THE ACCIDENTAL CONTRACT: AVOIDING THE E-MAIL DEALS YOU NEVER KNEW YOU MADE

Avoiding Lawsuits

Agreements in Principle, Understandings, and Accidental Contracts

Business executives frequently talk about reaching an "agreement in principle" or an "understanding." They then ask their lawyers to write it up in a "contract," which they perceive to be something very different from what they already have. But more often than not, the "agreement in principle" or "understanding" is already a legally-valid contract. Lawyers and documents do not make contracts. People make contracts by what they say and do. Generally, it boils down to little more than an offer followed by an acceptance. And most contracts, once made, become immediately enforceable, even before the lawyers start drafting the documents.

A good example involved the Philadelphia Eagles back in the 1980's. The then-owner of the team got involved in complicated negotiations with some prospective buyers. The parties reached a consensus on the essential terms of the deal, and the lawyers were told to start preparing the formal documents. Before the documents were finalized, however, the owner reconsidered and decided not to sell. But the buyers maintained that the deal was beyond the backing out stage, and they sued for the right to buy the team based on the oral understanding that had been reached. In response, the owner confidently faced the media and assured Philadelphia that no deal had been finalized. There might have been an "understanding" he maintained, but there was no signed "contract." Like many executives, he believed in the legal mythology that a "contract" had to be in the form of a written, "legal" document in order to be binding.

When the case got to court, the owner got a quick, but very expensive lesson in Contracts 101. What was important, the judge said, was what had gone on between the people involved - had there been an offer that covered the important terms of the deal, and had that offer been accepted? If so, whether or not the owner called it an "understanding" or a "tentative deal" or any other of the euphemisms of business lingo, and whether or not the lawyers finished with the "whereases" and "wherefores", there was enough of a "contract" - however accidental or unintended - to cost the Eagles owner a seven-figure settlement.

E-mail And The Loss Of Plausible Deniability

With e-mail becoming a universal and routine means of business communication among business executives, this long-standing business problem has become infinitely more threatening.

A curious psychology has evolved around the use of e-mail. Executives who would never allow a letter or a memo to escape their desk with typos or colloquialisms think nothing about sending e-mail messages that are replete with misspellings, no capitalization and sideways happy faces made from colons and parentheses. Otherwise staid business people, who would never commit an off-color remark to writing, think nothing about forwarding via e-mail the latest risque joke to 50 of their closest friends. The "logic" seems to be that a letter or memo is concrete, and it can end up in a file that can come back to haunt you. E-mails, on the other hand, are written in vapor, and are not nearly as serious or significant. Of course, this could be no less true. E-mails bear the same legal weight as any other writing. They are much more difficult to destroy than paper - networks are often set up to keep back up copies of e-mails indefinitely, and even when deleted they remain in a recoverable form for a substantial time. And the ease with which e-mails can be copied and forwarded, in geometric proportions, makes them much more dangerous than a paper document could ever be.

But the worst part is the fact that e-mail is so easy and instantaneous. Before e-mail, in order for business people to communicate in writing, they would usually dictate the document, a secretary would type it, they would get it and revise it, and it would eventually be finalized. There would be a built-in delay and review that took the impulse and emotion out of the process, and that injected a "do I really want to do this" opportunity for reconsideration and deliberation (often generating a call to counsel). True off-the-cuff communications took place orally, over the telephone or in person. But with e-mail, there is a much greater propensity to simply write what you are thinking at the time, sort of like a written telephone call. But there is, of course, a monumentally crucial difference between e-mail and oral communications: with the latter, there is no written record that comes back to haunt you; with e-mail, however, there is no "I never said that" or "you must have misunderstood me" opportunity for retrenchment. It is all right there, in bold relief, to be introduced as Exhibit "A" during the trial. You lose what the Nixonians used to call "plausible deniability".

Now combine all that with some recent Federal legislation, such as the Electronic Signatures In Global And National Commerce Act (known by the acronym E-Sign, one of the best legislative acronyms yet). E-Sign says that "a signature, contract, or other record relating to such transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form . . .". In other words, and as if there were any doubt about this, a contract formed via e-mail is just as valid as a contract written on parchment and sealed in wax.

How It Works In The Real World

So how does all of this apply to the real world? The short answer is that no matter what you do - buying, selling, dealing in products, dealing in services - it can be devastating. Here, for instance, is a scenario that is starting to clog courtrooms all over the country. Let's say that you are in the market to buy some widgets (or some services, or some advice - it really does not matter). You e-mail your supplier: "I am willing to buy 5,000 widgets at $100 each." You get an e-mail back: "Your offer to buy 5,000 widgets at $100 each is accepted." You e-mail back: "Great. I will have my lawyer draft the documents."

