A few weeks ago, we addressed the need for hemp sellers and purchaser to enter into agricultural production agreements (“APAs”), and in doing so, avoid unnecessary litigation. APAs are generally entered into at the beginning of a contractual relationship. In other cases, parties will forego a formal APA, and opt for a simpler, more “casual” way of doing business by using a purchase order, sometimes known as a “PO.”
A PO is a contractual document generated by the purchaser to authorize a purchase transaction. When the PO is accepted by the seller (typically on the seller’s preferred form), it becomes a binding agreement on both parties. A PO sets forth the description of the goods, their quantities, their prices, payment terms and the date of performance or shipment. It can also incorporate a wide array of associated terms and conditions. If the parties are operating without an underlying APA, it’s very important that the seller include these.
Whether hemp sellers and purchasers adopt an APA and/or a PO with associated terms and conditions, they should ensure that the following five terms are incorporated in their agreement:
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.
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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.
As reflected in this non-exhaustive list, hemp is a unique commodity that requires contractual terms beyond those found in generic agreements. As such, any agreement entered by hemp sellers and purchasers should, at a minimum, include the five terms discussed above to help mitigate their risks. For more information on hemp APAs and POs, please contact our regulatory attorneys.