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Inadvertent e-mail contracts

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24/03/2020

Commercial Dispute Resolution specialist, Senior Associate Kathryn Vickers, reports on Athena v Superdrug [1], the latest case to highlight the risks of doing business informally over e-mail, and offers good practice advice for businesses.

Why is this case of interest?

At the outset of many commercial ventures, relationships are positive and parties are eager to get on with doing business together, often before formal legal documentation is put in place.  In addition, with e-mail now being the predominant means by which business is conducted, there is an increased risk that e-mail correspondence can result in the inadvertent creation of binding – albeit informally documented – legal obligations.  As this recent case demonstrates, there are some real risks associated with proceeding in this way.

What practical advice arises?

  • Without a concluded contract document, parties lack certainty or common understanding as to the terms which govern their business relationship. Significant problems can arise when one party seeks to enforce what it believes to be binding contractual terms, whereas the other believes that no contract exists.
  • An understanding of the basics of commercial contract law is crucial for managing those risks (as to which, see below).
  • An awareness of the likely scenarios in which informal commercial discussions and/or e-mail correspondence may arise for a particular business will be key to getting the balance right between being able to quickly obtain sufficient comfort to enable parties to proceed with their plans, and becoming legally bound when that is actually required.
  • Commercial parties should note that the lack of any specific requirement for formality and/or documentation means that contracts can be formed orally and by conduct as well as in writing; and it is therefore important that parties should not act in any way that is inconsistent with their contractual intentions in case a contract comes into effect prematurely, inadvertently or on unsuitable terms.
  • Ideally, parties should communicate their intentions clearly when negotiating. If you do not intend to be bound until a formal document is signed or further terms are agreed, the relevant party would be best advised to expressly and prominently label correspondence and draft agreements as “subject to contract”. This includes email correspondence.
  • “Subject to contract” or equivalent language is a strong indicator that parties do not intend to be legally bound, but it is not conclusive. A court will look at all of the parties’ words – and conduct – when deciding whether or not a contract has been formed in any particular case.
  • It is essential that businesses educate their staff as to the risks of both inadvertent contract formation and of conducting business outside internal/standard procedures and/or outside their remit or authority.
  • For large organisations, it can be particularly important to ensure that different teams are aligned to the same position (so that, for example, operational teams behave consistently with procurement teams if a contract is not yet meant to be binding).
  • In addition, before committing resources and expenditure to perform a particular transaction, businesses should be clear that any counterparties have actually committed to their side of the bargain.

On a related point, another recent case [2] has confirmed that: a single ‘document’ can include a chain of e-mails; an automatically-generated e-mail footer can constitute a valid signature for the purposes of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989: and whether a document has been ‘signed’ is whether the name (or mark) was applied with authenticating intent.

All of these points together mean that it is now more important than ever before that parties negotiating arrangements or agreements by e-mail  understand the fundamental law of formation of contract, and appreciate that e-mail correspondence could have a legally binding effect.

Formation of contract: Back to basics

A contract is formed when all of the following key elements are present: offer; acceptance; consideration (that is, money or money’s worth); certainty of terms; and intention to create legal relations.  In a commercial context there is a rebuttable presumption of an intention to create legal relations.

Contracts can be made orally (face-to-face or via some communication medium such as the telephone); via an exchange of e-mails or other correspondence; or they can even arise by virtue of the parties’ conduct. Crucially therefore (with some limited exceptions) contracts can be formed without any written documentation or other formality whatsoever.

A lack of understanding about the formation of contracts can have devastating consequences. For example, a party may have invested significant time and money in a project on the understanding that its opposite number was contractually bound to the scheme, only to find that no binding obligations are actually in effect and that its opposite number can walk away scot-free, leaving the project to collapse, at any time.  Similarly, a party may be operating under the assumption that key terms (say, as to price, limitation of liability or termination options) are still to be agreed, only to find that their conduct, or something they said to their opposite number several weeks ago, has committed them contractually to what is now an unfavourable deal.

What happened in the particular case?

In a chain of e-mail correspondence a senior brand manager for Athena referred to the proposed purchase by Superdrug of minimum yearly quantities of stock and a buyer for Superdrug responded writing “Please go ahead with the below”.  Superdrug then purchased stock for some four months.  When it ceased purchasing, Athena claimed for the shortfall, in reliance on the minimum yearly contract.

Superdrug argued that the informality of the e-mail exchange did not create a binding contract.  It referred to the fact that its standard purchase order process was not followed; that it was standard industry practice not to agree significant volume commitments upfront; that there was no intention to enter a binding contract; and that the Superdrug buyer did not have authority to enter a contract of this type.

Superdrug’s arguments failed, resulting in a £1.3 million liability.

The requirements for formation of a contract were met; there was nothing in the correspondence between the parties, nor any standard industry practice, to suggest that Athena must have known that the buyer did not intend to commit Superdrug to a minimum yearly purchase.  Similarly, on the facts the buyer was held out as being authorised to negotiate terms of trade, and no relevant restriction on that authority was identified to Athena.  It was reasonable for Athena to assume that the buyer had the requisite authority to agree.

 

[1] [2019] EWHC 3503 (Comm)

[2] Neocleous v Rees [2019] EWHC 2462 (Ch) (20 September 2019) (HHJ Pearce), and see our more detailed briefing

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