As the hemp industry matures we are thankful to see more contracts in place outlining the interests of parties conducting business together. Contracts and agreements are an important part of business in any industry but arguably even more so in hemp, land of the wild west.
Hemp purchase agreements and contracts ensure considerations for both parties are discussed and terms are agreed upon before money is exchanged or business is conducted.
Last year, the hemp industry saw waves of litigations resulting from crops failures, purchases of genetics, biomass and flower gone wrong and many other things in between.
A hemp seller and purchaser should enter into agricultural production agreements or “APAs”, which is the legal contract commonly referred to as a “hemp purchase agreement”
APAs are generally entered into at the beginning of a contractual relationship. In other cases, parties may opt for a simpler process and use a less formal version of an APA such as a purchase order, sometimes referred to as a “PO.”
A purchase order is a contractual document created by the purchaser to move forward with a purchase transaction. If the seller agrees to the PO it becomes a binding agreement for both parties.
A purchase order details the description of goods being sold, the quantities, prices, payment terms and date of shipment. It can also incorporate associated terms and conditions.
Whether hemp sellers and purchasers coose to use an APA and/or a purchase order, they should ensure the following terms are incorporated into their agreement since these are some of the most common issues and oversights.
1. Proof of Authorization to Grow Hemp
The US Department of Agriculture is working on regulations under the 2018 Farm Bill and will eventually approve of hemp cultivation plans submitted by states. Until then (and for a year following the adoption of the USDA regulations), the 2014 Farm Bill remains in effect. Pursuant to the 2014 Farm Bill, every state that allows hemp cultivation requires that hemp be produced under a license, permit, or other authorization issued by its state department of agriculture. Accordingly, a hemp agreement should mandate that the seller (i.e., grower and/or processor), provide a copy of its license registration with the state department of agriculture in which the hemp is grown and/or processed. In addition, a well-drafted hemp agreement should further require that the seller provide information regarding the harvest lot and process lot identifiers with every delivery of the goods.
2. Testing Requirements.
The 2018 Farm Bill legalized hemp by removing the agricultural crop from the definition of marijuana under the Controlled Substances Act. What differentiates hemp from marijuana is merely its tetrahydrocannabinol (“THC“) concentration, which must not exceed 0.3 percent on a dry weight basis. Therefore, it is vital that the hemp or hemp product sold meet this THC limit. The seller should attach to each delivery a copy of a certificate of analysis (“COA”) from a licensed third-party lab that show compliance with this testing requirement. A prudently-drafted hemp agreement will also afford the purchaser the right to inspect and test the goods to ensure the sufficiency of testing under all applicable laws.
3. Packaging & Labeling.
States with robust regulatory systems require hemp and hemp products be packaged and labeled in conformance with rules adopted by their department of agriculture. As such, the hemp agreement should designate which party is responsible for labeling and its associated costs, as well as what would happen in the event of non-compliance.
4. Representations and Warranties.
Most agreements contain an abundance of representations and warranties; however, hemp agreements take this concept further and cover everything from program compliance concepts to product safety. This also tends to be one of the most heavily negotiated area of any hemp sale agreement.
5. Limitation of Liability.
This section also tends to be heavily negotiated, as the parties determine who would be responsible for problems and to what extent. Many things could go wrong given the perishable nature of hemp and the risk of THC fluctuation from the time of harvest all the way to the manufacture of a finished product. Under this provision, each party will seek indemnification for anything beyond its control.
6. Description of Goods
Transactions going poorly due to unnegotiated expectations of quality, acceptance of inevitable variables in large lots, or where delivered product varied from what was originally represented are commonplace. As such, outlining the quality and state of the material being purchased with inclusion of descriptive text is critical.
Descriptions should include what minimum and maximum percentages are allowed for the different chemical compounds as well as a description of expected trim quality, moisture content, and how defects such as seeds and mold will affect the agreement if found.
As reflected in this list, hemp is a commodity that requires contractual terms beyond those found in generic agreements due to its unique variables. As such, any agreement entered by hemp sellers and purchasers should, at a minimum, include the terms outlined above to help mitigate risk.
The Hemp Collect offers a free hemp purchase agreement to our partners as a resource. Contact us to request a copy.