In the cannabis industry, many relationships don’t last. One of the top questions our cannabis lawyers get is “how do I terminate my cannabis contract”? Despite clear contract termination provisions, terminating a cannabis contract can be a very difficult. Today, I’ll examine how cannabis contracts can be terminated.
Contract termination provisions
The first place I go when analyzing how to terminate a cannabis contract is the termination language in the contract itself. 99% of contracts have a termination provision. For the 1% that don’t, well, the parties may have bigger problems than just terminating.
Termination provisions done correctly will list the grounds on which a party can terminate a contract. Common termination grounds, in no particular order, are:
Uncured breaches of the contract
Insolvency of a party
Long-lasting force majeure events
Changes in law that render a cannabis contract void or unlawful
Convenience termination rights (i.e., one party can terminate for any reason by giving notice in advance)
Mutual agreement of the parties
Once a party figures out whether there are grounds to terminate, it will then need to figure out how to terminate the contract.
Contract termination notices
In almost all cases, contracts are terminated by giving notice to the other party. There are some exceptions, like where termination is automatic based after the occurrence of a pre-determined event. But we’re only concerned with optional contract termination today.
If a party needs to give notice, the contract (or at least the 99% of decent ones) will spell out how notice is given. Often, it must be given by mail or even personal delivery and email does not suffice.
Parties usually neglect to follow contract notice provisions during the life of a license. Most of the time nobody really cares. But on termination, especially a contentious termination, precision is key. A party that wrongfully terminates can be deemed in breach, so following the contract notice provisions literally (and anything else) is always recommended.
Dealing with contract clingers
Some people are bad at breakups, including in their cannabis contracts. It’s easy to see why a party may not want to quickly agree to terminating a cannabis agreement. Maybe it gives them valuable exclusivity rights. Maybe they are getting a much better deal financially. There are millions of reasons why cannabis businesses resist terminating contracts. In practice, there are a few really common tactics we see for a party that does not want to terminate.
First, the party may challenge the underlying grounds for termination – what I call “attacking the facts”. For example, if the termination is based on its breach, the party may claim it never breached. Or if the termination is based on the occurrence of a force majeure event, it will claim that the event does not actually count as a force majeure event. In some cases, attacking the facts is warranted if there’s a legitimate dispute about what happened. But in many cases, parties act in bad faith so as not to get forced out of a contract.
Second, the party may claim that the other party can’t terminate for various reasons. Sometimes they claim that the other side failed to follow protocol (see above). Maybe they claim that the other side actually breached first and therefore cannot terminate. These arguments aren’t the strongest and often just result in kicking the can down the road.
Third, they may flex their muscle and make every threat under the sun. The prospect of expensive litigation may just scare the terminating party into staying put. But even where threats like that are justified, it’s almost never the sign of a good future relationship between the parties.
Finally, and what I think can be the most effective: the non-terminating party may come to the table and try to negotiate. A pragmatic cannabis company may be willing to put its differences aside and try to save a relationship where possible. And even if the relationship can’t be salvaged, a good-faith attempt to negotiate may mean that the parties can work out some kind of arrangement that at least makes everyone happy.
Terminating a cannabis contract is hard
The point of this post is that terminating a cannabis contract is never easy. Even for parties with silver bullet termination rights, a well-capitalized contract party can always make life a challenge. It’s important to anticipate these things at the beginning of the relationship when negotiating for termination rights. Otherwise, things can get difficult down the road.