Product recalls occur when the maker or seller of a cannabis good asks downstream sellers or consumers to return the product, usually after discovery of some defect or safety hazard. For example, a manufacturer of a cannabis vaporizer may initiate a recall in the event that it learns that the vaporizer battery can overheat and burn consumers.
Recalls can be initiated by the manufacturer, but can also be initiated by downstream sellers or government agencies. Given that cannabis products often pass through multiple licensees’ possession before making their way to consumers, it’s key to address recall provisions in supply chain agreements. Not doing so can lead to problems and disputes.
In terms of payment, let's consider the following example: If, for some reason, a defect in a battery were caused by the distributor (maybe the distributor stored the vaporizers in extreme temperatures which caused them to malfunction), then from the manufacturer’s point of view, the distributor should pay. As you can imagine, even when contracts have well-drafting cost-shifting provisions, this can lead to a lot of headaches in practice and litigation could arise between the manufacturer and distributor over the issue of who was actually responsible for damage and should bear the costs of a recall.
It’s also important for cannabis contracts in particular to consider the regulatory impact of a recall.