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California Hashish Provide Chain Contracts: Inspection and Rejection

Our cannabis company lawyers have drawn up many cannabis supply chain agreements (such as distribution agreements, licensing agreements, etc.) over the years. In general, supply chain cannabis contracts have the same format and the same nuanced provisions seem to keep popping up (some of which I wrote about before here under three-party supply chain agreements). One such provision concerns inspection and refusal rights.

Virtually any type of agreement where commercial products change hands gives the recipient the right to review products and reject them for certain non-compliance issues. The main negotiating points for these clauses are usually (1) the length of this inspection period and (2) the reasons for which the recipient can refuse the goods. During the negotiation, disputes may arise as to whether or not to reject things. For example, a recipient may want the right to refuse goods if, for some reason, they find they cannot sell them. It goes without saying, but the recipient almost always wants more time and broader rejection rights, with the seller usually wanting short rejection windows and very narrowly defined rejection rights.

This doesn’t just apply to cannabis. Every time a contract has inspection and rejection deadlines, these issues arise. What makes them unique to cannabis is that the California Bureau of Cannabis Control (BCC) imposes additional inspection and refusal rights on its licensees. While the rules only apply to BCC licensees such as dealers and retailers, these are the types of licenses that typically do (the circumstances under which cultivators obtain cannabis products, for example, are very limited).

According to the BCC, recipients of cannabis goods are required to refuse partial or full shipments of cannabis goods if the shipment differs from the goods on a sales invoice or receipt, contains goods that were damaged in transit, and the cannabis goods do not meet or do not meet labeling requirements Goods have passed their expiry date. Presumably, the BCC would also like the recipients to reject goods that otherwise do not meet the applicable requirements, e.g. B. failed the exam. Basically, it follows from the BCC rule that this inspection should be carried out after receipt of the goods.

This is all important as some sellers may try to bargain for very tight opt-out rights that are against the rules. This means that when negotiating a contract, the rules need to be followed to avoid disputes. For example, what happens if a contract does not allow goods to be rejected due to non-compliance with labeling requirements and the recipient wants to reject goods with non-compliant labels? The answer is not always clear and it is good to understand this when designing.

Beyond the contract, inspections are important for practical reasons. Once a licensee has accepted cannabis goods, their ability to return those goods is severely limited. The BCC allows B2B returns only for incorrectly manufactured goods and only after certain exchange processes have been completed. The BCC does not define what “defective” means, but it does include the above items for manufactured goods, such as: B. Damage or incorrect labeling. However, it in no way includes being dissatisfied with goods or flower products. This is just one of the reasons thorough inspections are important.

Inspection and rejection clauses are often glossed over in contract negotiations. The clauses are particularly important for buyers. Visit the law Law Blog as we discuss additional issues with supply chain contracts in the cannabis industry. Until then, you can find more information about contracts with cannabis supply chains at the following information:

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