It is not surprising that a number of our litigation cases involve oral agreements. Parties too often enter into “ hand-shake ” deals without clearly defining the terms of the agreement. When an agreement is ambiguous, parties can have different expectations from the outset. Each party will stubbornly stick to the feeling of being wronged by the other’s actions, but the dispute actually began at the “hand-shake,” when there was an initial misunderstanding of the terms.
Litigation involving ambiguous agreements can be much more expensive than litigation involving agreements where the terms are well-defined. When there are disputes about the terms of the agreement, courts will look to the “mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” (Cal. Civ. Code § 1636.)
“A contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates.” (Cal. Civ. Code § 1647.)
“In construing contract terms, the construction given the contract by the acts and conduct of the parties with knowledge of its terms, and before any controversy arises as to its meaning, is relevant on the issue of the parties’ intent.” (Southern Pacific Transportation Co. v. Santa Fe Pacific Pipelines, Inc., 74 Cal.App.4th 1232, 1242 (1999.)
This rule “is predicated on the common sense concept that ‘actions speak louder than words.’ Words are frequently but an imperfect medium to convey thought and intention. When the parties to a contract perform under it and demonstrate by their conduct that they knew what they were talking about the courts should enforce that intent.” (Crestview Cemetery Assn. v. Dieden, 54 Cal.2d 744, 754 (1960).
The process of determining the parties’ mutual intent involves reviewing mountains of emails and text messages and deposing witnesses. The volume of documents, alone, significantly increases attorneys’ fees in litigation. These fees are typically not recoverable in a breach of contract claim where the subject contract does not have an attorneys’ fees provision.
“Hand-shake” deals were popular in the cannabis industry due to the conflict between state and federal laws. While the medicinal and recreational use of cannabis is still currently illegal under federal law, California authorized medicinal cannabis in 1996, and adult recreational cannabis use by passing the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). Since existing law requires that a contract “be for a lawful object,” the federal conflict in law created uncertainty regarding the enforceability of contracts in the cannabis industry.
In 2017, the California Legislature responded with a new law that states commercial activity relating to medicinal cannabis or adult-use cannabis conducted in compliance with state law, and any applicable local standards and regulations, is a lawful object of a contract, is not contrary to an express policy or provision of law or to good morals, and is not against public policy. (See Cal. Civil Code Section 1550.5(b).)
This law is beneficial because it promotes written agreements in the cannabis industry, which will lead to good business practices, and will reduce disputes over the terms of ambiguous oral agreements.
Anne “Annie” SmiddY is senior counsel with Ad Astra Law Group, LLP and acts as Senior Counsel on cases in Northern and Southern California. Check out her previous article on unions and new regulation.
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