Hemp Litigation: What Does a Good Hemp Supply Agreement Look Like?
We write and speak often about hemp litigation and the importance of a good hemp supply contract. That’s because a common thread in many of the cases winding through the courts is the lack of a contract that clearly defines the expectations and obligations of the hemp grower and purchaser. Here are a few of those articles:
To be sure, a good hemp supply agreement does not mean there will not be litigation. But it can reduce the odds of litigation and hemp clarify claims for breach of contract. A case recently filed in Marion County, Oregon, New Earth BioSciences, LLC v. Terra Ridge Farms, LLC et al., 20CV22732, (“New Earth”) attaches the hemp supply agreement and, unlike many of the cases discussed in prior posts, the agreement is a pretty good one. (Email me if you’d like a copy of the Complaint).
So let’s take a look at some of the elements of the Hemp Supply Agreement (“HSA”) in New Earth. The stated purpose of the HSA is to define the relationship between Terra Ridge Farms (the grower, sourcer, transporter and seller of raw industrial hemp) and New Earth BioSciences (the purchase and extractor).
One of the issues we often see in hemp supply agreements is the failure to clearly define the terms used in the agreement. What may seem obvious and clear to the contracting parties at the outset of the business relationship can become fraught with ambiguity and subject to competing interpretations if and when things go south.
The HSA in New Earth attempts to avoid these problems by defining a variety of terms. For example, it defines “Dry Biomass” as “Organic plant matter from the Industrial Hemp plant that has been harvested and dried to a moisture content of 10% – 12%.” The inclusion of a specific range of acceptable moisture content of dried biomass is certainly important to the purchaser, who may reject deliveries of biomass that do not meet the standard. This definition also provides clear guidance to the hemp grower on the standards it must meet – standards the grower can use should it enter into agreements with third-party drying services.
The HSA defines “Per Point” as the percentage of total CBD content per pound of dry Biomass. Although the meaning of “per point” may seem obvious to anyone in the hemp industry, by plainly spelling out what it means and that it will be used for pricing and determining the value of the Industrial Hemp crop, the parties have removed ambiguity.
The HSA also specifies that the hemp biomass will be tested by an accredited third-party lab to determine the concentration of CBD and THC cannabinoids in the Biomass. Another provision provides how the parties will select a representative sample and that the sample would be sent to a laboratory to which both parties agreed. As we have often explained, these kinds of provisions are critical to any hemp supply agreement.
Compliance with Laws and Delivery Schedule
Another set of provisions in the HSA concern representations by the grower that it has secured licenses to lawfully handle hemp and detailed provisions concerning the timing of deliveries, monthly targets, delivery notices, and quality benchmarks. These are critical terms in any hemp supply agreement. Here, these provisions lie at the heart of New Earth’s lawsuit.
The HSA includes specific benchmarks for the harvesting, delivery, quality, and transportation of the biomass. For example, here is the provision on quality benchmarks:
Section 4. 2 Quality Benchmarks. TRF shall deliver Biomass Lots (as defined in the Appendix) that achieve the following quality measurements:
- high CBD potency on a dry-weight basis
- moisture content no greater than (10-12%)
- stored in bins/containers/totes/agribags with identification tags
- all agribag storage shall be in standard footprint bags, which shall not exceed 4.5’x4.5′ in footprint
- harvested hemp shall be dried on a priority basis and not bailed prior to drying, all Biomass if machine dried, shall have drying initiated within 24 hours of each harvest lot and the drying will be continuous until complete, if Biomass is hung dried the activity must be conducted in an appropriate facility and will be hung within 24 hours of the harvest of each harvest lot
- storage of dried hemp material will be in a protected area so as to limit any degradation of the material due to environmental factors, and
- shucked, machine harvested, or milled to a specification to be defined by NEB. NEB reserves the right to reject any Biomass that has been deteriorated by mold, or rot. Quality measurement details for transactions are listed in the Appendix – Transaction Details.
The importance of these kind of provisions cannot be understated.
Purchase Price, Payment, Liens, Default
A surprising number of hemp supply agreements that we see fail to adequately set out the most important part of the contract—how and when money changes hands. Here the HSA contains detailed specifications on the purchase price, which is tied to the CBD content of the hemp and the per point basis, and provides that payment is due upon delivery. And for the benefit of the purchaser, the HSA includes a warranty by the hemp grower that any biomass sold is and will remain free of all liens, encumbrances or security interests of any kind. These sort of provisions should be carefully negotiated by the parties’ attorneys.
“What If Things Go Bad” Provisions
Too often, contracts between hemp growers and purchasers fail to include provisions that address breakdowns in the commercial relationship. Here the HSA defines events of default, remedies on default, when the parties may terminate the agreement, and a force majeure clause. These kind of provisions – along with choice of law, venue, and other provisions should be negotiated between the parties to avoid headaches later.
Hemp supply contracts, like any other commercial relationship, should be carefully negotiated. The devil is in the details. Although a good contract does not eliminate the possibility of litigation, it can make a world of difference if a dispute arises. Our experienced team of Hemp/CBD attorneys stand ready to help.