Originally published by The Entrepreneur Revolution.
Not long ago, it was easier to understand when you had entered into a legally binding contract. The parties negotiated and agreed to terms that were spelled out in a document. The buyer and seller signed the papers and the deal was done.
That’s all changed. In today’s electronic world, you can enter into agreements without ever holding a piece of paper or signing your name with a pen. With the convenience and speed of conducting business by email also comes potential peril. You could land in a situation where a contract is unexpectedly created which you never intended.
5 Words Cost $1 Million
It was an expensive lesson for one company. During email negotiations about purchasing an item from the seller, five words ended up costing them more than a million dollars. After agreeing on a price only and thinking other contract terms would be hammered out later, a company representative wrote a 5-word email back to the seller: “We have a deal then.” No doubt, the company representative meant to say, “We have a deal then on price.” The buyer and seller went on to discuss other terms for a few months but a formal contract was never signed and communications ended.
Three years later, after the value of the item fell drastically, the seller/email recipient focused on those five words—claiming for the first time that a binding contract was formed through the earlier email exchange. The seller demanded the previously agreed purchase price and, when not paid, sued the company for breach of contract. The case settled before trial but ended up costing the company more than $1 million in legal and other fees.
Make Your Intentions Clear
To avoid a similar legal hassle, you should clearly specify in emails what you are negotiating, and that if agreement is reached on one or more issues, you will then move on to negotiating other issues. Additionally, if you intend to use a formal contract but do not want to be bound until the formal contract is signed, expressly state this.
Because emails are often informal and can be sent without much thought or review, your need to be especially careful. We sometimes use artless language in emails we would not use in a contract. If someone is negotiating on behalf of your company, that person should be clear upfront that if an agreement is reached, it must still be approved by a superior or board members before the agreement becomes binding.
Email is Just the Beginning
What changed? The Uniform Electronic Transactions Act of 1999 made it so that electronic exchanges can, in certain circumstances, replace the need for a signature on a formal contract page. Therefore, a contract can be made through fax, email and even text messages. And, it doesn’t have to be neatly summarized in one message. If a series of emails, read together, lay out the various terms and acceptance then a legally binding contract may have been created without a written signature.
Don’t Rush Your Response
If you’re asked to agree to something in an email, be sure you have all the facts first. If it’s 4:45 p.m. on the Friday before vacation, you may be pressed to wrap it up, but take the time to figure out how you want to proceed. You can always request a formal document spelling out all the details. Trying to quickly clear your inbox could really cost you.
Better to Backtrack Than Be in Trouble
While it’s always best to be clear from the start, if you find yourself in a situation where you are unsure about the other party’s understanding, don’t put it off. You can follow up by spelling out what you’ve agreed to and what terms must still be resolved. You will likely get a response that supports your position or one that alerts you to trouble which is good for your attorney to know sooner rather than later.
Before You Hit “Send”
- Remember, legally binding contracts can be created through emails and other electronic communications
- Be clear if you have no intention of creating a contract until a certain event occurs, e.g., approval by Board of Directors, all parties sign a formal contract, etc.
- Take the time to review the email thread before agreeing to anything