Up in Smoke: How the Illegal Contract Defense Threatens Enforcement of Cannabis Contracts

April/May 2019, Cannainvestor Magazine, Pages 84-99

I. Introduction

Lurking just below the surface of every recreational cannabis investment is the justifiable fear that the federal government will unwind the deal, thereby leaving a vacuum of uncertainty for investors and distributors alike.  It is the doomsday scenario that the industry has been planning for since Colorado and Washington first legalized recreational use and distribution of cannabis in 2012.

As the first wave of recreational cannabis-related cases wind their way through courts across the country, this doomsday scenario has now played out through various legal arguments.  The most recent iterations of this scenario are cases involving a legal rule called the illegal contract defense.  The illegal contract defense is as old as contract law itself and states that a contract requiring an illegal purpose is unenforceable. The illegal act must come from the contract’s performance itself and not some incidental duty or obligation under the contract.

Because the manufacture and distribution of cannabis is illegal at the federal level under the Controlled Substances Act, the argument is that contracts requiring the manufacture or distribution of cannabis are illegal and therefore unenforceable under the illegal contract defense.  This argument has been advanced in several jurisdictions, both federal and state, by various parties looking to avoid their contractual obligations.  The purpose of this article is to give a “state of the law” review of the illegal contract defense regarding recreational cannabis operations and to provide best practices to avoid the doomsday scenario of a court applying the defense to invalidate your otherwise enforceable contract.  To read entire article click here.


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