Is a contract between an employer and employee to pay the employee a $100,000 bonus for delivering a healthy harvest of 1,400 pounds of recreational pot enforceable? The Houston Court of Appeals recently held, no.

In BRCC Enterprises LLC v. Jesse Skie, Skie sued his employer, BRCC Enterprises LLC, for breach of an oral contract made in Houston under which BRCC agreed to pay Skie a $100,000 bonus upon the healthy harvest of 1,400 lbs. of dry cannabis crop. Skie moved from Houston to Oregon and obtained state licenses to work on a marijuana farm. Among other things, he fenced the two-acre plot, prepared the land, converted a shipping container to an office, installed a camera system, built an outdoor kitchen and furniture, constructed a system to hold additional plants, installed plumbing to deliver nutrients to the plants, and treated the plants with organic pesticides. When he was not busy with such construction tasks, Skie assisted in the garden, working as many as eighteen hours a day when harvesting the crop. That year, the farm harvested more than 23,000 pounds of marijuana by “wet weight.” The “dry weight” of marijuana is a quarter of that, or well over 5,000 pounds.

When Skie asked for his $100,000 bonus, BRCC told him that it could not pay yet because it had not yet made any sales. Skie suggested that BRCC sign a contract agreeing to continue paying him $3,000 per month and deducting that amount from the $100,000 bonus until BRCC was able to pay the remainder. BRCC refused to sign a contract, and in December 2017, Skie returned to Texas.

Skie sued BRCC in Houston district court asserting several causes of action, but ultimately, the only claim submitted to the jury was Skie’s claim against BRCC for breach of contract. The jury was asked whether ‘BRCC and Skie orally agree[d] that Skie would be paid a guaranteed $100,000.00 bonus, upon the healthy harvest of 1,400 pounds of dry cannabis crop,’ and if so, ‘[d]id BRCC fail to comply with the agreement?’ The jury answered ‘yes’ to both questions and assessed damages at $100,000.

On appeal, BRCC argued that the oral contract was void as the underlying performance—growing and harvesting recreational pot—was illegal under federal law. As the parties never entered into a written contract, there was no selection of whether Texas or Oregon or federal law would apply to the dispute. Instead, the trial court assumed Texas law applied, Skie failed to preserve error on whether Oregon law should apply, and the Houston Court of Appeal agreed with the trial court and applied Texas law.

Although Texas is a strong right to contract state, that right has limits. Agreements that violate the law or public policy or require performance of an act which cannot be done without violating the law are void and unenforceable. In that regard, illegality is an affirmative defense to a breach of contract claim. An illegal contract is one in which the parties undertake to do an act forbidden by the law of place where it is to be done.

According to the Court, the illegality defense hews closely to the in pari delicto maxim, or, in a case of equal or mutual fault, the position of the defending party [the one asserting illegality] is the better one. The Court explored two exceptions that might be applicable to Skie’s claim: The contract may be enforced when the parties are not in pari delicto and the least culpable party is seeking relief, and even if the parties are in pari delicto, the contract may be enforced if public policy demands it. Unfortunately for Skie, the Court held that neither exception applied.

The backbone of the BRCC’s illegality defense and the Court’s opinion is the Controlled Substances Act, a federal statute. Under the CSA, marijuana is a Schedule I controlled substance, that provides, with certain statutory exceptions inapplicable to Skie’s case, ‘it shall be unlawful for any person knowingly or intentionally . . . to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance.’  Relying on an Oregon Supreme Court case, the Houston Court of Appeals found that the CSA preempts Oregon state law that legalized the commercial production for pot for medical or recreational uses. As such, the Houston Court held that harvesting and cultivation of marijuana in Oregon was unlawful under the CSA.

Finding that harvesting recreational pot violated the CSA and that illegality rendered the oral employment agreement void, the Court reversed and remanded the trial court’s judgment granting Skie the $100,000.00 bonus, even though it has the side effect of creating a windfall for BRCC. The Court held open the possibility that the case might have been decided differently had Oregon law applied.

As the United States Supreme Court urges states to blaze their own path with regard to personal decisions and behavior, the legal implications, even for members in the construction industry, of the subject matter of a contract may determine whether the contract is enforceable. As Skie learned, even establishing performance under a contract based on an illegality does not assure receiving promised payment or consideration. Also, choice of law and jurisdiction may have significant implications on whether and how the illegality defense is applied.

The attorneys in our Austin and Dallas office have significant experience drafting, negotiating and advising clients about contracts. Please contact us at info@gstexlaw.com with any questions you may have.

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