Litigation Looms as the Likeliest Outcome of Oral Contracts or Handshake Deals

By Samuel J. Scheurich, Hoban Law Group

To professionals having recently entered the industry space for legalized cannabis and hemp, the adjustment from the types of commercial issues encountered while working for a large mainstream corporation can be an abrupt, if not outright dramatic, switch.

As an old legal saying goes, a contract is a contract is a contract. Yet, not all contracts are created equal. That can be a particularly meaningful distinction among so-called handshake deals. Prosperous hemp farmers, dealers, and businesspeople have been known to enter into multimillion-dollar agreements to buy and sell hemp. Often, the understanding hinges on an [ostensible] stipulation that high-grade or high-quality hemp will yield CBD content to a certain percentage.

Unfortunately, when buyers of hemp biomass process the product, the result often does not meet expectations. Too frequently, the lack of a written contract which specified expectations ends up exacerbating the pain from such results. Whether the informality stems from a throwback to simpler times or a vestige of when hemp and cannabis were prohibited, it is no less an invitation for disputes.

Colorado, for one, suffers from a characteristic dearth of written hemp purchase agreements. While it is true that even an oral contract is still a contract (notwithstanding the lingering statute of frauds arguments one may encounter), having a formal written agreement with quantity, price, and terms always trumps an email and a handshake.

Litigation is often the culmination of many things. Sometimes it includes a series of unfortunate events. Sometimes it involves people who had a perfectly legitimate rationale backing their business decision, but who seek (for whatever ends) to blame another as an offset. Yet another instance may revolve around something as simple as lacking a formal written agreement regarding what the parties want.

When things do break down though, it is much easier, cost effective, and efficient when a contract is in place to litigate – rather than waiting until trial or using an affidavit to attempt to prove a he-said/she-said scenario.

One solution may be an agricultural production contract, which establishes a definitive agreement between producers and contractors for hemp as a specific agricultural commodity. Typically, such contracts detail an arrangement for raising agricultural commodities by identifying each the production practices to be used; any parties responsible for supplying required resources; and the specific quantity, quality, and method of payment for the product. Major advantages of production contracts include: (1) providing contractors with overall control of supply; (2) enabling contractors to exert influence over the production process so that a uniform product is produced; (3) forcing parties to invest in technological advances in production equipment because financial returns are more likely when technical information to producers is given in a controlled manner; and (4) effectively guarding processors from liabilities, such as labor or environmental consequences.

The primary disadvantage of a production contract is borne by contractors who assume the market risk. Guaranteeing a certain level of payment for any commodity comes with risk that the market price will change in a detrimental fashion. Also, as with any contract, a production contract can be drafted to favor one party over another – the sort of disproportionate consideration which can occur when one party lacks bargaining power.

It is a best practice to establish some sort of written agreement prior to entering any sort of transaction or processing arrangement. Even should that type of agreement itself result in litigation, its existence will serve to minimize delays (and fees) throughout the pendency of the dispute.

Samuel Scheurich is a senior associate attorney at Hoban Law Group, specializing in resolution of contract disputes, representation of clients facing marijuana enforcement issues, and general commercial litigation.

This article has been prepared for informational and general guidance purposes only; it does not constitute legal or professional advice. You should not act upon the information contained herein without obtaining specific professional advice. No representation or warranty (express or implied) is made to the accuracy or completeness of the information contained in this publication. Hoban Law Group, its members, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based thereupon.