Why Arbitration?

 

A  History of arbitration

B  Commodity arbitration

C  Why cannabis arbitration is different

D  Arbitration vs. Litigation

E  How arbitration avoids conflicts with Federal law

F  Enforceability of the Arbitration Clause

G Enforceability of the Award

H Benefits of arbitration – risk reduction

I After the fact (Submit to arbitration)

J  The importance of the seat of arbitration

K Industry-specific arbitrators

 

 

 

A  History of arbitration

                Arbitration has been an accepted method of resolving disputes for thousands of years.  It may have been commonly used even before any formal court system was established, and has co-existed with the legal systems that have grown up around the world.  Arbitration for millennia has consisted of having someone with expertise evaluate the facts, or a sample of a product, and make a decision.  Because the arbitrator was regarded by both parties to the dispute as an expert, the decision was accepted as binding.  That still holds true today.

 

B  Commodity arbitration

                Most globally traded commodities have their own trade groups, and most of those trade groups have some dispute resolution procedure.   For the most part, the disputes referred to the trade group are between members of the group, and group membership includes agreeing to arbitrate disputes.  Some trade groups deal more with outside vendors than others, and while arbitration is possible in these disputes, most vendors prefer a neutral (non-industry) arbitration, or use the legal system.

 

C  Why cannabis arbitration is different

                In many ways cannabis is just like any other globally traded commodity.  Within a few years, it may be one of the leading globally traded commodities, at least in value, and eventually by volume.  But right now, there are difficulties with inter-state trading, and global trading.  The problems arise from the unusual situation where cannabis and hemp are legal to own and sell and the State level, but not under Federal  laws and regulations.  A contract to purchase cannabis, or even cannabis-related products and services, may be legal under State law but not under Federal law.  While this complicates things slightly, it also allows arbitration to become the one sure way to resolve cannabis-related disputes, as explained in the following paragraphs.

 

D  Arbitration vs. Litigation

                When a cannabis-related dispute ends up in court, the outcome is far from certain.  Even when the contract is written under state law, and in a state court, the judge may still apply Federal law and declare that the contract is void for illegality under Federal law.  Or the judge may refuse to apply Federal law.  Either decision can be appealed, potentially dragging on the dispute even longer.  In Federal court, the judge is highly likely to throw out the case for illegality of the contract.  It is therefore hard to have a contract enforced by the courts.  Honest parties cannot get their disputes resolved, and dishonest parties can game the system by knowingly entering into contracts which they will later have the courts declare to be void.

                In arbitration, it is possible to select the applicable law.  Obviously that would be Colorado State law or the law of an equally friendly jurisdiction.  It is also possible to appoint an arbitrator who will abide by that choice and not introduce Federal law.   But not all arbitral institutes will cooperate, unlike the CDRI which is committed to providing effective arbitration for cannabis-related disputes.

 

E  How arbitration avoids conflicts with Federal law

               How can the arbitration not include Federal law?  The answer is found in the Federal Arbitration Act (FAA) - a powerful set of Federal laws, supported by several decisions for the United States Supreme Court.   The FAA strongly supports arbitration as a means of resolving commercial disputes.  It supports the right of the parties to choose the law which will apply to their contract and to the dispute.  It supports the right of the parties to choose an arbitrator, and the site of the arbitration (which governs the applicable procedural law).  As long as the parties agree to State law only in their contract, Federal law does not apply to the arbitration.

 

F  Enforceability of the Arbitration Clause 

                  Even when two parties agree to arbitrate their disputes, it is not uncommon when a dispute arises for one of the parties to attempt to avoid arbitration.  This may happen if one party sees an advantage in trying to claim that the contract is void under Federal law.   The Federal Arbitration Act and several US Supreme Court decisions make it almost impossible to avoid arbitration, even when the underlying contract is illegal under Federal law, or even illegal under the applicable state law.  In cases such as Buckeye Check Cashing, Inc., v. Cardegna et al.,  the Supreme Court ruled that a challenge to the validity of a contract must go to the arbitrator and not to the court.   Therefore if such a claim is made, the court will refer the case to arbitration.

