I will be posting a number of posts over the next few months that will identify common issues with contracts for the California cannabis supply chain. If you haven’t read previous articles on this topic, we recommend that you start with the following:
Today I want to talk about termination rights. Believe it or not, our California cannabis lawyers have seen a slew of cannabis supply chain contracts that don’t even cover basic concepts like the length of the contract, the reasons for terminating a contract, and what happens afterwards. consider termination. I’m going to unpack below why each of these things is necessary:
Most supply chain contracts, with the exception of things like the one-time sale of a single good, provide for a continuing relationship over a period of time. If the contract does not specify this length of time by clearly defining the “term”, problems will almost certainly arise later and exit from the contract can be challenging for parties who wish to do so.
Another common problem with contract terms is renewal. If a contract has a term of one year but does not provide for an extension, it ends and any further contract term depends on the negotiations between the parties. Depending on the particular party, this can be very bad. For example, let’s say ABC Co. ran for a year and bought a certain amount of goods for $ 10 each. During the term, the demand for these goods soared and it would cost $ 15 to get them to market elsewhere. If the term is automatically extended with the same conditions, ABC Co. is in luck. If it were not renewed, it would have to renegotiate the contract and the supplier would almost certainly be asking a higher price.
Extending or extending a contract period itself can be difficult. Sometimes it’s automatic, but one party chooses not to extend it at any fixed point before the original term ends. sometimes it is at the discretion of one party; and sometimes it is subject to mutual agreement. In each case, clearly define how and when extension or extension rights are to be exercised. Otherwise disputes arise again.
Next, the termination events are defined. As mentioned earlier, we’ve seen a lot of contracts that don’t. Some people just assume that if they violate the other side, they can quit. In reality, it is not always that clear, so it is important to clearly define the reasons why a party can terminate the contract. The reasons for termination vary significantly from contract to contract and from party to party. Therefore, the use of the boilerplate language can be problematic unless it is changed and tailored to the respective contract.
After all, even many contracts that clearly define a term and the events that lead to termination do not clearly explain what happens in the event of termination or expiry of the contract term. This can be a problematic mistake. For example, consider a distribution agreement in which ABC Co. has hired XYZ Co. to distribute ABC’s goods, the distribution agreement expires on a specified date, and XYZ still has 100 units of ABC products at the time it expires. What happens to these goods? Is there a sell-out period? Does XYZ have to return it to ABC? Can they even return them according to California cannabis regulations?
The moral of the story is that contracts with a California cannabis supply chain can be problematic if: They don’t clearly define a term, explain how it is renewed, detail reasons for termination, and explain how the parties should act and which ones Rights you have termination or expiration. For more information on California cannabis supply chain agreements, visit the law Law Blog.