The cannabis market is kind of like the Wild West. As more states approve adult-use cannabis, companies are scrambling to adhere to regulations, be the first to reach new customers, and stake their claim in the market. In the process, many cannabis operators enter into vendor agreements or partnerships that may not serve them in the long-term.
Our experts frequently work with cannabis operators who are seeking to remedy – and, more likely, exit – contracts that have gone sour. Here are your options if you’re stuck in a bad contract that doesn’t work for your cannabis business.
What’s a bad contract?
There are a few scenarios in which a contract goes bad. The most common instance is when you aren’t being compensated fairly. Your effort, energy, and resources are not being compensated for their actual relative worth to finishing a project or deal successfully. This can happen when a new cannabis operator doesn’t know their value.
Other common scenarios are when the other party is not performing their agreed-upon responsibilities; they fail to hold up their end of the contract. Or, some cannabis operators enter into contracts and end up not being able to perform their assigned duties. Many distributors find themselves in bad contracts due to vague terms with the supplier, or a non-exclusivity agreement with a certain product line.
No matter what your bad contract scenario, the goal is to find a win-win between all the parties in the contract. Work toward aligning incentives as much as possible so everyone rallies around the same end result. And, if you can, try to mitigate a contract that’s going south before it gets worse.
When you notice a contractual relationship heading south, document the instances of non-compliance. Often, in the scenario of a partner’s performance not being to the standard set forth in the contract, the other party can’t substantiate the issues they’re having. Document each and every instance of insufficient performance. You must have concrete examples to demonstrate your case if you wish to withdraw from an agreement early – especially if the disagreement becomes litigious.
Whether it’s a supply agreement, a lease, or any other contract, make sure you document everything and consult your lawyer or an outside attorney. Get situation-specific guidance from an expert before making any definitive moves to exit a contract early. They can help you minimize the litigation risk you face in getting out of a bad contract.
How to get out of a bad contract
Follow the agreement terms
It’s common that an agreement will have a termination provision, so that those in the agreement can exit so long as they follow the guidelines. Check your contract to see if there’s anything that gives you instructions as to how to quit the contract, such as by providing written notice to the other party within a certain window of time. Follow these instructions carefully: for example, providing verbal notice that you intend to exit the contract is not the same as written confirmation. These details make the difference between an organized, amicable procedure and a lawsuit.
Ask for a renegotiation
In many, if not most cases, a few simple uncomfortable conversations can lead to better, more equitable deal terms. Experts suggest that you start by pointing out that the deal is inequitable for your company. “Because most people have an innate desire to be fair, the other party may be willing to reopen a discussion before the end of your contract period, especially if you back up your request with convincing evidence,” write the experts at Harvard. Show that the economics make no sense for your company and that you’re seeking to remedy an unfair deal.
Here’s an example. Imagine a scenario in which you’re a distribution company that sells and distributes products for brands. Your payment terms to the brand are on units delivered to a retailer – and not on units collected. Essentially, you are paying the brand before you get paid. Now, what if the retailers start getting a lot of refunds from clients, or maybe they pay their bills late or not at all? Then you’re left floating payments, and could quickly run out of cash.
Show your brand partners that this is not financially responsible and that you want to pay them out on units collected on, and not by units delivered to the dispensary. Point out to the retailer that you’ll be unable to distribute their product if you go bankrupt. Essentially, if the economics don’t work, then the contract means nothing because you will not be able to perform. It’s important to show your reasoning for each deal term and why it does or does not work for you.
There may be ways that you can mitigate a bad contract without having to litigate or cause conflict. For example, if you’re in a bad real estate contract, consider subleasing. Usually, your lease will say whether or not you can sublease. If permitted, take the time to find a viable tenant to take over your space. If subleasing is not permitted, speak to with the lessor and see if they will remove you from the lease if you can help them find a new tenant.
Real estate is one of the biggest expenses for a cannabis operator and therefore can cause some of the most complicated cash flow issues. In a scenario where you get a lease the intent of getting a cannabis business license, there’s the risk that you won’t get the license or won’t want to be stuck in the lease for the full term. See if you can sublease to new tenants or read what the provisions are to walk away from the lease. In some cases, it may even be less expensive to break the lease and walk away. Speak to one of our experts to weigh the financial costs and benefits.
Claim impossibility of performance
Last, there’s a legal provision called “impossibility of performance” that you may be able to claim to get out of a contract. Impossibility of performance is “grounds for contract termination because circumstances beyond the control of the contractual party prevent performance. Death or incapacity of a key player involved in the contract can cause such an impossibility.” Natural disasters or other acts of God are considered eligible reasons for ending the contract due to circumstances beyond your control.
Other ways to claim the impossibility of performance include:
If you’re caught in a bad contract, reach out to our team today and we can help you get in touch with a cannabis legal expert who can help you find a way out.