Why Your Cannabis Contracts May Be Unenforceable Even if State Law Says Otherwise – JD Supra

Few industries promise rapid growth equal to that of the cannabis industry, with one study projecting the industry could reach $30 billion in annual sales by 2025. This growth continues to accelerate as more states legalize cannabis for medical or adult use. But until federal cannabis laws are reformed, the illegality of cannabis at the federal level could render all contracts associated with cannabis – whether they govern insurance, banking, consulting, leasing, etc. – unenforceable.

It is a basic tenet of contract law that a contract that requires a party to perform an illegal activity is unenforceable. After experiencing buyer’s remorse, some cannabis companies and their vendors have used this “illegality” defense as a sword to avoid the enforcement of cannabis-related contracts. Whether cannabis’s federal illegality renders a particular cannabis contract unenforceable turns on several factors: state law differences in the illegality defense, the language of the specific state statute providing for legalization, or whether the conduct was illegal at the time of contract formation even if that conduct has since been legalized under state law. Although the answer may not always be clear cut, anticipating these issues on the front end can prevent serious heartburn down the road.

This article analyzes how several courts have addressed the illegality defense as applied to cannabis contracts and provides key considerations for cannabis industry participants to help ensure their contracts are enforceable.

Insurance Coverage

We have previously discussed how the illegality of cannabis on the federal level resulted in denial of commercial insurance coverage to the tune of $500,000 even though medicinal cannabis was legal in the state where the conduct occurred (Michigan). To recap, the Sixth Circuit held that an insurance company properly denied coverage because the insured sought to recover for property damage caused by a cannabis tenant and the

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