Executing Cannabis Contracts

04 Jan Executing Cannabis Contracts

I spend a LOT of time blogging about the importance of written cannabis contracts as a general concept (most recently here or here). Today I want to talk about something that a lot of people overlook when it comes to cannabis contract drafting: how the contract will actually be signed. You may think this is in the weeds, and you’d be right to think that. But issues with properly executing cannabis contracts are more common than you’d think, so let’s dive in a bit.

Who is signing? And can they sign?

Most cannabis contracts are between entities, not individuals. When an entity is a party to a contract, a person needs to sign on behalf of the entity. So, each signing party will need to designate an individual who can fulfill this role. And that person will need to be properly authorized to do the signing.

Authorization here is a key concept. Generally speaking, only certain persons are authorized to sign contracts and bind an entity. For example, a budtender probably wouldn’t be authorized to sign a cannabis lease. Usually, signature authority is reserved to officers or managers of a company. At the same time, non-officer procurement employees may be authorized to sign purchase agreements (but not employment agreements). It really depends on the circumstances.

Because of this, you’ll often see representations within a cannabis contract that the person signing on behalf of a company is fully authorized to do so. Still, it’s important to determine whether the signing counter-party actually has that authority, especially if their identified title is one that generally does not have that kind of authority. It will make for one less thing to fight about if a deal goes south.

How are cannabis contracts signed?

Now let’s say two entities have negotiated a cannabis contract to finality, have selected duly authorized officers to sign, and are ready to sign. Now how do they sign? Do they need to drive to the same office and hand sign the same original copy? Can they each print, sign, scan, and exchange counterpart signature pages? Can they sign with Adobe or some kind of digital signature tool? Can they use DocuSign or an e-signature tool?

The answer to this question is: it depends. There are a few things that parties absolutely have to consider:

1. Does state law require wet (hand) signatures for this type of cannabis contract?
2. Must the cannabis contract be notarized under state law? If so, is a digital or e-signature notary sufficient or does it need to be a wet signature?
3. Even if state law allows digital or electronic signatures, do the circumstances warrant wet signatures? There may be circumstances where, despite state law, an original signature is important. For example, states may be silent on whether a personal guaranty must have a wet signature, but many lenders nevertheless insist on hand signatures on personal guarantees so that there can be no dispute about validity later down the road.
4. If digital or e-signatures are permitted, what are the specific requirements under applicable law? And what did the parties say about signatures within the cannabis contract? Some jurisdictions require parties to consent to electronic signatures in certain manners, which means you’ll often see cannabis contract provisions authorizing e-signatures.

What happens if someone doesn’t sign the cannabis contract?

Here’s a relatively common fact pattern: Company A and Company B negotiate a cannabis contract, which is in final form. One or both of the parties does not sign the contract. But, the parties perform under the contract as if it had been signed. A dispute arises and one side wants to claim breach of the contract. What happens?

The answer is complicated, and depends on state law and the circumstances. In some cases, a court may find that the contract was binding on the parties despite not being executed, if the parties performed consistently with the terms of the unsigned cannabis contract. Fact patterns usually aren’t that neat though – most of the time in these circumstances, the parties perform sort of in line with the unsigned contract, which leads to an awful lot of headbanging in subsequent litigation.

The point here – which is one I often make – is that it’s always better to just properly sign a contract rather than deal with the repercussions down the road.