Bound by an e-mail

Companies face the growing risk of being legally bound to contracts mistakenly, and sometimes unknowingly, entered into after exchanging e-mails with suppliers or customers.

As the trend of substituting snail mail for e-mail continues, more and more businesses are finding they have unwittingly entered into a contract with another party when they actually had no intention or desire to do so.

Contracts can be entered into through various means and, unless it relates to the sale of land or a hire-purchase agreement, does not require a written signature on a physical contract. Whilst this allows deals to be conducted quicker and more conveniently, it has led to an increasing number of disputes over whether a formal contract was ever actually entered into.

For a valid contract to exist, one party must make a clear offer which is then accepted by a second party. In addition, there must be ‘consideration’ whereby each party receives an offering as part of the contract; most commonly a product or service is offered in exchange for monies. Anyone who “reasonably represents” they have the authority to act on the company’s behalf can enter it into a contract, whether in fact they have such authority or not. This can lead to contracts being formed where the company has no actual desire to enter into it.

Whilst verbal contracts have always been popular ground for dispute, the ever increasing use of e-mail, as an alternative to written communication, is leaving many companies vulnerable to claims, as shown by the recent case Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd 2011.

Golden Ocean Group Ltd owned a number of sea fearing ships and was in negotiations with Salgaocar Mining Industries Ltd (SMI) which was looking to charter such a ship. Negotiations took place via e-mail and in one e-mail from SMI to Golden Ocean Group Ltd, an employee referred to the charter of the ship being “fully guaranteed by SMI”. However, a formal contract between the parties was never signed. SMI later refused to take delivery of the ship resulting in Golden Ocean Group Ltd suing them on the basis of the ‘Guarantee’ referred to in the e-mail exchange.

In its defence SMI argued the exchange of e-mails was too disjointed to form either a binding contract or a guarantee. Despite this the High Court held the e-mails had contained all the necessary points to form a contract and as a result SMI was legally bound to it.

For businesses looking to protect against something similar happening to them, there are several simple steps which can be taken:

1. Where employees are empowered to negotiate with third parties on behalf of the company, they should be making it clear at the earliest opportunity, ideally in writing, that they do not have the authority to finalise the contract.
   
2. Such a statement should also be included in the company’s standard footer, along with the fact that only directors have the authority to enter contracts on the company’s behalf.
   
3. E-mails relating to the negotiation of a contract should include the term “subject to contract” so as to infer nothing has yet been agreed.

Advice from expert solicitors

Holmes & Hills Solicitors has teams of corporate and commercial solicitors and commercial litigation solicitors which advise and represent commercial clients across Essex and Suffolk.