be well advised educate themselves on the particulars of the state and local-level regulatory frameworks applicable to the prospective projects in question, address the scope of each contracting party’s responsibilities and liabilities at the outset, and seek consultation in the event of any uncertainty or dispute.
First and foremost, cannabis cultivation facilities require an intricate system of lighting, watering, heating, ventilation, and air conditioning mechanisms, whose effectiveness hinges on the proper implementation on the part of construction contractors of certain design standards. A failure to adhere to these specialized standards could compromise the quality or viability of the producer’s crops. This is what happened in J Lilly LLC v. Clearspan Fabric Structures International Inc., a case in which a licensed producer sued a construction company for failing to construct a greenhouse in a workmanlike manner. The defects that arose from the defendant’s alleged negligence led to much of the plaintiff’s product being lost to spoilage, ultimately costing the plaintiff $5.4 million in lost profits. Interestingly, the Court in this case ruled it lacked jurisdiction to award the lost profits sought, as they arose from a business operation that is illegal under federal statute, i.e., the Controlled Substances Act. This demonstrates the importance of both 1) ensuring compliance with facility standards from the outset of the design process throughout the construction period and 2) agreeing upon an alternative forum of dispute resolution that can be turned to in order to hold a breaching party accountable.
Further, grow-op facilities and dispensaries alike are often subject to complex and strict zoning regulations circumscribing where and how cannabis-related establishments can operate. The specifics of these regulations will vary from state to state and, indeed, even between different intrastate municipalities. For example, most states and municipalities establish “buffer zones” between cannabis facilities/dispensaries and certain protected locations such as schools and places of worship. Less obviously, local or state-level zoning ordinances may prohibit businesses from emitting odors in a manner that creates a nuisance for neighboring property owners. In the event that a cannabis facility’s noncompliance with such an ordinance can be traced back to a construction contractor failing to implement an effective ventilation/filtration system, for example, a dispute may arise as to who should bear accountability for the consequences of the violation. It is imperative to foresee these situations and deal with them proactively, establishing explicit contractual terms outlining the scope of each party’s liability.
Finally, cannabis dispensaries are subject to much stricter regulations regarding security than most other kinds of retail establishments. This is the result of regulatory and security concerns unique to the cannabis industry. First, states are careful to design their legalization schemes in compliance with federal guidelines, including the prevention of cannabis industry revenue getting in the hands of criminal enterprises, the prevention of cannabis products being diverted into non-legalization states, and the prevention of violence and the use of firearms in cannabis activities. Second, licensed producers are forced to shoulder unique risks as a result of the hesitancy many financial institutions have in establishing relationships with enterprises engaging in operations in violation of federal law, meaning most of these producers have to resort to dealing in cash only. This sharply increases the risk of theft/robbery at these establishments, warranting enhanced security requirements at the local and state levels, including video surveillance systems, model floor plans, product/cash storage rules, access control mechanisms, third-party security audits, or even perimeter fencing, depending on the state/municipality in question. Given the especially severe consequences a failure to adhere to such requirements could have for a cannabis business, ranging from massive losses in product/revenue to the revocation of state licenses, it is crucial to outline responsibilities and liabilities in construction contracts and build in alternative dispute resolution mechanisms that will ensure the availability of recourse for all parties involved.
(Justin is a 2nd-year law student and summer student for CansultED. CansultEd is an alternative dispute resolution company that operates exclusively in the US Cannabis space.)