California Cannabis Supply Chain Contracts: Inspection and Rejection

Our cannabis business attorneys have drafted many cannabis supply chain agreements (such as distribution agreements, licensing agreements, etc.) over the years. Generally, supply chain cannabis contracts follow the same format and the same nuanced provisions seem to pop up time and time again (I wrote about some of them previously in the context of tri-party supply chain agreements here). One such provision concerns inspection and rejection rights.

Virtually any kind of agreement where commercial products are changing hands gives the recipient the right to inspect products and reject them for certain non-conformance issues. The biggest negotiating point for these clauses are typically (1) how long that inspection period is, and (2) the grounds upon which the recipient can reject the goods. Disputes can crop up during negotiation around whether or not rejection is allowed for things that are discretionary. For example, a recipient may want the right to reject goods if it determines for some reason that it can’t sell them. It goes without saying, but the recipient almost always wants more time and broader rejection rights, where the seller usually wants short rejection windows and very narrowly defined rejection rights.

This is not unique to cannabis. Any time a

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