Alternatives to contract law in the marijuana industry

In an earlier post, I explained why courts won’t enforce some contracts between marijuana dealers and their investors, landlords, suppliers, etc. 

Without the state’s help in enforcing their bargains, the state-legalized marijuana industry will face higher costs of doing business compared to other industries. After all, contracting parties are more likely to engage in opportunistic behavior (e.g., refusing to repay a loan) when their partners have no legal recourse.

But the unavailability of legal remedies isn’t the “final nail in the coffin” of the marijuana industry because there are viable, albeit second-best alternatives to contract law. Indeed, black markets can flourish without lawful contracts (think Silk Road), and even lawful businesses sometimes prefer cheaper non-legal solutions to expensive legal ones.

Here I briefly tease out some non-legal strategies the marijuana industry and its partners might pursue in the wake of an Arizona court ruling holding their contracts unenforceable. (Note I purposely avoid illegal strategies, like, well, this.)

One, obvious solution is to limit the universe of contracting partners, namely, to persons who are known and can be trusted. Indeed, reputation plays a pivotal role in some industries (think Amazon, EBay, and their illicit cousin Silk Road). A good reputation is a valuable asset, one that vendors won’t sacrifice too readily (particularly when they hope to remain in the industry). For example, if a marijuana dealer like the one in my prior post thought it might need future financing, it would be less likely to walk away from $500,000 in obligations to its current lenders. Firms can even take this idea to the next level and integrate. Indeed, Colorado has required vertical integration of marijuana growers and sellers. Such integration creates its own problems, but a dealer which grows its own stock now at least doesn’t have to worry about enforcing deals with third-party suppliers.

A second strategy involves taking various forms of self-protection against breach. Think of a security deposit paid to a landlord. The deposit reduces the risk to the landlord that the tenant will just walk away from the lease. The payment of such a deposit should help marijuana dealers secure leases. And as long as tenants remain in possession of the property under lease, they have their own ways of protecting themselves against breach by landlords.

In short, there are alternative, albeit second best alternatives to contract law. Readers, I would be curious to know how people are now handling deals in the marijuana industry.