Cheshire County Council acknowledged "shortcomings" in the evidence and information presented to an appeals committee that backed the exclusion.
It has now written to all schools to ensure that similar errors are not made again.
A spokesman said: "Every authority has its problems (with drugs) and we are no exception. Fortunately we don't compare with some of the inner-city areas. We take a serious view of drugs and, as far as we are concerned, one case is one case too many."
The council is now planning to provide all headteachers with a legal guide to exclusions.
The boy was permanently excluded from school in 1998 after two pupils reported seeing him receiving money from another pupil, known to be in debt for drugs, in the boys' toilets.
He had previously been excluded for 12 days after admitting supplying cannabis to other pupis, not necessarily in school, and fighting a pupil who owed him money.
The head, however, failed to take formal witness statements from the two pupils.
He also admitted it might have been wiser to have had another member of staff present when he interviewed the teenager.
The boy's father complained to the local government ombudsman, Patricia Thomas. But she rejected his demand that his son - aged 15 and in his final year at school, at the time of the incident - be compensated for every day he was out of school. She said: "I could only make such a recommendation if I could be satisfied that (the boy)... had every likelihood of completing his final two terms in school."
However, the council offered the father pound;200 for his "time and trouble" in making the complaint.
Cheshire backs total exclusion for drug dealing, but not for possession. Its director of education, David Cracknell, chairs the south Cheshire drug action team.
Neither the school nor the boy has been identified.