Purchasing or Supplying Cannabis? What You Lose When You Ditch the Contract

 

Are supply contracts a thing of the past in the cannabis market? As many cannabis markets continue to develop state to state — whether it be veteran markets adjusting to changes in consolidation or emerging markets expending efforts to establish a foundation — many operators are considering moving away from having a master supply agreement govern the legal terms and conditions of the business relationship between B2B product suppliers and product buyers for one-page purchase orders and invoices as a replacement. This blog identifies the top 5 legal considerations you need know when relying on this latter approach.

Under the traditional approach used in many industries, product fulfillment arrangements to be supplied by a distributor, on the one hand, and received by either a middle-entity operator, like a product manufacturer, or retailer for resale, on the other hand, are papered up as a form of master supply agreement (aka, purchase agreement, distributor agreement or wholesale agreement). These agreements govern the terms of the purchase, payment, delivery, and other legal jargon of the purchase-supply relationship generally and would be later supplemented by the parties through the use of purchase orders or invoices from time to time when the purchaser requires an order of specific products. The purchase orders typically looked like a simple one-page form with a few details on the products purchased (such as product name, quantity type, price, and delivery date), and would defer to the legal terms in the master supply agreement that it corresponded with.

However, as supply and demand dictate rush orders, which need to fluctuate with pricing and product variety and other market pressures, many suppliers in the cannabis space are ditching the traditional master supply agreements and instead relying on simple, one-page invoices or purchase orders to govern their legal business relationship with retailers or products manufacturers. And some buyers even prefer it. While suppliers may save a few dollars from expenditure on legal fees on the front end, the ramifications of some of the legal pitfalls that can occur with this approach can quickly escalate into expensive dispute resolution. When using this approach, there are a few key things to keep in mind:

1. Limited Contractual Legal Remedies. Typically, these purchase orders or invoices include minimal terms such as the product’s price, product name, quantity, and delivery date. These purchase orders often lack the necessary legal terms and protections afforded by contract that address typical issues in a purchaser-supply relationship. Businesses are forced to rely on state statutes and case law to fill in the holes, which often may be less favorable than terms agreed to and fleshed out during the contract negotiation process, and, even in some cases, may not provide a distinct remedy at all. Suppliers can hedge this risk and give a reference to a URL link of legal terms and conditions in which the invoice or purchase order is subject to incorporate those necessary legal terms in the business relationship. Any such references should make clear to the buyer that it is subject to those linked T&Cs via acceptance and signature of the purchase order.

2. Change Orders. As common in any industry of supplying or purchasing a commodity, changes in the supply chain, demand, and availability of products can cause a need to change the types and quantities of products available. Change orders are often used to supplement or amend purchase orders to address these needs. Such change orders are typical of a similar one-page format as a purchase order, with limited to no legal terms or conditions. Suppliers and buyers alike should make sure that any change order specifically refers to the purchase order or invoice that such change order intends to modify. Another useful measure is to include language in purchase orders stating that the order can be modified or changed by mutual written agreements of the parties. This way, communication as simple as an email exchange referencing the purchase number to be modified can be an easy and practical method of addressing change orders with less risk of enforceability than the alternative.

3. Right to Cancel. At a minimum, suppliers should include language in their purchase order that provides them with a right to cancel an order in the event of unforeseen circumstances (aka Force Majeure) or, for suppliers with higher negotiating power, at the supplier’s sole and absolute discretion. The cannabis market is often unpredictable, where supply and demand can shift in a matter of months as new operators enter the state market or events out of the control of the supplier, such as natural disasters, fires, or floods, can cause serious delays or increased costs in product shipments.

4. Liability, Disclaimers, Damages. Consider whether your purchase order addresses what you are willing and what you’re not willing to take on in terms of risk concerning a shipment or receipt of a shipment. Suppliers should carefully consider including limitation of liability and disclaimer terms incorporated in each purchase order (through clickable incorporated terms as explained above) or directly in the purchase order itself. Product liability claims can trigger compensatory, liquidation, and excessive damages. Distributors should be weary of relying on invoices absent terms or conditions regarding the types of damages, warranties (whether express or implied,) or remedies that the parties may or may not (by contract) avail themselves of.

5. Have Trusted Counsel. Both distributors and buyers should have a lawyer review a form purchase order or invoice typically used in such licensees’ business. Especially for suppliers and purchasers that often work together, counsel should review the form in question that is to govern the B2B relationship between the parties for advisement on the adequacy of the legal terms (if any) presently in the form and/or address the issues discussed above of contractual necessities (and bare minimum protections) that should strongly be considered.