The ongoing COVID-19 pandemic is causing wide-spread disruption, and, unfortunately, the cannabis industry is not immune. The pandemic and resulting stay-at-home orders may even be severe enough to prevent companies from fulfilling their obligations under contracts with distributors, retailers, or other vendors. Fortunately, there are certain contract-law protections that may provide relief.
Many contracts contain a “force majeure” clause, which typically allows parties to the contract to cancel or postpone contract performance if the performance is rendered impossible by an unforeseen calamity. These contractual provisions, frequently referred to as “act of God” clauses, have a fairly high threshold. As the name suggests, the at-issue event must be of a sufficiently severe and unexpected nature to qualify. Force majeure clauses can be specific as to the kinds of calamities that will trigger their protections or can be very vague. Some void the contract entirely while others merely postpone performance until the qualifying event ends. The specific contract language should be carefully reviewed in order to determine its effect.
However, even if a contract does not contain a force majeure clause, there are similar protections available under California common law, namely, the “commercial frustration” doctrine, an equitable doctrine largely developed during World War II that allows a party to cease performance under a contract if an unforeseen “frustrating” event has rendered performance of the contract impossible. Notably, at least one California case, 20th Century Lites, Inc. v. Goodman (1944) 64 Cal. App. 2d. Supp. 938, confirmed that a government order preventing the business from operating can constitute such a “frustrating event.”
Analyses of both force majeure clauses and the commercial frustration doctrine include some common issues. First and foremost, the event in question must have been unforeseeable when the parties entered the contract. If the event is foreseeable, then the Court will view it as a simple business risk. There is not case law addressing COVID-19 specifically, but given the scope and nature of the pandemic it is likely it will qualify as unforeseeable. Second, the event must make it impossible for the contract to be performed. It is not enough that the event renders performance merely more expensive or burdensome. Finally, the event itself must render contractual performance impossible. If the party seeking the protections of these legal doctrines had problems meeting their obligations before the pandemic, it is unlikely that a Court would decide in their favor on this issue. Given the struggling state of the cannabis industry just before the proliferation of COVID-19, this requirement may prove problematic for some cannabis businesses.
The ongoing COVID-19 pandemic is unprecedented and is requiring many cannabis businesses to throw away their playbook, and seek creative solutions to new and evolving problems. Force majeure clauses and the commercial frustration doctrine could be an option for companies who are struggling to meet their obligations as a result of the pandemic. At the very least, they may provide leverage in renegotiating contracts affected by the pandemic. However, every business’ situation is different, and the contract in question should be carefully analyzed by an attorney before determining a course of action. The attorneys at Huguenin Kahn have extensive experience in addressing contractual disputes and stand ready to assist any cannabis business with their legal needs during this challenging time.
The attorneys at Huguenin Kahn are available to address any concerns you have relating to the above or other aspects and implications of COVID-19, including, but not limited to, employment disputes, whistleblower concerns, or other disputes relating to the shelter-in-place restrictions. Please call us at 530-955-3080 or e-mail us at info@hkcannabislaw.com. You can also follow us on social media @hkcannabislaw.