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Inadvertent Contract Formation-The Perils of Electronic Communications

Tuesday, August 21, 2012

By Frank Aquila and Sarah Payne, Sullivan & Cromwell LLP

With the prevalence of email and text messaging in today's business world, multi-billion dollar deals can be signed up without the parties ever sitting down together in the same room. Negotiations frequently occur over email, with lawyers and businesspeople alike sending quick emails, often in shorthand, with words that may not be chosen with the same degree of thought and care as the words that are “written” in the actual transaction document. Even with their attendant risks, emails, text messages and other forms of electronic communications are a fact of life. Caselaw in this area continues to develop, as courts seek to apply centuries-old contract principles to emails, text messages and other forms of electronic communication. Certain principles can, however, be gleaned from this relatively nascent area of law.

Language Clearly Stating an Intent to Be Bound Only by a Formal Agreement Can Help to Reduce or Eliminate Claims that a Contract Has Been Formed
In many instances, email-related disputes center around whether qualifying language in an email clearly indicates an intent to be bound only by a later documented formal written agreement, or whether the email indicates a current intent to be bound, with the parties later formalizing that agreement in a separate writing. To that end, specifically stating an intent only to be bound by a separate writing can help to minimize claims and increase the chances that a contract dispute will be dismissed early on in the litigation process.

For example, in Rubinstein v. Clark & Green, Inc.,1 the parties exchanged a series of emails relating to architectural design work to be performed by one party for the benefit of the other. Prior to execution of a formal agreement, the design firm began work on the project. In response to emails from the design firm that included the proposed form of contract, the client indicated a desire to wait on execution of the agreement until the parties were further along in the project, stating that he “would like to start working with” the design firm, but that he did not have the time to “get into” the contract terms at that time “so [he] would like to target completing a more comprehensive understanding in writing before we get to contract documents stage if ok with [the design firm].”2 In upholding the district court's award of summary judgment in favor of the defendant design firm (who argued that no contract had been formed), the court held that the “correspondence clearly establishes the parties' intent to negotiate further and enter into a formal written contract. Plaintiffs' argument that the … email exchange by itself constitutes a binding written contract thus fails as a matter of law.”3

In 1-800 Contacts, Inc. v. Weigner,4 the appeals court upheld the lower court's determination that email communications did not intend to create a binding agreement where the email stated “[t]his offer is entirely dependent upon my agreement with your attorney's terms and conditions for the acquisition and is not to be considered legally binding until a physically executed contract between the two companies is completed. Until the time said contract is executed I may, at my sole discretion, rescind or modify this offer in any way I see fit.”5 The court noted that the defendant “clearly and unambiguously reserved the right to modify or rescind its offer up to and until the time the parties executed a written agreement.”6 The court further noted that “If an intention is manifested in any way that legal obligations between the parties shall be deferred until the writing is made, the preliminary negotiations and agreements do not constitute a contract.”7

In Basis Technology Corporation v. Amazon.com Inc.,8 the court found the presence of a binding email agreement under Massachusetts law notwithstanding reference in the emails to the execution of later formal documentation, where the emails outlined and agreed to settlement terms, and where both sets of counsel made representations to the court that a settlement agreement had been reached. The court noted that “a deferred document was not conclusive of a deferred intent; a present agreement upon all material terms could reduce the later document to mere memorialization of an existent agreement.”9

In qualifying email exchanges that reference written agreements, parties also should take care not to create binding preliminary agreements—either with respect to the substantive business transaction itself, or with respect to an agreement to negotiate in good faith to reach such a business agreement. For example, New York law recognizes two types of binding preliminary agreements: (1) binding preliminary commitments, where parties are bound only to make a good faith effort to negotiate and agree upon the open terms and a final agreement, with no further obligation; and (2) fully binding preliminary agreements, where the parties agree on all the points that require negotiation but agree to memorialize their agreement in a more formal document.10

If Offers Are Subject to Contingencies, Be Explicit
Email writers may think that it is obvious to the recipient that they do not have the authority to bind their organization, or that an informal offer is subject to conditions, such as finalization of a formal written agreement or resolution of certain points around pricing, and therefore that such contingencies need not be stated in an email communication. However, during the course of litigation, emails may be read by a judge or jury on a standalone basis, without accompanying context. To reduce the risk of inadvertent contract formation through a substantive email exchange, the email should clearly state the key contingencies that may accompany an otherwise potentially binding offer. For example, if the offer is subject to board or management approval, remaining diligence or negotiation of a satisfactory contract, the email should state those contingencies.

