Can an email exchange really be considered a binding contract?
The short answer is yes. According to The Electronic Signatures in Global and National Commerce Act, an email exchange may act as a legally binding contract so long as its context and function align with a traditional contract law. 15 USC § 7001(a)(1).
What makes a contract?
A contract is an (often) written agreement between two or more parties to perform or refrain from performing some act now, or in the future. Restatement (Second) of Contracts § 1 (Am. Law. Inst. 1981). The basic elements required for a contractual agreement to be legally enforceable are: (1) mutual assent, (2) expressed by a valid offer, (3) acceptance of the offer, (4) with adequate consideration. What this means in plain English is that two or more parties affirmatively agree to exchange performance or omission of performance in exchange for something of value.
Mutual assent is the most contentious principle in contract law disputes and where email exchanges can be tricky. This is because in order for a contract to be valid, each party to the contract must genuinely consent and intend to enter into the agreement – which can sometimes be difficult to determine from simply reading words on a page without context.
A pump jack operates near Carlsbad, New Mexico, U.S. February 11, 2019. REUTERS/Nick Oxford.
Read the agreement and the fine print.
In 2020, the Texas Supreme Court decided a case between Chalker Energy Partners III, LLC (“Chalker”) and Le Norman Operating LLC (“LNO”) where the two sides disputed whether or not a valid contract was formed via email exchange and over $330 million dollars’ worth of oil and gas leases hung in the balance. Chalker Energy Partners III, LLC v. Le Norman Operating LLC, 595 S.W.3d 668 (Tex. 2020).
Prior to accessing the data for the leases, all bidders had to sign a confidentiality agreement which included a “no obligation clause” which stated that neither side was bound until a definitive agreement was executed. The clause went on to specifically explain what a definitive agreement was and was not:
“…the term ‘definitive agreement’ does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing and executed by both Parties.”
Chalker, 595 S.W.3d at 670
The dispute arose when several emails were exchanged included a bid proposal, a counteroffer, and a “soft” acceptance which was subject to an acceptable agreement and listing certain specifics including traditional contract requirements such as price, effective dates, and other identifying information that was being negotiated. The emails contained a sentence stating the bid was subject to execution of a mutually acceptable purchase and sale agreement. However, there was no affirmative delivery and acceptance of the purchase and sale agreement, and the sellers authorized Chalker to accept a different bid from a different company.
LNO sued for breach of contract, claiming that an agreement had been reached through the email exchange. Nonetheless, the Texas Supreme Court sided with Chalker noting the ‘no obligation clause’ and failure to deliver and execute a definitive agreement fell short of the requirement under contract law to create a contract as a matter of law. The email exchange was considered a preliminary agreement with proposed terms, instead of a definitive agreement.
Importantly, this decision did not turn on the fact that the discussions occurred via email. In fact, in Texas, electronic records satisfy the writing requirement. Some Texas courts have found that if the email sender uses their name, and the context reads that both sides agree to conduct or execute the transaction electronically, then an emailed signature will likely create an enforceable agreement. Khoury v. Prentis Tomlinson Jr., No. 01-16-00006-CV, (Tex. App.- Houston [1st Dist.] 2017).
Your words matter.
In the wake of the COVID-19, virtual and remote work have increased electronic-based negotiations and contract formation. This event spurred an increase in email exchanges and tactics to create, bid, and seal various deals across multiple different platforms. This 2020 decision by the Texas Supreme Court gave a hard look at what is intended and what is said in email exchanges contemplating various business deals.
To protect yourself and your business, from getting into a similarly sticky situation, consider outlining the negotiation and expectations of the parties prior to discussing any terms or conditions. You may want to expressly write a sentence that states a definitive agreement must be executed or the email exchange shall not become a binding agreement. Additionally, follow up with a recap of the exchange, and set clear expectations that require a formal document to be signed.
If you have questions or concerns regarding email exchanges or contracts, contact Madan Law PLLC to discuss how our firm can capture the intent and ensure you and your business are protected moving forward, and how we can help you Make Your Mark.