The California cannabis regime is set up so that every point in the supply chain is broken down into different license types: cultivation, manufacture, distribution, testing, and retail sales, to name a few. With the exception of a few vertically integrated companies, virtually all cannabis companies have to rely on other companies in the supply chain to get products from the farm to the consumer.
To this end, our California cannabis lawyers regularly draft “supply chain” agreements. This is a broad term that includes cannabis contracts such as purchase agreements, distribution agreements, manufacturing agreements, supply agreements, license agreements, etc. We have published a number of posts that have identified common issues with California cannabis supply chain contracts and will continue to do so in the coming months. If you haven’t read previous articles on this topic, we recommend that you start with the following:
Today I’m going to dive into a fairly dry but very important provision in supply chain agreements. Honestly, it’s an important topic for any contract, but this series is about supply chain contracts, so we’ll stick with it.
For some backgrounds, the general rule in the United States is that in the case of contractual acts (that is, claims for breach of contract, or for the interpretation or enforcement of a contract), each party pays its own legal fees. That is, if one party wins or loses, it will generally have to pay its own legal fees, but not the other side’s legal fees. This is known as the “American Rule” and is in contrast to the “English Rule” where the loser pays the winner’s legal fees. I won’t go into the nuances of the differences between these two systems, but there is one Your of science you’re better at if you want to read something like this.
Another important side note about the American rule is that there are many exceptions. The government often creates laws (codified laws) that allow for fee shifting in the event of disputes. For example, attorney fees may in some cases be deferred under Lanham federal law or its state counterpart laws. In these cases, the laws set the specific standards by which fees can be postponed. More on that later.
When it comes to supply chain agreements, parties wanting to shift fees need to know the American rule and understand that fee shifting is unlikely to be possible without a lawyer fee scheme. Even parties who don’t want to move fees may find it a good idea to actually say so in the contract so that it’s very clear and no one wastes time looking into the issue during a legal dispute.
Fee shifting provisions are often set out in the rest of a contract or otherwise towards the end and are usually aggregated with applicable laws and dispute resolution clauses for obvious reasons. There are many different ways to write them and many different nuances. For example:
- Some countries may require specific information when listing the types of fees that are refundable. If the clause only lists legal fees, the dominant party may not be able to obtain reimbursement of expert or other legal counsel fees. With this in mind, court or arbitration fees or appeal fees may not be refundable if they are not called.
- Most contracts state that only reasonable legal fees are reimbursable. This can lead to heated arguments about which fees are refundable and which are not. For example, if a party’s attorney spent 10 hours charging something that the average attorney would likely have spent 2 hours on, the party that is forced to pay those fees will often resist them. Going through billing records line by line can be a time-consuming process. Even if a contract does not state that only reasonable fees are refundable, a court or arbitrator can still read this standard and not award unreasonably high fees.
- Usually the language used in these clauses refers to the “dominant party” receiving its fees. Given the complexity of trade disputes these days, it is not always clear who the dominant party is. What if there are more than two parties to litigation and a number of counter complaints where each party makes some claims but loses the rest? Contracts can really drill down on this and more define the dominant party or just note that the “essentially dominant party” gets its fees.
Remember when I said that there are some exceptions to the American rule for statutory fee switching laws? Well, what if there is a lawsuit that has a contract that does not include fee shifting or that specifically prohibits fee shifting and the same lawsuit has legal claims that include fee shifting clauses? To be honest, these situations can be pretty easy for parties to run into, especially when contracts involve intellectual property, as many different IP laws contain fee shifting provisions – and many supply chain agreements contain IP.
The answer to the above question is very complicated and depends heavily on the judge, jurisdiction, and whether the written agreement is silent on the matter or specifically prohibits fees. There may be instances where courts will not allow fees for certain tasks in litigation but allow fees in others. It is really a factual issue and it is advisable for the parties to consider it depending on the type of contract.
This is definitely a dry area of the law, but it is important that the parties to it take this into account. Visit the law Law Blog to learn more about cannabis supply chain agreements in California.