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Here is a scenario that our cannabis attorneys and litigation team have seen countless times: A client calls and wants to take immediate action for breach of a cannabis contract. You want to terminate the contract. Or cancel a tenant. Or file a lawsuit. The first question I always ask these customers is whether the contract contains termination and rectification provisions. In almost all cases, the answer will complicate matters.
What are termination and healing provisions?
Notice and Cure is a legal art term that can be really difficult for laypeople to understand. This means that a party does not breach a contract until they:
- notified that a violation has occurred (e.g. notification); AND
- a certain amount of time is given to remedy the violation (ie, to heal); AND
- Do not fix the injury during this time.
This can put off many non-lawyers because it often does not match reality. If a contract says that a party cannot do X and they do X, they are violating, at least according to normal perceptions of what it means to violate.
But the law has evolved over time so that going to court, kicking tenants out and awarding damages is the absolute last resort if possible. In practice, this means that the parties often have the opportunity to correct their wrongdoing.
What counts as a healing message?
Require good notice periods and grace periods written Note. Failure to do so can lead to crazy scenarios where one party claims they terminated by phone or in person, which cannot be definitively proven.
In order for the message to have a meaningful effect, the flag must always specify a minimum level of detail. Imagine if the other party to your contract said, “You are violating Section X, fix it in 5 days or I will sue.” How did you know what you allegedly did wrong, let alone comply? This type of communication has no legal effect and can lead to a number of problems. Outside of the minimum termination thresholds, however, some termination and supplementary performance provisions require specific and detailed information from the terminating party.
How to submit a notification
Contracts almost always contain detailed termination procedures in the Miscellaneous section. You can allow notification by post, in person, by fax, by email, or by any other means that the parties may choose. Many people just gloss over these terms when reviewing a contract, and some even skip them when analyzing a termination and fixing a provision after a breach. Those are both bad ideas. It’s good to know how to get notified in the event of a dispute. Sometimes contracts do not contain any notice periods (also bad!), Which can make the termination process considerably more difficult.
How long does the other side have to heal?
If there is no termination and cure regulation, there is generally no chance of a cure. If the parties want a healing period, they must determine its length, otherwise it is unlimited. Contracts often have different healing periods for different violations. Rental or other payment obligations usually have short healing periods, non-financial violations usually longer. That’s because it is much easier to pay money and heal than it is to correct the effects of failing to act. In some cases, there may not even be a healing period – it is entirely up to the parties. And depending on the type of contract and the type of breach, the duration of the “market” healing period can be very different.
How a party heals
Upon notification, a party may or may not attempt to heal (more on this below). Healing a financial breach is quite procedurally simple: you pay money. However, healing a non-financial breach can be complicated. If the other side says you breached a lease by not meeting certain tenant improvement benchmarks, it can be a challenge. If a notification and supplementary performance period does not give the infringing party enough time for supplementary performance, a common tactic is to start supplementary performance and contact the other side for more time. Some termination and healing policies even let parties who begin healing within a healing period and finish healing as soon as possible off the hook.
What if a party doesn’t heal in time?
If a party does not heal or heals in time, it is a breach of contract or default in payment. This enables the other side to use whatever remedies they have under the contract or law – termination, eviction, claims for damages, etc. If this happens, a party who tries too late to heal will be out of luck under the contract. If one party was healed a little late and is still being dragged in court, a judge or jury can be compassionate and reject the other side. But compassion from a court or jury is never something a person should hang their hat on.
What if one party denies a breach?
In most cases, a party receiving notification of a breach of contract or late payment will disagree. They claim it is a lie. Or that it’s wrong. Or that they actually didn’t have to adhere to it because the other side broke first. The list goes on.
In any case, the clock starts ticking as soon as a letter of resignation is received. Some contracts may allow a party to pay a disputed amount under protest. In other cases, a party could sue. Or it could reach out to the noting party and try to negotiate or explain why their position is wrong. The possibilities are many and it depends on the facts.
Termination and healing provisions are complicated but essential. Our lawyers have experienced too many situations in which parties in the litigation process botched the termination and improvement process or failed to think through the termination and improvement provisions when drafting contracts. Either way, bad things can happen and a lot of money can be wasted.