Cannabis industry: Enforcing contracts

TEXAS:  One of the many problems created by the conflict between federal and state marijuana law is uncertainty in the enforceability of certain contracts.  Judges can, and in cannabis cases often do, void contracts for violating federal policy. Attendees at the Marijuana Investment Conference in Houston voiced their concerns about the possibility of federal law inhibiting the growth of a legal marijuana industry. At the conference, a Baker Institute and South Texas College of Law collaborative survey found that investors and entrepreneurs view the “risk of federal law superiority” and “legislative roadblocks” as among the greatest challenges faced by the marijuana industry.

Investors, financiers and entrepreneurs may achieve great success by participating in the growing field of cannabis commerce. Yet an improperly drafted contract agreement could hinder the sustainability of a successful business or investment. By reviewing cases and laws that address cannabis contract enforceability and researching ways to craft viable agreements in their cannabis-related transactions, investors, financiers and entrepreneurs can better navigate the marijuana marketplace. Although not an exhaustive review, the following cases reveal the challenges of enforcing cannabis contracts.

In 2010, financiers agreed to loan $500,000 to an Arizona medical marijuana business. The company eventually defaulted on the loan obligation. The financiers sued the defaulting business. In 2012, an Arizona Superior Court ruled in summary judgment against the enforceability of a marijuana-related loan agreement. The judge stated that since the purpose of the agreement, which was to finance the sale and distribution of marijuana, violates federal law, the “contract is void and unenforceable.”

In 2013, a court in California ruled in a similar manner. When a medical marijuana business failed to honor a contract calling for investment in exchange for profits, the investor sued the business in a California Superior Court. The judge ruled that the purpose of the contract was “illegal under applicable federal law” and thus the investment agreement was an “illegal and unenforceable contract.”

 

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