This final blog in our 5-part series regarding California cannabis contracts focuses on the types of contracts to be used in different scenarios. Here’s a rundown of the most common agreements:
1. PURCHASE OR SALES AGREEMENTS
A purchase or a sale agreement is a contract to buy or sell something. These types of agreements are used most commonly when a distributor or a manufacturer buys a set quantity of cannabis flower, cannabis leaf, or fresh cannabis plant. Purchase agreements can be a one-time transaction, or folks will often style them as “master agreements,” which allow the parties to continue to buy and sell to each other multiple times using only “purchase orders” (which are issued by a buyer) and “invoices” (which are issued by a seller).
Here’s a sample master purchase agreement but BEWARE that this sample is pro-seller or, in other words, this contract includes farmer friendly terms. Additionally, there is no one-size-fits-all type of contract, so this sample document must be vetted thoroughly before use. Please have your attorney review this document in full before deciding if the deal structure laid out in this agreement makes sense for any particular transaction. All use of the Sample Master Purchase Agreement (Pro-Farmer) is subject to the Terms and Conditions of Use.
2. SERVICES AGREEMENTS
A services agreement is a contract to provide a service or to hire a service. The most common services agreements we see in the California cannabis context are where the distributor or the manufacturer do not take title to the farmer’s cannabis and, instead, perform distribution services or manufacturing services. In such a scenario, the farmer is legally hiring the distributor (usually as an independent contractor) to perform services, such as pickup, storage, lab testing, and so on.
3. HYBRID SALES AND SERVICE AGREEMENTS.
Many transactions we encounter today are hybrids of a purchase and service agreement, in that the distributor will pick up the cannabis, store it, and perform lab testing, all as a “service” to the farmer (with resulting costs being deducted from the farmer’s sale price), with an additional agreement to buy the cannabis after the lab testing comes in. Although this is common today, it is often wise to parse out the two agreements into separate documents, i.e. a services agreement and a purchase agreement, so that everyone’s roles remain clear.
The most common difficulty in these types of hybrid purchase/sale agreements is where the distro is hired to perform trimming services, but does not perform the trimming services to the farmer’s quality standards. In such a case, who pays for the loss to the value of the product caused by the distro’s terrible trim job? The way most of these types of deals are currently structured, the farmer has to accept that loss, which would be less likely if the two different relationships (i.e. the service relationship and the buy/sell relationship) were clearly laid out.
4. LICENSING AGREEMENTS
Any time a farmer’s name or logo is used on a jar or a subsequent product, intellectual property agreements are in play, whether the parties realize it or not. If the distro or manufacturer intends to use the farmer’s name or logo, the agreement between the parties (i.e. the purchase agreement or the services agreement) should address whether the buyer can use the farmer’s name or logo.
For more complicated agreements such as a co-branding type of arrangement, such as where the farmer’s name or logo will be prominently displayed, it may make sense to use a totally separate licensing agreement. However, if the use of the farmer’s name or logo will be less prominent, such as where the farmer’s name and license number will be printed on the back of the jar for attribution (i.e. giving credit), then these more simple agreements can be added to the underlying purchase or services agreement.
Don’t forget that use of a farmer’s name and logo can increase the value of a product. As such, additional consideration (i.e. money) to the farmer for use of their intellectual property is always on the table (in other words, it’s totally acceptable to ask for more money if the distro is going to use the farmer’s name or logo to sell the product).
5. NONDISCLOSURE AGREEMENTS
Confidentiality agreements are common in business and can be used wherever two parties are beginning to engage in discussions regarding a potential sale. We often suggest adding a standard NDA to a party’s initial due diligence document review procedures when vetting a potential buyer or seller, so that this protective measure becomes more commonplace in the industry. At minimum, every California cannabis company should have a standard NDA on hand.
Although there are as many types of contracts as there are ways to structure a transaction, these are the most common agreements California cannabis entrepreneurs will encounter on a regular basis, so it’s wise to be familiar with them.
Huge thank you to Virginia Ryan, my co-author in this blog series whose experience in transactions has been invaluable. I’m deeply grateful for all the knowledge you dropped.
Additional thanks to my business partner and legal guru, Sarah Smale, as well as Lauren Mendelsohn at the Law Offices of Omar Figueroa, Jeffrey Hamilton of Farella, Braun, and Martel, Shay Gilmore of The Law Office of Shay Aaron Gilmore, and Holly Carter of Oxalis Integrative Services all of whom reviewed the sample purchase agreement and gave valuable insight, in addition to Virginia Ryan. I’m deeply grateful.
Happy harvest all. Please stay safe. ~hb
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