When a contract is formed, binding rights and obligations are created that can be legally enforced through the Courts. It is crucial to understand the many ways in which a contract can be created and whether a particular party is bound by its terms.
The rise of email has had a significant impact on how we do business and consequently, the formation of contracts. The speed and ease at which emails can be sent, and their perceived informality, has increased the flow and level of communication which may pass between negotiating parties. Recent case law from the UK now suggests that a chain of email correspondence can constitute a binding agreement, so it may be time to reassess the manner in which emails are used between contracting parties.
Formation of Contracts
To create a legally enforceable contract there must be an offer, acceptance of that offer, consideration for it and an intention to create legal relations between the parties. There is a presumption that parties to a commercial contract intend to create legal relations. Despite this basic formula, the realities of commercial life mean that agreements are not always reduced in their entirety to one concise, duly executed document. When uncertainties as to the fact, and nature and extent, of a contract arise, the parties are often forced to call on the courts to determine whether a contract has been formed and if so, what are the respective rights and obligations of the parties.
Recent Case Law
In Nicholas Prestige Homes v. Neal1, the Court of Appeal held that a binding contract was created over a chain of emails, where in response to an email from a Property Agency attaching an agency agreement, the Property Owner replied, "that's fine". The Property Agency was entitled to recover damages for breach of contract, when the property owner subsequently sold the property through a different agency. While the damages awarded were small, and the circumstances of the case discrete, this judgement serves as a warning shot from the Court of Appeal, that email correspondence, despite its perceived informal nature, can create a contract.
In another, even more recent case, Golden Ocean Group Limited v. Salgaocar Mining Industries PVT Ltd and anor2, the UK High Court held that a series of emails, could arguably create a binding guarantee. The case involved an agreement and guarantee for the chartering of a vessel over a period of ten years. When the charterers refused to take delivery of the vessel, they were sued on foot of the guarantee. While no final version of the agreement or guarantee were ever signed, the High Court held that it was arguable that not only did the chain of emails between the parties create a sufficiently certain guarantee but that the emails and the electronically printed signature of the person sending them satisfied the Statute of Frauds 1677 (which requires that certain agreements must be in writing and signed). In his judgment, Clarke, J noted that a chain of emails can show more clearly, than other methods of communication, the basic sequence of contract formation: offer, acceptance etc.
Pre-contractual Negotiations
There are many ways in which a party might attempt, during pre-contractual negotiations, to distance themselves from a binding contract. The most common of these ways, is the insertion of "subject to contract" at head of any correspondence or documentation being passed between the parties or the insertion of a clause in the contract to the effect that it only becomes binding on formal execution. While it may seem sensible to do this as a matter of course, engaging in such a rubberstamping exercise may not prevent a court finding a contract to exist. A recent case from the UK Supreme Court, RTS Flexible Systems Ltd v. Molkerei Alois Muller GmbH & Co KG (UK Production)3 shows that a contract may be found to exist even where it is stated to be "subject to contract". In this case, it was held that waiver of a "subject to contract" condition could be inferred from communications between the parties and their conduct. Notably, much of the communications in this case were by email.
How can a party protect itself, particularly in situations where emails are flying furiously back and forth?
Protective Measures
Parties should ensure that when agreement is reached, the agreed terms are reduced to one document and formally executed on the understanding that that document contains the entire agreement between the parties. The absence of a final formally executed agreement could mean a future court shifting through volumes of emails, piecing together the terms of a contract.
Parties should carefully monitor all email correspondence and documentation passing by email during pre-contractual negotiations. It should always be clear when replying to an email as part of a chain, what parts of the preceding email are being replied to.
Conclusion
While these judgements from the UK Courts turn on their own particular set of facts, they may be a precedent for a more general approach, in the future. If there was ever a time for the members of the Construction Industry to assess how they deal with emails and how the use of emails can change the face of pre-contractual negotiations, it is now. There is no substitute for the certainty of knowing, what contracts you can rely on, and what contracts may be relied on against you.
Footnotes
1 [2010] EWCA Civ 1552
2 [2011] EWHC 56 (Comm)
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
