If you’ve been anywhere near the cannabis industry lately, you know that conditional agreements – sometimes referred to as “conditional contracts” – are a hot topic. In fact, you’ve probably seen this idea cropping up in headlines on everything from hemp commodities to the latest buzz about CBD and cannabinoids. Now, while we can definitely appreciate peoples’ efforts to be funny with words, we also have to say that we’re not so sure that these cheeky headlines achieve what they set out to do. You see, hemp as an industry is bursting at the seams with potential since national legalization through the 2018 Farm Bill. CBD and other cannabinoids hold incredible potential for consumers in particular. This means that the business world is quick to take advantage of the hemp boom, creating all kinds of partnerships in the process. Some of those partnerships are truly remarkable, but some of them are also remarkably poorly constructed. The problem is that there’s not a ton of regulation around the hemp industry right now, probably because it’s such a new field (and also because the federal government doesn’t want to particularly acknowledge that such an industry exists). Those poor contract partnerships leave the people in the cannabis space in a bit of a pickle, as while industry conditions have expanded to include hemp, the legal framework around the crop hasn’t really had a chance to catch up. Poor contracts create both legal and practical headaches for all parties involved.
If you find yourself reading all of this and not quite grasping the meaning of a conditional contract, don’t worry: we’ve got you. The idea is simple, though. With a conditional contract, certain elements of the deal have to be fulfilled before the contract becomes legally binding. In the case of hemp, that could look like any number of things, but generally, it’s something contractual like having all of the required EPA filings submitted (or other regulatory obligations they do). If a party fails to fulfill those obligations, then the contract will either fall through automatically or it will open the door for a legal dispute. That list of contractual obligations can be anything, and there’s no limit on how specific you can get. For example, it could be as straightforward as the number of units that a dispensary needs to stock. That’s a pretty clear condition, and it doesn’t take a conditional agreement to pull it off (though it does help to have it). Essentially, if the agriculture farm cultivator has the number of units listed in the conditional contract, then they’ll send a shipment to the dispensary that has the quantity noted in the contract.
But let’s take it to the next level. What happens if the farm needs to have the number of units provided, but they’re also trying to pay off an investment in stock and keep grain storage at a minimum? No problem. By using a conditional contract, the firm can agree to ship the quantities they have right now and then to submit shipments over time. The conditional agreement provides some flexibility because it could have terms like this: That takes some of the pressure off the original shipment because, if something should go awry, then the farm isn’t really beholden to follow through. While there might be some legal consequences (more on that later), the farm might not lose thousands of dollars right out of the gate. If this seems like a useful framework for the cannabis industry, you’re absolutely right.
So why doesn’t everyone use conditional agreements all the time? Well, it has a lot to do with the fact that most companies actually still need a cash flow boost right now. Sure, the hemp industry is seeing big numbers in terms of crop expenditure, but a lot of that money isn’t rolling in quite yet. If a farm gets a conditional contract for, say, $50,000, then nothing is going to in flow for that contract unless the grower has the operational capacity in their stockpile. In other words, if a grower has one full container of hemp oil at a value of $50,000 and they’ve got two more containers of oil that still need to run through the manufacturing process, they probably can’t accept a conditional contract right now. It’s the classic “you can’t squeeze blood from a turnip” problem.
But that’s just the financial side of things. You also have to remember that a lot of contracts are built on relationships, and those relationships get built on trust. Now, some farms might not care about that trust relationship (and frankly, they shouldn’t if they’re smart about it), but nothing replaces the value of a handshake agreement. If you’re a small farm who has the resources to follow through on your deal, then you don’t want conditional agreements holding you back. You want to have a real deal with the people you’re working with, and while the legal framework does help, you also want to make sure that the people you’re contracting with understand what you’re looking for. If you’re not protecting yourself with conditional agreements, then you’re really opening the door to problems.
For example, suppose that your farm sends out their first conditional shipment just in time for harvest season. They send 1 box of hemp flowers off to Pittsburgh, then have a good fourth quarter, maintaining steady sales into Q4. Unfortunately, not everything works out so well. Your farm ends up with some insects, and those insects spread to all of your hemp flower stockpile. You can’t send the 5 boxes to Brooklyn because your product is tainted. Well, if you had a conditional agreement with the Brooklyn buyer, then it would be a pretty simple process to let them know you can’t fulfill your end of the condition. However, without a conditional agreement, the Brooklyn buyer will probably sue you for breach of contract, and their lawyers will come after you with all of their energy.
You’ve probably figured out that we’re pretty adamant about law firms in the cannabis industry. And while we’re no exception when it comes to offering legal advice, we also have to say that, really, an ounce of prevention is worth a pound of cure. That means that your regular meetings with a professional law firm can help you build the best conditional agreement possible. It also means that an ounce of preparation today can spare you a ton of pain later down the line. We can’t predict the future, so we can’t give you a solid answer on how changing regulations might affect conditional agreements in the cannabis industry. To put it simply: it’s complicated. Even in the CBD industry, lawyers will probably have their hands full keeping track of all of the changes. That reactionary nature to legal systems is why we’re so committed to having good records from the beginning.
We’ve mentioned before that regular legal meetings are important in the cannabis industry, but they’re especially important for these problems. Maybe you’re thinking that it sounds like conditional agreements are a positive thing that can help boost hemp business. You’d be right… but there are direct and indirect costs to this benefit. In the short term, a conditional agreement might benefit your business and help it link up with other companies. But what if demand goes through the roof, like it did earlier this year when farmers saw the boom and panic harvested? Your farm will also have to deal with the cash flow gap created by your conditional agreement. Considering that a lot of hemp businesses are part of a larger agricultural operation, that sort of disruption can impact the entire system.
If not anything else, we hope you’ve enjoyed this breakdown as we’ve mixed and mingled all kinds of legal problems within the many facets of the hemp industry. At the end of the day, we’ll say that this isn’t just an interesting question to explore – it’s a real problem that all farmers are struggling with. That’s true for any farmer, really, but that’s especially true for farmers that couldn’t do what they do without their fellow farmers. It’s a sad reality that, even in the hemp industry, those farmers will struggle on their own if they try to take this on. So, if you want to hear more about the legal ramifications behind conditional agreements, head on over to Making Sense of Conditional Agreements in Legal Contracts from our good friends at Tarabridals. As always, feel free to let us know what you think about our approach. We view the law as a tool to help you carry out your business, and we want to see hemp thrive as an industry.
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