01 Feb Can an E-mail Create a Legally-Enforceable Contract?
When non-lawyers think of contracts, they usually imagine a formalized document that has a place for two or more signatures, next to a line for the date of signing. Many non-lawyers also recognize that “oral” agreements can be legally binding as well.
But what about a routine exchange of e-mails? Can you be hauled into court for breach of contract, when all you did was respond to an e-mail?
Intent is the Key.
California law provides many ways to create an enforceable contract: by a signed writing; by an exchange of oral promises (“oral agreement”); by the conduct of the contracting parties; and by legal implication (“implied by law” contracts). In fact, most contracts in everyday commerce are neither written nor oral. Consider this: when you place groceries on a conveyor belt at the check-out stand and hand cash to the clerk, you are not signing anything (no written contract), nor do you typically engage in the following exchange (no oral contract):
You:“Will you sell me these food items for the
price listed on the shelf?”
Grocer:“Yes; you have a deal!”
Instead, transactions like these qualify as enforceable contracts “by conduct,” with each side getting a full array of legal rights if there is a breach. The key legal determinant for whether a contract has been formed, and is therefore enforceable in court, is the “intent of the parties” — regardless of whether the alleged contract is written, oral, implied by conduct, or implied by law. Thus, everyday practice confirms that shoppers intend to purchase grocery items by placing the items on a conveyor belt and handing over cash — even if no words are exchanged.
Contracts in the Internet Age.
The rules described above have existed for decades if not centuries. However, in the internet age new rules have been promulgated to deal with internet transactions and electronic communications. Internet commerce is a relatively new and developing area of the law. In June 2000, President Clinton signed into law the Electronic Signatures in Global National Commerce Act, or “E-SIGN” for short. The E-SIGN law sets a national standard for businesses and consumers for internet or electronic transactions. In addition, the majority of states (including California) now adhere to some version of the Uniform Electronic Transactions Act (“UETA”). The only non-UETA states are Illinois, New York and Washington, but even those states have adopted their own specialized laws to enforce electronic transactions. E-SIGN and UETA both validate electronic documents and electronic signatures, so that they can create enforceable contracts. For example, if you buy consumer items on the internet, you are engaging in transactions covered by these relatively new laws.
In the commercial realm, it is important to know the basics of state and federal law on electronic contracts and signatures, so that a business does not find itself unintentionally obligated to a contract. California’s version of UETA (specifically, Civil Code section 1633.7) provides that if the law of contract formation requires a signature for a contract to be effective, then an electronic signature will satisfy the law. In other words, a contract may not be denied legal effect solely because an electronic signature was used in its formation. What is an electronic signature? Basically, anything that the sender intends to qualify as such. This means that e-mails, text messages, instant chats, and other forms of electronic communications can all create binding contracts. Note, however, that many types of transactions are exempt from E-SIGN and UETA — such as wills, trusts, negotiable interests, investment securities, letters of credit, and more. Generally speaking, these contracts still must be formed the old-fashioned way.
Here are some key facts that you, as a business owner, should know about e-contracts and e-signatures:
Failure to respond to an e-mail request could bind your company to a contract. (Cloud Corp. v. Hasbro,314 F. 3d 289 (7th Cir. 2002).)
Even if your company has a written contract that states orders cannot be issued by electronic commerce, an e-mail still could bind your company. (Mabus v. General Dynamics C4 Systems, Inc., 633 F.3d 1356 (Fed.Cir. 2011).)
Instant messages constitute signed writings that can bind your company to a contract. (CX Digital Media, Inc. v. Smoking Everywhere (S.D. Fla., Mar. 23, 2011) 2011 WL 1102782.)
Written contracts (i.e., written on paper and signed in ink) can be amended through e-mail. (Grubb & Ellis v. Porter Ranch Shopping Center, LLC (Sept. 16, 2010) 2010 WL 3587261.)
The court cases cited above are cautionary tales of what can happen to your company in this age of digital communications. Here are the details.
In Cloud Corp. v. Hasbro, toy maker Hasbro typically ordered its materials by submitting written purchase orders (“PO’s”), and Cloud Corporation then typically filled the orders. On one occasion, Cloud Corporation sent an e-mail to Hasbro acknowledging an order from Hasbro, but Hasbro failed to respond. As it turned out, Hasbro had never formally placed the order with Cloud Corporation, but the court found that Hasbro’s failure to respond to the e-mail created a contract, based on the conduct of the parties. Lesson learned: if a supplier or customer sends you an e-mail with an order or confirmation which differs from your understanding, you must respond, or you will potentially bind your company to what is written in that e-mail.
Mabus v. General Dynamics C4 Systems, Inc. involved a master contract between the United States Navy and a government supplier, providing that orders could not be placed by electronic transmission. At first, the Navy placed several orders by regular mail, and the contractor filled them. Later, the Navy began to place similar orders by e-mail, and the contractor again filled the orders. Eventually, the government contractor decided not to fill some of the orders due to pricing concerns, so it sent a letter to the Navy rejecting the orders. The stated reason for the rejection? The orders had been placed by e-mail, in violation of the master contract. The court didn’t buy it, finding that the government contractor had behaved in a misleading manner by filling at least thirteen orders that had been sent by e-mail, before objecting under the terms of the master contract. The court found that, based on the course of conduct of the parties, the e-mail orders had been properly placed. This case stands as a reminder that the terms of a “non-electronic” contract can be altered by e-mail.
In CX Digital Media, Inc. v. Smoking Everywhere, Inc., a written contract placed a limit on the number of daily orders that could be sold through a website advertising campaign. At one time during the life of the contract, the parties had an “instant chat” conversation in which the product supplier agreed that the website seller could sell the product with “NO LIMIT.” The court held that this instant chat agreement modified the written contract, and was enforceable.
Finally, in Grubb & Ellis v. Porter Ranch Shopping Center, LLC, a real estate brokerage sued its client for not paying the full commission allegedly owed. The client claimed no money was due, because an e-mail exchange had lowered the original commission amount from 2% to 1.5% (a reduction of over $128,000). The brokerage countered that the listing agreement only permitted contract modifications where both an owner and an officer of the company signed a written amendment. The court enforced the e-mail modification, relying in part on UETA, even though no owner or officer of the company was a party to the e-mail.
It is understandable why contract short-cuts like these occur in our digital age. Businesses are eager to be responsive to customers, and have armed their employees and managers with i-phones, blackberries, laptops and tablet computers, to ensure that they are reachable at all times. But this ability to respond almost immediately can and does result in errors. Employees may respond to e-mails or phone calls without realizing that the response, drafted in haste and on the run, can undo an entire contract negotiated over several months and signed by the parties. Word to the wise: digital communications such as emails, instant chat conversations, and text messages, can be enforceable contracts under the law.