As more states have rolled out legalization campaigns over the last decade, the cannabis industry has ballooned to become a multi-billion-dollar industry – a trend expected to continue as new markets are created and more licensed producers enter this space. This means an ever-increasing amount of money tied up in commercial contracts between producers, distributors, landlords, construction companies, and financial institutions.
Unfortunately, a growing market comes with a greater potential for disputes regarding the performance of contractual obligations. If you’re a player in this space who feels that a contracting party has failed to fulfill the terms of the contract you’ve entered into, or are the target of such an accusation, you may think that a drawn-out, expensive lawsuit is inevitable. However, there are a number of reasons why an alternative course of action is not only preferable but mutually beneficial.
It is important to remember that, even in states with legal cannabis markets, the activities detailed in cannabis-related commercial contracts remain illegal at a federal level, due to the drug’s status as a Schedule I substance under the Controlled Substances Act. The largely hands-off approach taken by federal law enforcement with regard to state legalization programs is simply a policy choice. While this tension between state-level and federal-level law rarely poses legal risks for those involved in manufacturing, selling, or purchasing cannabis in legalization states, it may limit the avenues available for those who wish to have a cannabis-related commercial contract enforced or otherwise pursue a breach-of-contract claim in court.
Consider the recent case J Lilly LLC v. Clearspan Fabric Structures International Inc., in which a federal court refused to enforce a contract between a licensed producer and a commercial greenhouse builder, in part because awarding damages for lost profits in such a context would compel the defendants to violate the Controlled Substances Act. Thus, the plaintiffs were left with no recourse for the financial harm incurred as a result of the alleged breach of contract – now in addition to an ultimately pointless legal bill.
Commercial cannabis contracts are a relatively novel phenomenon, and courts are still trying to figure out if and how they can be enforced. To avoid running the risk of spending time and money seeking the enforcement of a cannabis-related contract, only to have your claim rejected on account of a technicality beyond your control, consider proactively designing such contracts to include a mandatory arbitration clause, which will designate an arbitral proceeding as the forum of first instance for resolving disputes that may arise.
An arbitration is an alternative dispute resolution process by which parties to a dispute agree to abide by the ruling of a neutral arbiter, whose decision is made on the basis of the evidence/arguments submitted by the parties and, in many cases, the relevant expertise of the arbiter in the particular context. Like those of court proceedings, arbitral outcomes are unilaterally arrived at, meaning it doesn’t matter how far apart the parties are in terms of their understanding of the facts/law at issue. The arbiter simply evaluates the parties’ competing claims and determines whose is more compelling. Nonetheless, there is more flexibility regarding the rulings available to arbiters – the arbiter may have free rein to fashion a ruling as he/she sees fit in the circumstances, or, alternatively, the parties may agree to have the arbiter choose among two rulings respectively proposed by the parties themselves.
It would be in neither party’s interest if claims regarding alleged breaches were destined to fail prior to a resolution. After all, what would be the point of putting all the effort into configuring a particular contractual relationship if its terms are known to be unenforceable from the outset? Thus, both parties to a commercial cannabis contract should be incentivized to add mandatory arbitration clauses, at least until the jurisprudence paints a clearer picture regarding courts’ ability to enforce contracts in violation of the Controlled Substances Act.
By Justin Hovey
(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.)