Nobody could have predicted the situation that the cannabis industry now finds itself in. Just a few months ago, it looked like there were challenging financial issues for many cannabis businesses across the country. Now, many states that have imposed coronavirus lockdowns have declared cannabis businesses to be essential so that they can stay open, leading to massive spikes in sales at the retail level.
If the increase in cannabis sales continues (just my two cents, but I think it will during lockdowns) then increased demand is likely to benefit the whole supply chain, necessitating lots of deals on a short-term basis. There are some important considerations for cannabis companies making deals in the time of COVID-19.
First, given the need for speed with cannabis dealmaking right now, it may be tempting to enter into handshake deals. As I wrote a while back, this is never a good idea and can lead to huge disputes. In such a volatile market, where laws, enforcement priorities, and consumer demands can change immediately, handshake deals are even worse.
Second, parties to any kind of contract need to consider the possibility that the coronavirus situation gets worse. We’ve written about force majeure provisions in contracts recently, but it’s not clear how a force majeure provision would be interpreted if it were in a contract that was signed during what was arguably a force majeure event. There are many other things that can be inserted into contracts, such as broad termination rights, that can also help in cannabis contracts in the age of coronavirus.
Third, and on a related note, given that the future is so uncertain, it may be wise not to enter into long-term deals. What may make sense today may not make sense in two weeks. We expect to see a lot of short-term contracts with contingent renewal provisions so that parties aren’t stuck if the current situation gets worse.
Fourth, now’s the time for businesses to evaluate existing contractual relationships to determine whether they need revisiting in light of the coronavirus. If contracts contain force majeure or other provisions that allow delayed performance, it’s time to take a hard look and see whether re-negotiations are necessary.
Finally, and most importantly, it’s critical NOT to forget about cannabis regulations. Again, it may be tempting to act fast and enter into short or handshake contracts without a thoughtful consideration of regulatory implications, but it’s a bad idea. Cannabis contracts need to consider regulatory requirements and impacts, otherwise they could lead to massive problems for licensed businesses down the line.
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