How to Avoid Drafting a Really Bad Arbitration Agreement: Cannabis Edition

How to Avoid Drafting a Really Bad Arbitration Agreement: Cannabis Edition
Posted on: Mon, 07/31/2023

By: Lance Tanaka, Vice President, AAA® Commercial Division

The cannabis industry has gravitated toward using arbitration to resolve its disputes. Because some jurisdictions do not recognize authority over disputes in this field, accessing justice in court for cannabis-industry parties continues to be a challenge.

Cannabis disputes are business disputes, just like any other commercial matter. Likewise, at the outset of a business transaction, as in more traditional enterprises, those dealing in the cannabis industry should include a clear dispute-resolution clause in their contracts. The agreement may be between partners in a storefront, a grower and a processor, a dispensary and a supplier, or any other business deal.

Drafting clear, unambiguous clauses contributes to the efficiency of the alternative dispute resolution (ADR) process for all business disputes, and the cannabis industry is no exception. Overly complex or ambiguous language risks delays and procedural obstacles—or even the necessity to litigate aspects of the arbitration process in court. 

Read on for what happened to parties in the management and operation of a cannabis growing, distribution, and dispensary business that had two operative agreements, each with different dispute-resolution provisions.

Clause Issue: Conflicting or Ambiguous Language

  1. The first agreement allowed the complaining party to select mediation or arbitration, whereas the second agreement implied that mediation is a condition precedent before arbitration. 
  2. Both agreements failed to specify the process for mediator selection in the event the parties reach an impasse selecting a mediator. 
  3. Agreement 1 failed to specify a dispute-resolution service or procedural rules for mediation and arbitration, conflicting with Agreement 2, which specified that the rules of the American Arbitration Association® (AAA®) would apply to resolve disputes. This created uncertainty as to whether Agreement 2 controls and overrides Agreement 1’s dispute-resolution process.  
  4. Agreement 2 specifies a venue for the mediation or arbitration; Agreement 1 is silent on this issue.
  5. Both agreements call for a “competent” arbitrator—but by whose definition of “competent?” 

Result of Conflicting or Ambiguous Language 

The claimant filed a Demand for Arbitration with the AAA, but the Respondent objected to the AAA’s authority and jurisdiction, arguing that mediation should be the first step before proceeding with arbitration. Additionally, the responding party argued that the matter is not properly before the AAA, since Agreement 1 does not require the AAA’s services or procedural rules.  As a result, the parties stipulated to hold the arbitration in abeyance, pending the court’s ruling on the AAA’s jurisdiction/authority. After more than a month, the court issued a ruling compelling arbitration before the AAA, based on the arbitration provision included in Agreement 2.  

After recommencing the arbitration, another dispute arose—this time, over what constituted a “competent” arbitrator. Because the clause did not specify any arbitrator preferences—such as minimum qualifications, background, or experience--the arbitrator selection process caused additional delay. The AAA afforded each of the parties an opportunity to provide a description of relevant background and desired experience for the potential arbitrator candidates. The AAA provided the parties with a list of potential candidates based on the parties’ input and the nature of the dispute. 

Time and Cost Impact

Due to the conflicting language contained in both Agreements, the jurisdictional challenge and arbitrator-qualifications issues required over three months to resolve before the arbitrator was appointed—twice as long as usual.

How to Avoid This 

  • Implement identical dispute-resolution clauses if more than one agreement governs the parties’ relationship or incorporate a single controlling clause by reference or amendment among the contracts.
  • Provide an administrative framework for the resolution of issues by specifying an administering organization and/or set of rules to govern arbitration proceedings.
  • Balance the avoidance of vague descriptions of arbitrator qualifications with over-specificity where the pool of potential arbitrators meeting the parties’ description may become too limited or even fails to exist. 

For an in-depth analysis of additional faulty arbitration clauses in actual cannabis industry contracts, see the white paper Cannabis Disputes Are Business Disputes: A Clause Primer for the Cannabis Industry.


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