California Cannabis Contract Conundrums For Lawyers

AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s

We were prompted to write this article by the juxtaposition of two articles republished by Cannabis Business Executive in its July 4th Edition. The title of the first article, The Top 5 Most Dangerous Cannabis Contracts in California, caught our eye. We were intrigued by the title. What is a “dangerous” contract?

Dangerous is not an adjective we would use to describe a contract. We regularly describe contracts as ill-conceived or poorly drafted. Such contracts are “dangerous” for the parties. Such contracts expose the parties to financial loss. Even a one-sided contract must be well-conceived and carefully drafted in order to minimize the risk of loss because one party fails to perform.

We will come back to the list of the five most dangerous cannabis contracts. First, we want to briefly comment on What’s a Cannabis Lawyer? The juxtaposition of this article with the above article was surprising. It seems to us the answer to the question “What’s a Cannabis Lawyer?” is “See above.” Isn’t a lawyer who can identify the five most dangerous cannabis contracts a cannabis lawyer?

The title to the second article, like the title to the first article, was eye-catching but misleading. The title “What’s a Cannabis Lawyer?” is a misleading presentation of an issue that plagues California’s cannabis industry. The opening sentence of the article “When compiling the new cannabis law chapter this year, one question loomed largest; what does it mean to be a cannabis lawyer or law firm, and why should cannabis company executives need one?” explains the misleading title.

Asking a single question in two different forms reflects an unjustified conceit. This conceit arises from the idea there is something “special” about cannabis. What is special about a cannabis lawyer? Nothing. What is special about a cannabis business executive? Nothing. Cannabis is not special. Cannabis is an agricultural product with a boatload of historical baggage from marijuana’s place in the War on Drugs.

A business executive involved in the cannabis industry must first ask “Am I qualified to decide what advice and assistance I need in connection with a contractual relationship?” When the first question can be answered with a qualified affirmative, the business executive must then ask, “Who can provide me with the advice and assistance I need in connection with the establishment of an on-going business relationship, and how can I be confident I can rely on the legal advice and assistance I receive?” A business executive involved in any industry should always ask the same questions.

Consider the article “The Top 5 Most Dangerous Cannabis Contracts in California” a five-question pop-quiz. As a business executive with a substantial financial interest in the performance of the parties to each of these types of contracts, what skill and experience should a lawyer have who represents my interests with respect to this type of contract? Does my lawyer have the required skill and experience?

The question business executives involved in California’s cannabis industry should ask with greater frequency is, “Do I know enough about the issues involved in a matter to judge the legal assistance I need?” We have constantly marvel at how many business executives involved in cannabis rely on lawyers whose skill and experience are based in criminal law. Avoiding jail time is no longer a primary concern for most of the individuals involved in California’s cannabis industry.

Making money appears to be the primary concern of most business executives involved in the cannabis industry. Why would the advice of an experienced criminal attorney help you make more money? Experience in commercial transactions and in the negotiation and drafting of business agreements seem far more beneficial. Almost one-half of California dollars spent on cannabis by consumers represent taxes due a governmental agency. Securing quality advice relating to minimizing the tax load on a cannabis business appears important, although as we have observed, many tax advisors involved in the cannabis industry are not well-qualified. [ See Choosing Cannabis Tax Advisors.]

California will have a substantial financial interest in most cannabis business contracts as a consequence of the Cannabis Cultivation Tax (“CCT”) and the Cannabis Excise Tax (“CET”). The most straight-forward business contract is a sale of real property for cash. Every lawyer involved in sales of real estate quickly learns that a sale is not completed until escrow closes and the check clears. The closing of a sale, however, may not be the end for the parties. The parties may become embroiled in litigation. Such litigation may involve others – brokers, lenders, title insurance companies and governmental agencies. Controversies over cannabis business contracts are likely to involve claims by California.

 

California is also likely to have a regulatory interest in business contracts involving cannabis because all commercial cannabis activity must occur between licensees. Proposition 64 was ill-conceived and poorly-drafted [See Implementing Proposition 64” Marijuana Policy in California and Keeping Proposition 215’s Promise ] California’s regulatory landscape is rapidly evolving. [ See Background – California Cannabis Regulation and Cultivators – Taxes – Licensing Delays ] California’s cannabis regulatory agencies have proved singularly inept. [See California Chaos Causes and California Cannabis Regulation Blunders ] A transaction that is legal today may be illegal tomorrow. A contract that complies with law when executed may be against public policy when litigated.

In order to establish a contract, the parties must reach a meeting of minds. The five types of cannabis business contracts identified as most dangerous involve on-going financial relationships. The meeting of the minds that is required to establish such a contract must continue to exist in the future as the underlying premise for the contract is a meeting of minds. If the premise for a contact fails, the contract will begin to unravel. California has an interest in every contract, but it is unlikely to be a signatory. California’s interests in cannabis business contracts can never be overlooked by the parties.

We would likely identify five different types of contracts as those which should cause the greatest concern for business executives. We have a different perspective on which contracts involve the most risk. We focus on the financial repercussions of the failure of performance pursuant to contracts, including the interests of third-parties.

One of the types of contracts identified as dangerous involves slotting fees. The payment of collection of slotting fees may be a reasonable business practice or it may be criminal conduct depending on the facts and circumstances. California has placed tremendous financial power in the hands of distributors. The power given to distributors by California carries with it a tremendous level of responsibility. As we have pointed out, distributors are primarily responsible for the black holes into which some of California’s cannabis tax revenue is disappearing. [[ When California comes looking for money from a distributor, it is unlikely to care whether the distributor’s contracts are well-drafted. California will follow the money, not necessarily the contract. California did not sign the contract. It simply wants its share of the money.

If you receive tax planning or tax reporting advice from us, we provide the highest-quality advice available in California whether the tax issues relate to sales taxes, income taxes, CCT, CET or local cannabis taxes. When it comes to advisors on matters of law relating to California’s cannabis industry, we must observe it appears there are far more “experts” than there are well-qualified attorneys.

We look forward to discussing how we can assist your cannabis business.

 

 

Sean Hocking

Sean Hocking


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The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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