Courts often point to contingent language in an email exchange to find that a contract has not been formed. For example, in Enable Commerce, Inc. v. Std. Register Co.,11 the court based its decision in part on an email contingency identifying that “upper management approval” would be needed for the business transaction.12 In Tiger Team Techs., Inc. v. Synesi Grp., Inc.,13 the court addressed a series of email correspondence that included what the email writer described as his understanding of what was agreed to in discussions between the two parties. The email included language to the effect that the two parties “have agreed to an exclusive license and or rights to the … processing technology…”14 The email went on to state that the licensor will receive an “as yet to be determined royalty per transaction.”15 The court focused on the “as yet to be determined” language around pricing, as well as other language in the email stating that funding of the project was “pending” a proposal defining structure and noting that “by committing to this funding, again pending further negotiations,” the parties have exclusive rights to the project for a term not to exceed 180 business days from the date of the memorandum.16 The court concluded that “the abundance of qualifying language in this email… runs contrary to manifesting an intent to form a contract in the email itself.”17

Parties need not include a full litany of contingencies, nor does the disclaimer need to be formal. A simple statement, including one written in shorthand, referencing at least some set of the outstanding contingencies, should be sufficient to reduce the risk of inadvertent contract formation.

Essential Contract Terms Need Not Be in the Email Communication in Order to Form a Contract
In negotiating over email, parties may erroneously take comfort in the fact that the email communication does not set forth all of the essential contract terms or that not all of the essential contract terms have been agreed upon. However, a contract may be formed by a number of separate writings, including multiple emails and written documents—not all of the essential terms have to be set forth in a single email. Moreover, parties may misjudge what constitutes an essential contract term, or the court may determine that the issue of whether a term constitutes an essential contract term is a matter better left for a jury, resulting in lengthy and costly litigation that could have been avoided with careful use of email.

For example, in Di Carimate v. Ginsglobal Index Funds,18 the plaintiff and defendant were parties to a memorandum of understanding (“MOU”) contemplating a joint venture in marketing, with an equal fee sharing agreement and 5-year exclusivity. A series of emails purported to expand the scope of the joint venture and set forth payment terms for the expansion. The court held that the terms of the MOU, as modified by the emails, could create an enforceable agreement. The court focused on email language explicitly stating that the defendant “agree[d] with [plaintiff's] comments re splitting all future initiatives …”19 The court noted that this language “appears to indicate both language expressing a final agreement so as to satisfy the Statute of Frauds, and mutual assent that would lead an objectively reasonable person to conclude that the parties intended to be bound by those terms.”20 In denying a motion to dismiss, the court found that the agreement embodied in the MOU as supplemented by a series of emails “contains the elements essential to create an enforceable contract.”21

Email Communications Can Amend Existing Written Agreements
Perhaps of greater risk than inadvertent contract formation is inadvertent contract modification or interpretation. Parties to existing contracts should take care in their correspondence regarding a contractual arrangement to not unwittingly modify or waive a contract through email correspondence.

In Stevens v. Publicis S.A.,22 the court found that the plaintiff's employment agreement had been modified by an email exchange. The plaintiff had been chairman and CEO of an advertising firm that was acquired by Publicis S.A., and as part of the acquisition, the plaintiff was provided with an employment agreement. Following a period of poor performance of the acquired company, the former chairman and CEO of Publicis USA and the plaintiff had a discussion regarding a new role for the plaintiff within the organization. Following those discussions, the former chairman and CEO sent an email setting forth his understanding of the terms of the plaintiff's new role. In response, the plaintiff said “I accept your proposal with total enthusiasm and excitement…”23 The CEO responded “I am thrilled with your decision… .”24 All of the emails bore the typed name of the sender at the end of the message. In determining that the parties had agreed in writing to modify the terms of the employment agreement, the court relied on the email exchange between the parties in which both parties demonstrated “unqualified acceptance” of the modified agreement.25 The court also found that the emails constituted a signed writing within the statute of frauds (stating that the plaintiff's name at the end of the email “signified his intent to authenticate the contents”) as well as for purposes of the employment agreement's amendment provision.26

In determining whether a contract has been amended, courts will look to determine whether all of the indicia of contract formation have been met under applicable state law. In Petroplast Petrofisa Plasticos S.A. v. Ameron Int'l Corp.,27 at issue was an email exchange in which the plaintiff wrote that there was no need for the defendant to send reports or take time to prepare data in progress, despite the fact that the existing contract required otherwise.28 The defendant argued that the email correspondence constituted a contract modification. The court rejected this argument, focusing on the fact that under California law, among other things, a modification ordinarily must be supported by new consideration, and neither party alleged that consideration was given for the purported modification.

In addition to the risk associated with amending an existing contract, an email exchange about a contract, either before execution or following execution, will be part of the “contractual history”, and in the event of a contract interpretation dispute, the court may look to the email communication to determine the parties' intent and course of dealings. Accordingly, parties should exercise caution, especially in pre-execution negotiations, when writing emails that may be viewed as interpreting provisions of a draft or final contract. Over the term of the contract, the relative position of each contract party may change, and what may appear to be a favorable interpretation at one point in the contract lifetime may end up being an unfavorable interpretation following a change of circumstances.