Your lawyer then drafts a contract which includes certain provisions that are very important to you: you wanted 90 days to pay; you wanted the supplier to be responsible for damages in the event that the widgets did not work and caused you harm; you wanted the right to return the widgets if they did not meet certain specifications; and you wanted an arbitration clause, in your jurisdiction, in case of a dispute. Your lawyer sends a draft contract including these terms to the widget supplier. The supplier immediately rejects it. You e-mail the supplier as follows: "Sorry we could not come to an agreement. We are not willing to purchase the widgets unless you accept the terms in the contract we sent you."

The next thing you know, you are served with a lawsuit for breach of the agreement to buy the widgets. Your position is that you weren't willing to consummate the deal unless all those terms became a part of the transaction. But that's not what you said in your e-mail. Your e-mail could easily be construed as an offer to buy the widgets at a stated price, and the responsive e-mail could easily be construed as an acceptance. That's all you need. Contract formed. One of the most basic precepts of contract law is that contracts are formed by "objective manifestations of mutual assent." That is legalese for "it doesn't matter what you meant, it only matters what you said."

Here's another one. When you're not quite satisfied with a proposal that someone makes to you, you might say, "I'll make that deal, so long as payment is received within 10 days." Or, perhaps, "that's fine, but you have to include all of the installation in your pricing." Sometimes, however, you might say, "That's a deal. But I'd also like to delay payment for three months, OK?" Or, "I accept that, but can you also meet our requirements for the next six months?"

Remember, it's not what you meant, but rather it's what you said. The first two responses would not form a contract. They are the equivalent of saying "I'll only make that deal if you agree to some other condition." The last two responses, however, could easily be construed as the acceptance of an offer - which forms a contract - followed by the commencement of negotiations on a separate deal. There is a huge difference in the law between "yes, provided that" (which is not an acceptance of an offer), and "yes, but can we also . . .", which may well be an acceptance, whether or not you are successful in obtaining the additional concession you seek.

The point is that these kinds of e-mails, which are all too typical, create a written record that is likely to be dissected, parsed and reconstructed in ways you never dreamed possible. The process of e-mailing converts what you thought to be casual conversation, and turns it into the functional equivalent of an FBI tape recording obtained by an informant wearing a wire. As they say on Law and Order, everything you say can and will be held against you.

So What Do You Do?

In the era before e-mail, courtrooms were dominated by conflicting recollections about what was said - the classic "my word against your word" battle. People tend to recollect things as they intended them to be, which can often be different than what actually happened. So you would get a good faith dispute between the person who claimed "you said you accepted the deal" versus the "I never said that. I said I would do the deal only if you cut the price." The inability of either side to prove the content of the communication led to compromises and settlements.

In the 21st century, however, the "my word against your word battle" is being replaced by the "my e-mail against your e-mail" battle. E-mail takes the dispute out of what was said and when it was said. And it cannot be stressed enough that "maybe that's what I said, but that's not what I meant" is not a defense.

The only solution to this problem is that executives who deal in e-mail, particularly in contexts in which damaging contracts or other commitments might be inadvertently communicated, need to be trained in what to say, what not to say, how to respond to the situations they typically face, and when to consult counsel. We offer such training on a customized, client-specific basis. The training includes methods by which to spot the danger signals of a binding commitment, and client-specific, "canned" written responses for foreseeable situations, all designed to avoid the accidental contracts that waste time and cost money.

This kind of knowledge must become a standard part of every executive's intellectual capital. We know from experience that, literally, most businesses and business people cannot afford to create the written record that e-mail generates, without also knowing the legal consequences of what they are producing.

Powell, Trachtman, Logan, Carrle & Lombardo, P.C. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Powell Trachtman represents a variety of commercial enterprises, entrepreneurs and business executives in respect to their litigation, litigation avoidance planning, business formation, business transactions, estate and tax planning, and other needs. We are also approved defense counsel for numerous insurance carriers in matters pertaining to professional malpractice, products liability, employment practices, directors and officers liability, and many other fields. For more information, contact us at info@powelltrachtman.com and visit our website at www.powelltrachtman.com.

©Copyright 2003 CCG Properties LLC. All rights reserved, except that recipients hereof are permitted, for noncommercial purposes, to provide copies or excerpts, with full attribution to us, to other interested persons for their personal use. Avoiding Lawsuits is distributed for general informational purposes only. It is not a substitute for personalized legal advice from a competent attorney.