It’s a common belief in business—a formal, signed contract is required to actually form a contract.  Until pen is put to paper on a nice, neat document, complete with signature lines dutifully placed at the bottom of the last page, there is simply no “deal.”  Right?

Unfortunately, no.  The reality is that many businesses miscalculate how easy it is to form a contract, often unintentionally. Perhaps nowhere is this more evident than in emails, the dominant form of business communications today.

Consider the following scenario: one of your customers is past due on a $100,000 debt.  The customer emails you proposing a payment of $50,000 to settle the debt.  You email the customer back that you have authority to settle the debt for $75,000 and ask the customer to let you know if the customer “can make this happen.”  The customer then responds via email that he is “OK” with your offer and says he agrees to the $75,000 to settle.  He then asks you to “please send paperwork so I can review.”

A day later, you reconsider and conclude that $75,000 is too low.  You inform the customer that there is no deal.  Your customer quickly responds that “we do have a deal and I expect you to honor it!”  You reply that “no one signed a contract and even you, Mr. Customer, expected to review the ‘paperwork’ for the deal, and that was never even drafted!”

Surprisingly, your customer may have a good argument that an agreement was formed simply from the email exchange.  Texas courts have found on similar facts that (i) such an “offer” email was clear, definite, and covered the essentials of the proposed transaction; and (ii) such an “acceptance” email was unequivocal and unconditional, and accepted the significant terms of the “offer.”  Even the Texas Supreme Court has concluded that emails exchanged between two different parties—when read together—can be construed as forming one single contract.  The emails do not even need to expressly refer to one another.

But what about the fact that no one actually “signed” anything?  Well, you actually did “sign” that email, as did your customer, you just did not know it.  Under the Texas Uniform Electronic Transactions Act, courts have found that both the “from” field in an email and a person’s email’s signature block constitute a legally effective “signature.”  Like it or not, your “John Hancock” is there, digitally and legally.

What about the missing terms of the so-called “deal”, such as when the $75,000 is to be paid, how it is to be paid and the form and scope of the settlement agreement?  How can there be a contract if these details were never specified?  Interestingly, Texas courts have routinely found that such items are not essential terms of such a contract, and thus the contract stands despite them being absent.

Perhaps most surprisingly, not much weight may be given to the customer’s response of “please send paperwork so I can review,” which certainly implies that even the customer thinks additional terms need to be ironed out in a subsequent formal written contract.  Rather, courts have viewed such language—which does not expressly condition the customer’s acceptance on any particular details such as further documentation—as failing to negate the customer’s acceptance of the offered terms, as expressed in his email.  In other words, the deal is stuck even without such further “paperwork,” even if the customer requested such “paperwork”.

At this point, you may be nervous about ever sending another email, wondering if the use of carrier pigeons or smoke signals might be a safer option.  Fortunately, there are some ways to mitigate against the risk of a “contract-by-email,” and one of the easiest is a slight twist on the “paperwork” request by our hypothetical customer—making clear in our email “offer” that no contract arises between the parties until a formal written contract is personally executed by the parties, and that the email communications are nothing more than preliminary discussions.

While this may not sound that different than simply “sending the paperwork,” it is different in one major way—you are now clarifying that your consent to the “deal” is conditioned upon such a formal written contract, rather than that the formal written contract simply memorializing the “deal.”  In other words, until the formal written contract is drafted and signed, there is no “deal.”

Of course, every situation is different, and it is impossible to guarantee no contract-by-email is formed in every circumstance—clever lawyers will always work the facts to their client’s benefit—but realizing the binding-power of an email conversation, and how to guard against it, never hurts.

If you have questions regarding the above, or have found yourself in a “contract-by-email” predicament, please contact Stibbs & Co.

These materials are made available by Stibbs & Co., P.C. for informational purposes only, do not constitute legal or tax advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Stibbs & Co., P.C. The facts and results of each case will vary, and no particular result can be guaranteed. The facts and results of each case will vary, and no particular result can be guaranteed.