Guide to Understanding & Evaluating Hemp Contracts in NC

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Guide to Understanding & Evaluating Hemp Contracts in North Carolina

*Disclaimer: This guide does not take the place of independent legal advice, and it is not intended to be used as legal advice.

The hemp industry is growing quickly in North Carolina (NC), and there are several contracting options currently offered in the market for hemp. This guide provides a brief overview of common provisions currently offered in these contracts, as well as some provisions to be cautious of. It is important to have a signed, written contract to serve as documentation of your agreement in the event that there is a dispute between the parties.

Hemp can be grown for three end-market agricultural commodities: floral bud, fiber, and seed. The majority of hemp grown in NC right now is being grown for floral bud for production of cannabidiol (CBD) oil (N.C. Department of Agriculture and Consumer Services, 2019, unpublished data). For this reason, this guide focuses on contracts for delivery of floral bud material and provides information that may be useful when choosing and negotiating a contract for this product. Additional information will be added as it becomes available.

If you are entering a contract for hemp, you should consider consulting an attorney
licensed in NC to review the contract before you sign it. A signed contract is legally
binding, and it is important you understand the terms of the agreement you are signing.

Common Contract Terminology

  • Broker: A person, corporation, or any other entity that purchases a hemp
    product from a producer and sells it to another entity for further processing,
    wholesale or retail, or for any other purpose.
  • Contract: A contract is a binding legal agreement between two or more parties that a court of law will enforce. Hemp contracts are typically in writing, but some courts may also find verbal agreements to be valid and enforceable.
  • Processor: Any person, corporation, or other business or service that may provide the modification of a raw hemp product into a secondary product different from its original form.
  • Producer: A farmer or any entity that produces a hemp product, typically raw hemp flower, stalk, biomass, seed, etc. that may be either wet or dried and trimmed and/or packaged.

Standard Contract Provisions

  • Independent Contractor: As a producer, if you sign a contract with a broker there may be a provision in the contract that states that you will be considered an independent contractor. These types of contracts also often say the plant material you use will be provided by the broker. This is standard language in contracts we have evaluated. Be aware that you may incur unforeseen costs associated with being an independent contractor that might not be outlined within the contract, including, but not limited to: income taxes, drying and/or further processing required to execute the terms of the contract.
  • Price: One of the most important provisions in the contract will be the price a producer will receive for the crop. A contract should clearly outline how and when a producer is to be paid and in what form they will be paid: company check, in-kind, part cash and part product, etc.
  • Testing: Contracts should address required testing and what specifications delivered material should fall within in order to receive full payment. This may include, but is not limited to: CBD profile, THC content, presence of heavy metals, pesticide residues, mycotoxins, and molds. It is strongly recommended that producers test their own products using a well-known testing facility. Having their own comprehensive tests provides producers with the appropriate documentation if there is a disagreement with a buyer in the future.

Tips for testing: Producers and buyers should agree on a 3rd party testing facility before signing the contract. A 3rd party facility refers to a lab that is not owned or operated by the producer or the buyer.

Cautionary Provisions

  • Assignment of license: Some contracts have language stipulating that the grower assigns all “right, title and interest” in their grower license to the broker. This results in the broker having all rights in the license. When a grower applies for and receives a license to grow hemp in NC, that license provides rights and responsibilities to the individual who applied for the license. These rights cannot be transferred to other individuals, companies, or entities.
  • Exclusivity: A contract may have an exclusivity clause that states a producer
    can only contract with one buyer, and prohibits the producer from having a contract with anyone else. A producer should have the freedom to enter into as many contracts as his/her land allows as long as a producer is not utilizing one buyer’s provided plant material to fill another buyer’s contract.
  • Non-disclosure provision: A non-disclosure provision limits what a producer can say during the life of the contract, or even after the initial terms of the contract have ended. Non-disclosures are typically added to keep a producer from discussing disputes that may arise during the term of the contract, or other information about the company or terms of the contract.
  • Payment: It is important to understand the terms regarding the price for the crop before signing a contract. Some contracts have a set price based on weight and percentage of CBD content. However, there are many variations in purchasing practices. Payments may be made in product, a combination of product and cash, or delayed until after processing and/or marketing. Payments may also be decreased or refused for various reasons set forth in the contract. Price reductions are often related to producer’s raw product not meeting the buyer’s specifications.

Documentation
It is a good idea for all parties to a contract to keep good documentation in the event that there is a dispute at some point. The use emails and texts as a means of communication will help to provide such documentation. Ensure that everything both parties want is in the contract and clearly written out.

Company information for the buyer should be included in the contract and should include physical and mailing address as well as the full company name. If company information is not provided it may be a sign that the company is not legitimate and/or reputable. It is a good practice to verify that the company is registered with the Secretary of State.

Final Note
Although hemp is still a relatively new crop in NC, contracts for hemp are similar to contracts for other products. Parties should conduct business with other reputable parties and conduct their own due diligence before entering into an agreement. Parties may want to consult with an attorney licensed in NC to review agreements before signing.

References
H.B. 992. General Assembly of North Carolina. House Bill 992. G.S. 106-568.51.2016. An act to modify the industrial hemp research program by clarifying the definition of research purposes and the responsibilities of licensees, creating civil and criminal penalties for violations of the industrial hemp program, and granting rule-making authority to the industrial hemp commission. May 5,
2019.

North Carolina Department of Agriculture. 2019. Industrial Hemp Pilot Program in North Carolina. May 5, 2019.

Secretary of State Knowledge Base. 2019. May 5, 2019.

Five contracts offered to North Carolina growers were reviewed in order to develop this document.

*Written by Marne Coit, JD, LLM, Agricultural Law Lecturer; Robert Elliott, AGI Veteran Liaison, Soldier to Agriculture Program; Angela Post, PhD, Small Grains Extension Specialist