In this article, commercial solicitor Leigh Ellis explains why contractors should be careful when negotiating with potential clients, as you could unwittingly enter a binding contract during an email conversation if you don’t use the correct terminology.
The colloquial use of the term “contract” can be divorced from the legal reality. The word “contract” may give rise to images of beautifully crafted document with structured clause numbers, sub-clauses and text, headings and space for signing. The law however looks to the substance of documents rather than their form to decide whether a contract exists. Or in stricter legal parlance when there exists: offer, acceptance, consideration, existence of an intention to create legal relations and contractual capacity of the parties.
Adults enter dozens of contracts every day and the general rule is that there is no requirement for a contract to be in writing. There are exceptions, usually where the subject matter of the contract is potentially very valuable or there is serious liability attaching to the type of agreement. For instance the Statute of Frauds 1677 requires that all guarantees must be in writing and signed.
Commercial Contracts in the digital age
The majority of exceptions to the usual principles of contract formation are well established and generate few problems.
However with the advent of technology, the applicability of these exceptions to digital communication has been challenged. For example, would a digital letter be sufficient to satisfy the writing requirement in the Stature of Frauds? Or to what extent can an e-mail be used in the formation of a binding contract?
Many of these questions still attract judicial clarification from time to time, particularly in cases where there is a lot at stake. An important ruling in this area was laid down by the Court of Appeal in Golden Ocean Group Limited v Salgaocar Mining Industries (2012). The claimants were negotiating with a third party, Trustworth Shipping, for the charter of a shipping vessel. During email correspondence, Trustworth mentioned that the deal was being ‘fully guaranteed’ by an affiliate of theirs – Salgaocar Mining.
When Trustworth repudiated the contract, the claimants sought to enforce the guarantee. In response, Salgaocar argued that the guarantee was unenforceable for failing to comply with the Statute of Frauds.
The Court of Appeal sided with the claimants and ruled that the guarantee was effective. It found that email correspondence was sufficient to demonstrate the agreement was in writing, as necessary to satisfy the Statue. The signature requirement was also deemed to be met by virtue of the sender typing his name ‘Guy’ (Salgogar’s Broker Mr Guy Hindley) at the end of the email.
Implications for email negotiations
This case is significant for a number of reasons. Most importantly it illustrates the potential for accidental contracts to be entered into through email communications even if no single document is created that codifies the agreement. Therefore adequate care and attention must be taken when drafting emails as they may in fact represent part of a contract. If a person does not wish to be bound by the contents of an email, they must make this clear in the correspondence by using terms such as ‘subject to contract’.
It also establishes the important precedent that signing one’s name at the bottom of an e-mail is sufficient for the purposes of the Statute of Frauds. The judgment is in line with the traditional English law approach of ensuring that contracts can be freely entered into.
- When negotiating a contract via email, insert “Subject to Contract” at the very top of each new email;
- If there is a potential dispute in the air about interpretation of terms of a contract, use “without prejudice”.
There is no reason why you cannot use both, if you are negotiating terms of settlement of a dispute.
Many thanks to Leigh Ellis, a leading business contracts solicitor, for providing this advice.