18 Apr 2016 Why Clicking Send Could Lead to a Binding Legal Contract
Thanks to the growing popularity of smartphones and communications technologies, it is not uncommon to conduct the bulk of your business over e-mail, including contract negotiation. While corresponding by e-mail can help close a deal more quickly, it can also lead to unintended consequences.
How is a contract formed?
Many professionals don’t realize that an email can form a binding agreement. However, courts across the country have found that an email or a series of messages can meet the requirements of an enforceable contract. In fact, California’s Uniform Electronic Transactions Act (UETA) explicitly states—“a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”
Whether a court is looking at a paper document or a series of emails, the test for a valid contract is the same. As long as the three elements of a contract are present—a valid offer and acceptance, supported by consideration— an enforceable contract can arise.
A contract can be formed even when parties do not fully intend to enter into a contract, or before negotiations have been finalized. For example, if one party proposes alternative terms in response to an e-mail, the original offer is considered rejected and the negotiations continue. A series of emails can even modify material terms of an existing contract if the contracting parties authenticate the communications. Thus, parties may want to exercise caution when discussing material terms of a contract, and steer away from language manifesting agreement to proposed terms.
Does intent matter?
Yes, but intent can be communicated by a simple one-word response, such as “yes” or “correct.” In fact, intent does not need to be explicit; it just has to be evident that both sides were planning to be bound by the terms discussed in the e-mail. Some courts have found that intent can be communicated merely by attaching the sender’s name at the end of an e-mail. Under both the federal Electronic Signatures in Global and National Commerce Act and the California UETA, a party’s name, signature block, or name on the “from” address line may serve as a sufficient electronic signature to bind the sender to a contract.
How do I avoid entering a contract?
When conducting business over email, it is advisable to be explicit regarding whether you intend to enter into a legally binding agreement. You could also specify who has the exclusive authority to enter a contract on behalf of your company. Cautious professionals may also consider including a general disclaimer, conspicuously placed at the end of an e-mail stating:
“This e-mail does not create any legally binding contract or enforceable obligation in the absence of a fully signed, separate written contract, executed by the parties, and that any contract terms contained within the correspondence are subject to the approval of both parties in writing.”
What does this mean for me?
It is becoming more important for companies to acknowledge email communications as a potential point of liability. As this area of law develops, it may be worthwhile to speak with legal counsel to gauge your company’s needs. Providing your employees and partners with adequate training on sensible email practices can help avoid the unintended formation of legally binding contracts.