An Arbitration Primer for the Marijuana Industry, Part Three

In the first part of this series we covered the basics of how arbitration works, and some of the main differences between arbitration and litigation. We then in the second part examined some of the benefits and drawbacks of a cannabis business settling a dispute through arbitration.

darts around a targetToday in the final installment, we will discuss arbitration clauses — what to watch out for, and how to protect your own interests. Many of these issues also arise in the context of contract drafting and negotiation, but arbitration can put a different spin on things.

As we noted in the first part, in the vast majority of cases, parties end up in arbitration because they agreed in advance to resolve any disputes in an arbitration proceeding. This agreement is almost always made in the context of some larger contract between the parties, but can be made in a separate agreement. In some cases the parties execute a number of agreements all at once and, even though the contract the complainant seeks to enforce does not contain an arbitration clause, a court may compel the parties to arbitrate anyway, if the agreements are closely enough related. This may also be true where a third-party beneficiary tries to enforce a contract containing an arbitration clause.

Any arbitration clause you encounter may address some or all of the following:

  • Scope: You can define the scope of arbitrable disputes as narrowly or broadly as you desire, or, more realistically, as the other side will agree to. You might draft a clause to cover only contract disputes, leaving tort cases to the courts, for example. More commonly you see inclusive language embracing any claim “arising out of or relating to” a contract. Judges and arbitrators consistently construe such clauses broadly, as covering just about any kind of controversy that might occur between the parties to the contract. If you want to explicitly exclude any particular type of claim, or a higher-value claim, etc., the best way to accomplish this is to add language specifically excepting the cases you do nor want to arbitrate. Otherwise you may very well find yourself in arbitration anyway.
  • Arbitral administration: If you know you want to use the American Arbitration Association or some other dispute resolution body, say so. If you don’t know, it is still probably worth the effort to research your options and include a provision in your agreement. It will be one less thing to argue with your opponent about later on, and get you one step closer to resolution.
  • Arbitrator selection: It is rare that an arbitration clause specifically identifies the arbitrator who will handle potential disputes between the contracting parties. Generally a pool of potential arbitrators is proposed by the arbitral body, or, in the case of smaller operators, the parties simply select one from those arbitrators associated with the organization. But the parties may want to stipulate whether a dispute will be decided by a single arbitrator, or a panel of arbitrators (usually three). In most cases one arbitrator will suffice (and the parties will only want to pay for one anyway), but in high-value or very complex cases, a panel of arbitrators can help ensure that mistakes are not made and that the result is fair. One other consideration is whether a dispute that might arise between the parties might benefit from an arbitrator with some degree of expertise. For instance, maybe in your dispensary’s contract with a laboratory, you foresee that an arbitrator with a chemistry background would be helpful. Assuming you are using an arbitration association with a wide range of arbitrators, your agreement could include such a stipulation. Although a more specialized arbitrator might be more expensive, you might also be able to forego hiring an expert witness in such a case.
  • Location: Arbitrators are not subject to the same jurisdictional limitations as courts, so you definitely want to specify a city where the arbitration will be held to avoid being surprised with a proceeding in Timbuktu. We have arbitrated cases in cities with virtually no tie to the case or parties (which would never go forward in a court in that jurisdiction), so choose carefully. Consider the parties’ location and the location of the arbitrator, but also where most of the “action” that might give rise to the dispute may occur. In some instances the most economical seat of arbitration is where all the witnesses and evidence are. If you are based in Colorado, but contract with an Arizona company to provide consulting services to your new dispensary in Maryland, arbitration in Maryland may make the most sense.
  • Choice of law: The law that will apply to your dispute may make a big difference or no difference, depending on the type of claim. Contract law is fairly uniform across the United States, but substantive cannabis law is not. Not only do the laws legalizing marijuana very greatly from state to state, but how those states’ laws intersect with employment law, disability law, and tax law (just to name a few) will vary more greatly still. And the landscape is changing all the time. The choice of law in your arbitration clause is an important one, and may require a few minutes’ consultation with your lawyer.
  • Entry of judgment: Your arbitration clause should always contain language empowering the arbitrator to issue a final, binding award and also stating the parties’ agreement that the award may be entered and enforced in any court having jurisdiction. This provision ensures that if you receive an award, you can eventually take it to court and seize assets or whatever you need to do to to collect from the other side.
  • Other limitations: As we’ve mentioned throughout this three-part series, arbitration offers the benefit of customization. If the parties wish to limit the scope of permissible discovery in arbitration, they can do that. In some cases, the statute of limitations can be waived, and a requirement included that a claim be filed on a shorter timeline. Within reason, the parties can also set out their expectation as to when a hearing must be set, or the duration of the entire proceeding from date of filing to final award.

We often encourage our cannabis clients and readers of this blog to conduct themselves as “real” businesses, not “just” a cannabis business. The strategic inclusion of arbitration clauses in your contracts is just one more way to prove your savvy.