The global threat of COVID-19 has wreaked havoc across all industries, particularly those that rely upon tourism and events as their main sources of revenue. In view of recommendations by the Center for Disease Control (CDC) and local and state governments to avoid large gatherings, the cannabis conference industry, which traditionally draws an immense global audience, has been scrambling to decide whether to produce their shows in person or online, what accommodations must be made, or whether it makes more sense to postpone or cancel — and at whose cost?
Spannabis, a Barcelona B2C event scheduled for mid-March, announced just days before the event that it would be postponed. The International Cannabis Business Conference, a B2B event that was scheduled in association with Spannabis, has been moved to Berlin and postponed (for now), until July. CannaTech, a medically driven conference previously scheduled for late April in Tel Aviv, has similarly been postponed, to June.
Domestic conferences, such as MJBizCon (in New Orleans) and the NCIA’s Cannabis Business Summit (in San Francisco) both remain scheduled for June (as of now). However, both conferences have issued statements providing virus-related guidance and accommodations for those who attend in-person and opportunities for distance learning and networking via live stream, Slack or other tech platforms. Similarly, the International Cannabis Bar Association, which is scheduled to produce in-person, continuing legal education courses at both conferences, is preparing its prospective audiences to migrate its content online, if needed. All of these producers (and other impacted businesses) have undoubtedly been fielding refund and cancelation requests, the resolution of which may require invoking “force majeure,” a legal description for extreme or cataclysmic events that arise and prevent a contracting party from performance. A force majeure clause in a contract allocates the risk of these events, because some extreme or cataclysmic events may be unpredictable, but foreseen as a possibility (however remote).
Force majeure clauses are often viewed as “boilerplate,” and thus frequently overlooked and under-negotiated. As described below, force majeure clauses are critical to the negotiation of any cannabis contract and cannot be reduced to form. They should be drafted to capture, among other things, what constitutes a force majeure event and which party must bear the consequences of non-performance.
First, each contract should define what a force majeure event is. Otherwise, courts are likely to construe that the parties allocated the risk of the event to the obligee (the non-paying party or the “supplier”). If it is not well-defined and a force majeure event occurs, the impacted party may be excused from performance, but may still have a basis to decline refund or demand payment. The negotiated list typically contains events such as: acts of god, including natural disasters and severe weather events or weather events that are uncommon in a specific geographic area; man-made occurrences such as an explosion; violence, including terrorism, hostilities and civil unrest; epidemics or quarantines (such as COVID-19); governmental action (such as a change in laws, regulations, embargoes or a non-responsive governmental authority); organized labor activities (such as strikes and slow-downs); shortages (of infrastructure, transportation, supplies or power); and other similar events. Common exclusions to force majeure events include, without limitation, equipment failures, labor shortages caused by an employer’s bad faith or other misconduct, and changes in economic circumstances, including bankruptcies and similar insolvency events.
Some of these force majeure events, for cannabis operators, happen regularly and are entirely predictable, such as fires in California and changes in state or federal regulations with respect to enforcement priorities. Others, such as COVID-19, are less predictable, but not entirely unforeseeable. Quarantines and curfews in China, where most domestic vape products are manufactured, has caused shortages on those products. A carefully considered force majeure clause could operate to excuse suppliers’ performance (or late performance) and provide price protection for downward participants in the supply chain.
Second, force majeure clauses may be mutual or unilateral — a force majeure event could excuse one party from performance, but not the other.
Third, parties are free to negotiate obligations of the parties impacted by the force majeure event. Common obligations include: notifying the other party (immediately, promptly or subject to “commercial reasonableness”) and mitigating the impact of the force majeure event. For a supplier, this could mean delaying performance until practical or replacing raw materials suppliers.
Lastly, parties should be clear on whether in the aftermath of a force majeure event, either or both parties are permitted to terminate the agreement altogether, and whether a buyer is entitled to a refund. To this end, the parties should specify the duration of (consecutive) time a force majeure event must continue before termination is permitted and the amount of time within which a refund (full or partial) will be paid.
Cannabis operators are wise to anticipate these unlikely but foreseeable events and let COVID-19 serve as a reminder to negotiate risk allocation, pre-calamity.
Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a boutique, full-service firm with a track record for success in various practice areas including cannabis law, land use and zoning, disability insurance law and business and corporate law.