A few weeks ago we ran a post examining the “illegal” nature of marijuana contracts and the challenge of enforcing such agreements, entitled, “Your Cannabis Contract: Is it Worth the Paper its Written On?” Today we follow up on that post and discuss how to draft your contracts so they have the best chance at enforceability. Although states are increasingly moving towards partial or full legalization, as long as federal prohibition remains the law of the land, your adversary in a contract dispute has a colorable illegality argument that you need to be ready for.
So, how best to combat an illegality argument? Craft your contract in anticipation of that claim. Consider including each of the following terms in your agreements:
- Acknowledgement of Illegality: Yes, we realize this sounds weird that lawyers would recommend you acknowledge the illegal nature of your business, but let’s face it – everyone knows that marijuana is still illegal under federal law and pretending otherwise, or even staying mum on the issue may hurt you more than help you. No court will ever buy it when one or both parties in a marijuana contract dispute try to claim ignorance or make a convoluted argument that he or she is not violating federal law. Including an express acknowledgment that your business includes the growing/processing/testing/selling of cannabis contrary to the federal Controlled Substances Act might score you a couple honesty points and convince the court to proceed with applying ordinary (state) contract law. More importantly, it gives you (and the court) something to point to when the other side is trying to assert its illegality defense.
- Waiver: You can further strengthen the acknowledgment provision by agreeing to waive an illegality defense, making it absolutely clear that no one expects to be able to make such an argument later down the road.
- Forum Selection: By necessity, the cannabis industry is very closed-borders; to avoid federal scrutiny, cannabis must remain strictly intrastate. Therefore the people and businesses who are hands-on with marijuana are likely to be found within your own state. This is less true of companies that are only ancillary to the cannabis industry, such as producers of childproof packaging or the online printer that makes up your business cards. Those companies may be based elsewhere, including even in states without any legal cannabis. I mention this because the location of the parties can dictate where a dispute is ultimately decided, unless the parties decide for themselves in advance. You will be better off in a court in a state with some form of legal cannabis, so decide in advance whether that’s in your home state or maybe your contracting partner’s home state. A word of caution, however: don’t put in a forum selection clause agreeing to litigate in Colorado just because you think it is the most marijuana-friendly place in the U.S. Your choice of forum must have some reasonable relationship to the parties to or subject matter of the contract or you might get tossed out of court. In addition, you might consider even narrowing the field of possible fora by selecting the exact court (or arbitral body) for your dispute, particularly if you live in a state with widely varying views on marijuana in specific locales (e.g., eastern versus western Washington).
- Choice of Law: Closely related to forum selection is choice of law – an agreement to use a particular jurisdiction’s law. Again, you are going to want the law of your home state or some other marijuana-friendly state applied to your dispute. As with the forum selection clause, though, make sure the applicable law has some relationship to you or your contract. For obvious reasons we would recommend choosing a state court over a federal court. State courts are also more likely to be in tune with the locally prevailing attitudes about marijuana as well.
- Subject Matter Description: Our previous post on this topic discussed how the closeness of the subject matter of the contract to illegal activity determines whether a court will invalidate the contract on illegality grounds. This means that how you describe the subject matter of your agreement can really influence whether a court will deem it “illegal.” In some cases then, it may make sense to be intentionally vague or broad when describing the object of the contract.
- Severability: You’ve probably seen such clauses in many contracts – it’s the few sentences that say that if one part of the contract is void, the rest remains in force. This may mean that only part of your agreement holds up on court, but a partly enforced contract is usually better than one that is completely invalidated.
- Independent Consideration: In line with the notion of severability, you should consider whether your contract can be divvied up into parts, with separate consideration tied to distinct products or services. This further ensures that if a part of your agreement is invalidated, you will at least get the benefit of what remains.
Marijuana contracts will continue to have an air of “illegality” about them until federal prohibition is done away with. But if you draft your business agreements carefully, you stand a decent chance that they will be given legal effect in court.