3 Vital Provisions to Include in Hemp Business Contracts

A recent case of broken hemp contracts in Montana that resulted in a $65.5 million payout highlights why it’s important to dot your I’s and cross your T’s.

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Hemp farmers have endured tough times over the past few years. One of their biggest problems? Prices for hemp biomass, as well as products derived from biomass such as CBD, experienced dramatic drops between 2018 and today.

As a result, farmers have generally received less income from hemp than they did shortly after the passage of the 2018 Farm Bill, which fully legalized hemp in the U.S. At the same time, the people whose companies revolved around extracting cannabinoids from hemp plants also took big hits.

The market crash thinned a lot of wallets and generated litigation (as large financial losses tend to do). A recent and large award to a group of Montana farmers illustrates the way in which the crash upended businesses and lives and yielded serious litigation.

While I was not involved in this case, I find the reported basics of the lawsuit serve as a useful launching pad for exploring how farmers can protect themselves while engaged with such a new and volatile marketplace—and a lesson for how doing so can pay off.

First, the case. In June, a jury in Wolf Point, Mont., awarded 25 Montana farmers $65.5 million in compensatory and punitive damages after concluding USA Biofuels, which had operations in Canada and the U.S., had committed fraud, negligence and deceit. It was the second-largest civil judgment in Montana history, according to Montana Free Press.

In short, businesspeople with USA Biofuels had entered into contracts with the farmers prior to planting, promising them an initial payment when they planted the hemp and an additional, larger payment once they harvested it, Montana Free Press reports. Farmers responded with immense enthusiasm, planting 20,000 acres of hemp in 2018 for the company—a vast majority of the 22,000 acres of hemp grown in Montana that year.

But the people that had promised to pay farmers for growing the hemp never collected nor paid for a majority of it. Instead, most of the harvested crop sat in fields, rotted, and became worthless.

The prosecuting attorney in the case argued USA Biofuels was a shell company, according to Montana Free Press. The people who created the company aimed to secure a huge volume of hemp and create processing and distribution before taking the company public. The attorney argued that the defendants in the suit would make hundreds of millions of dollars if the initial public offering (IPO) succeeded. For it to work, though, the businesspeople needed a guarantee that all that hemp would be sold to them instead of competitors—thus, the pre-planting contracts, according to Montana Free Press.

Other farmers lost money in the hemp market due to broken contracts in 2019 and 2020. Most of them never received big awards from trials. But these 25 Montana farmers received a huge award, and it’s likely their contracts contributed toward the judgment. Without them, it’s unlikely the farmers would have had a case to begin with.

Here are three things growers should include in business contracts to assure they’re protected should they be involved in a similar situation:

For farmers who supply the hemp that a proliferation of brands and products rely upon, legal vigilance and care is paramount.

1. Include attorneys’ fees provisions.

I would advise all hemp farmers to make sure they have attorneys’ fees provisions in their contracts. These provisions say if there is litigation, the losing party will pay the prevailing party’s attorneys’ fees, so the contract has teeth. Many times, provisions like this persuade parties to settle. You can spend hundreds of thousands of dollars going to trial. The party that breached the contract also has to pay lawyers for their work, as well as a judgment. But with the attorneys’ fees provision in place, that party (assuming it loses the case) would also have to pay the opponent’s lawyers for their time. That provision can cause people to say, “Let’s make this go away.”

2. Outline the price per pound of product.

I also recommend that farmers make sure they get the price per pound spelled out in the contract, and that if there is a breach of contract, the farmers get the price enumerated in the contract rather than the market price at the time of the breach. The contract should say the price drop doesn’t matter—the price agreed upon in the contract is binding.

3. State plaintiffs can sue in their hometowns.

Another important aspect to include in a contract is a venue provision that says if a breach occurs, plaintiffs can sue in their hometowns rather than those of the defendants. Traveling potentially long distances for trials can create unnecessary stress. In addition, having a trial in the plaintiffs’ hometown is advantageous because the jurors also live in the general region.

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The hemp market remains awfully dynamic and turbulent. I routinely encounter people who are getting ripped off. Much of the problems emerge from the market’s youth—legal hemp has only been an agricultural product since 2018, and it really wasn’t until the 2019 growing season that farmers began enthusiastically planting it across the country.

With hemp in particular, while many companies and people are doing fantastic and important work, there is a relatively high concentration of people with questionable motives, as well as unsophisticated businesspeople who are not properly documenting transactions and don’t respect terms of contract because they aren’t used to them.

As the market matures, I predict the more unscrupulous industry players will drift away. And if the U.S. Food and Drug Administration (FDA) finally regulates CBD in ingestible products, the positive evolution of the market will continue to grow even more robust.

Under current law, it is technically illegal to incorporate CBD products into ingestible products. This is widely ignored, but it has kept away larger corporate entities, which have no interest in engaging in an illegal marketplace. Clear rules and the entrance of new companies that follow the letter of the law are sure to help push the industry further toward maturity.

The good news: Hemp is here to stay. As the hemp market continues to evolve with a fluid dynamism not familiar to more stable markets for things like strawberries and lettuce, it is vital for hemp farmers to protect themselves. New products will continue to emerge, hatching fresh markets. Some of these markets will thrive and lead to long-term viability for the players along the way, while others may run into dead ends.

For farmers who supply the hemp that a proliferation of brands and products rely upon, legal vigilance and care are paramount.

Henry Baskerville is a partner in the Denver law firm Fortis Law Partners.

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