We recently had two situations that required us to analyze oral contracts. Lawyers always say to get things in writing, and there is a reason for that. Written contracts serve as an actual record of the promises the parties made to each other. Written contracts make enforceability easier, and certain contracts must be written to be enforceable at all. Sometimes, though, people don’t come to attorneys until after they have already exposed themselves to oral contracts.

In the two circumstances we recently handled, marijuana companies came to us without realizing that they had entered into a contract at all. One situation involved disputed ownership over a limited liability company. The other involved the sale of cannabis products from a licensed processor to a licensed retailer. Oral contracts in both of these instances can be enforceable, but dealing with them requires vastly different analyses.

With the LLC ownership dispute, you have the classic case that makes attorneys, judges, and litigants pull their hair out. Two people start a business with the basic understanding that they are 50/50 partners. A third partner is introduced and they agree to give him a stake but they never specify the amount of that stake nor whether the original partner shares will be equally diluted. The parties do not  even know if they have entered into a binding contract. Nothing specific is in writing, but various emails and phone calls reference slightly different versions and iterations of the same deal. There is no right answer in a case like this, but everyone knows that if they do not settle, litigation will be expensive and contentious and risky.

Compare this to our other situation, where a retailer and producer/processor orally agreed on the basic terms for a future cannabis product transaction. We have written before about the Uniform Commercial Code (the “UCC”), which applies to transactions for the sale of goods. Though the lack of a written document in the business ownership matter (as discussed above) led to all sorts of difficulties, in a sale of goods situation, the lack of a written contract can (but does not always) work out just fine. The default provisions in the UCC exist to protect parties with reasonable contract terms where they fail to bargain on those terms, even if there is nothing in writing. In other words, the UCC will fill in with clear-cut default provisions whatever the parties failed to agree upon. When we pointed out to the parties how the UCC would treat their contract, the answers to their fight presented themselves and litigation was avoided.

Bottom Line: If you want a clear contract that sets out the terms of your business relationship, get it in writing.

  • Able Cain

    Thanks Robert. Very helpful.