 

G Enforceability of the Award

                   In many cases, once the arbitrator has issued an award, the losing party pays the amount awarded, or complies with whatever conditions were imposed by the arbitrator.  In some cases, the losing party may refuse to comply with the award.  The winning party may then take the award to the court - the State Court, not Federal court, of course - and have the arbitration award converted to a State Court judgment.  The losing party may claim that the award was based on an illegal contract.  As with the arbitration clause, the State court may not look at the underlying contract.  Further, once the State court issues the judgment, all other states must honor that judgment.  This is based on a case from 1908, Fauntleroy, where the US Supreme Court held that the Full Faith and Credit Clause of the US Constitution forbids states from questioning judgments issued by other states.  Indeed, this is one of the pillars of our Federal system of government. 

                   If the losing party has assets in Texas, for example, you can take a Colorado state judgment to Texas, and the Texas courts have no choice - they have to enforce that judgment as if it were from a Texas court.

 

H Benefits of arbitration – risk reduction

                 Any business deal involves some degree of risk, so business write contracts to reduce the risk and provide remedies in case things go wrong.  In the cannabis industry, deals are even more risky, because it is not possible to go to court to resolve a dispute.  Yu may be running your business on a series of contracts which could be declared void.  There is even the possibility that some unscrupulous operators may agree to a deal, knowing that they can very likely have the contract declared void whenever it suits them.  But when there is an arbitration clause in the contract, there is a way to resolve disputes.  There is a way to obtain an enforceable judgment against those people who try to manipulate the system.

               Whether the contract is between two cannabis businesses, or a cannabis business and a provider of goods and services, an arbitration clause reduces the risk for both parties.  Therefore providers of goods and services will feel more comfortable dealing with cannabis companies, and cannabis companies will be able to obtain the goods and services they need to run and expand their business.

                This is especially true for investors, whose business model involves being able to balance risk and reward.  When the risk can be significantly reduced, a whole range of previously questionable investments suddenly becomes worth serious consideration.

 

I After the fact (Submit to arbitration)

                   One of the little-known facts about arbitration is that parties to a dispute can agree at any time to submit their dispute to arbitration, including after a dispute has arisen.  They may realize that they cannot take their dispute to court.  Or perhaps they have, and the judge has ordered them to go to arbitration.  All that is required is for the two parties to draft and sign an arbitration agreement, and the arbitration can proceed as normal.

 

J  The importance of the seat of arbitration

                    In the world of arbitration, the place where the arbitration legally takes place is referred to as the 'seat' of the arbitration.  This almost always determines the law which governs the arbitration itself, although it may not be the same as the law of the actual contract.  it makes sense to pick a seat which has cannabis-friendly laws, local judges who have a more progressive attitude, and if necessary, attorneys with experience in the cannabis industry and cannabis law.  This only becomes important when a party seeks interim injunctive relief, or has some procedural issue which must be decided by a court.  That happens infrequently.

                    It is possible to hold hearings anywhere, they do not need to be held in the seat of the arbitration.  Suppose a California based company contracts to sell products to a customer in Arizona.  Rather than bicker over whether to use California law, or Arizona law, they agree to use Colorado law for the contract, and to designate Denver, Colorado as the seat of the arbitration.  Then Colorado law will govern the contract and the arbitration.  But they could just as easily use California law for the contract and still select Denver as the seat of the arbitration.

 

K Industry-specific arbitrators 

                   There are several reasons to choose arbitrators who know the industry in which a dispute arises.  The very origins of arbitration go back to a time when disputes were resolved by experts in a trade or a craft, without recourse to judges who had no expertise in the business.  An industry-specific arbitrator will know the jargon, the customs, and the unwritten rules of a business and will therefore be better able to decide between conflicting versions of the case being presented.  Most importantly, in the cannabis industry, CDRI will ensure that the arbitrator will not introduce issues of Federal law, leading to the very problems arbitration is intended to avoid.  CDRI will maintain a roster of arbitrators who have agreed to abide by the CDRI Arbitration Rules.

 

 

 

CANNABIS - MARIJUANA DISCLOSURE – The Cannabis Dispute Resolution Institute’s (CDRI) services are strictly limited to dispute resolution within the confines of relevant state and foreign laws and regulations relating to legal medical marijuana and cannabis products, the legal adult use of marijuana, and other legal cannabis and hemp products. CDRI is based in Denver, Colorado, USA. Cannabis (which includes “marijuana,” and “marihuana”) are controlled by the United States of America pursuant to the Controlled Substances Act and nothing contained herein nor any of CDRI’s services are intended to assist in any way with violation of any applicable law. Do not assume that any information, documents, or samples sent to the CDRI will remain confidential. CDRI does not offer legal advice and strongly recommends that you consult competent legal counsel on any matters of law.

 

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