California law requires all contracts to have a “lawful object”.  Previously, this posed a problem for contracts involving cannabis since cannabis-related contracts are largely unlawful under federal law.  On January 1, 2018, California enacted Civil Code Section 1550.5. That Code Section explicitly states that cannabis-related contracts have a lawful object under California law.

California’s new law provides that commercial activity relating to adult-use cannabis conducted in compliance with California law is deemed to be the lawful object of a contract.  Section 1550.5 means that cannabis businesses can enter into and enforce contracts knowing that courts will not (or at least, should not) find their contracts invalid for lack of a lawful object.

Businesses in the cannabis industry should draft their contracts to take advantage of this change in the law and there are at least two immediate implications.  First, choice of law provisions should require application of California law (e.g., this contract shall be governed by California law).  Second, forum selection clauses should be used to make it mandatory that any claims relating to the contract be brought in California State Courts and not in any United States District Court (e.g., any action relating to this contract shall be decided by the Superior Court for the City and County of San Francisco).

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