Do Not Rely on the Absence of a ‘Signature'
It is generally accepted that an email can satisfy the writing and subscription requirements of the statute of frauds. Indeed, most states have adopted the Uniform Electronic Transactions Act (“UETA”), which provides that a “contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation” and that “[i]f a law requires a record to be in writing, an electronic record satisfies the law.”29 Unif. Elec. Transactions Act §§7(b)-(c). The UETA defines an electronic signature to mean “an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.” §2(8) (emphasis added).30

Notwithstanding the adoption of federal and state statutes addressing electronic communications and electronic signatures, uncertainty remains as to what kind of email signature is sufficient to create a contract, and whether a “signature” is required at all. This uncertainty is compounded by the fact that many email senders configure their emails such that the sender's name is automatically added at the end of each email, making it difficult, if not impossible, to determine whether the inclusion of a “signature block” is intended to be a signing of the email. Adding additional complexity is the fact that, as noted in Farnsworth on Contracts, “[t]he statute's requirement that the writing be signed is not applied with rigor. The modern test is whether the other party reasonably believes that the asserted signer's intention is to authenticate the writing as the asserted signer's own.”31

In JSO Assocs., Inc. v. Price,32 the court considered whether the sender's name in the email address was sufficient for contract subscription purposes under New York law. The court held that “where there is no question as to the source and authenticity of an email, the email is ‘signed’ for purposes of the statute of frauds if defendant's name clearly appears in the email as the sender…”33 The court acknowledged that although the law is still developing with respect to electronic communications and the statute of frauds, “the court must look for assurance as to the source of the email and the authority of the person who sent it…”34 The court in JSO Assocs., Inc. did not specify what is meant by the sender's name appearing in the email, and whether the full name has to appear within the email address or whether it is sufficient to be able to tie back the email address to the sender in question.

In Lamle v. Mattel, Inc.,35 the court held that concluding an email with “Best regards Mike Bucher” satisfied the statute of frauds under California law, noting that if a court “can plainly determine from the memorandum the identity of the parties to the contract, the nature of its subject matter, and its essential terms, the memorandum will be held to be adequate [with respect to the Statute of Frauds].”36 Notably, the court also stated that had the email been written after adoption of the UETA by California, there would be no question as to the sufficiency of the writing for purposes of the subscription requirement, although the court did not address the question of intent. In Di Carimate, the court also noted that a typed name in an email satisfies the subscription requirement under the Delaware statute of frauds.

On the other hand, in Cunningham v. Zurich Am. Ins. Co.,37 the court “decline[d] to hold that the mere sending … of an email containing a signature block satisfies the signature requirement when no evidence suggests that the information was typed purposefully rather than generated automatically, that [the email sender] intended the typing of her name to be her signature, or that the parties had previously agreed that this action would constitute a signature.” In Brantley v. Wilson,38 the court, in denying a motion for summary judgment, found that there were genuine issues of material fact as to whether the email sender intended that her typed name on her emails be her signature.

In light of uncertainty regarding whether any type of signature line is necessary for an email to create a contract, parties seeking to prevent contract formation through email should not rely on the absence of a salutation or formal or informal signature block and instead should focus on the content of the email.

Practice Pointers
The concerns and uncertainties we have outlined do not mean that parties should cease engaging in email and text communications; such a recommendation would ignore the realities of today's business world. Instead, parties should take an extra minute or two in crafting communications to consider a few guidelines:

•  Avoid unconditional statements or promises.

•  Use contract terms such as “offer,” “agree” and “accept” carefully.

•  Use care with statements that may be taken out of context. An email that follows up on oral conversations may be interpreted without the benefit of the oral conversations.

•  When discussing an already executed agreement, carefully consider statements that go beyond the language in the negotiated agreement. Email communications could inadvertently result in waivers or amendments of the existing agreement.

•  Similarly, formal written agreements should be clear as to amendment and waiver requirements. Parties may wish to specifically address electronic communications.

•  If proposed terms remain subject to contingencies, such as board or management approval, indicate that fact.

•  Correct any ambiguous emails before they can be acted upon.

•  Do not rely on the absence or inclusion of the sender's name at the bottom of the email.

•  For particularly sensitive or complex topics, consider having the discussion orally rather than via email or text message.

Frank Aquila (aquilaf@sullcrom.com) is co-head of Sullivan & Cromwell LLP's global corporate practice and in that role he has responsibility for 450 lawyers in 12 offices around the world. Mr. Aquila has a broad multidisciplinary practice that includes extensive experience in negotiated and unsolicited mergers and acquisitions; complex cross-border transactions; global joint ventures; private equity transactions; and corporate governance matters. He was an American Lawyer “Dealmaker of the Year” in 2009 and is the 2010 recipient of the Atlas Award as the “Global M&A Lawyer of the Year.” Mr. Aquila is a featured online columnist for Bloomberg BusinessWeek and has received Burton Awards for Legal Achievement in 2005 and 2010. He is also a member of the Council on Foreign Relations and the Leadership Council on Legal Diversity.

Sarah Payne (paynesa@sullcrom.com) is a partner in the Sullivan & Cromwell LLP Mergers & Acquisitions and Securities Groups, resident in the firm's Palo Alto office. Ms. Payne has a broad-based corporate practice advising clients on corporate governance and regulatory compliance issues, as well as on a wide range of transactions, including public and private securities offerings, acquisitions of public and private companies, and takeover defenses.

The views expressed in this article are their own and do not necessarily reflect the views of Sullivan & Cromwell LLP or its clients. The authors wish to thank Helen Lu for her assistance with this article.

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