It’s common for businesses to discuss transactions over email. But when do these discussions turn into a legally binding contract? Let’s find out.
Can an email create a legally binding contract?
An email can be legally binding in both the US and the UK, so long as it meets the usual requirements of a contract.
In fact, according to The Uniform Electronic Transactions Act and Electronic Signatures in Global and National Commerce Act, electronic communications can constitute legally binding contracts.
This means that emails and text messages can both act as contracts - if drafted in the right way. Let’s explore how this rule works in practice, and when an email can become legally binding or not.
When is an email legally binding?
An email must contain all of the standard elements of a contract to become legally binding. Exactly what these elements are will vary depending on where in the world you are.
We’ve already discussed the elements of a contract in detail in another post. But we’ll quickly recap the UK and US requirements again now in case you missed it.
Put simply, an email must contain four things to become a legally binding contract in the UK:
- One party must make an offer that another party accepts – called “offer and acceptance.”
- Something of value needs to pass in each direction e.g. a fee for a service – “consideration.”
- Both parties must intend to enter into a contract – “the intention to be legally bound.”
- Both parties must have the ability to understand that they’re entering into a contract – “contractual capacity.”
Meanwhile, emails in the US must have five elements in order to be legally binding contracts:
- Offer and acceptance
- Awareness – both parties must be aware of what they’re getting into
- Legality – US contracts are governed by the laws of the jurisdiction they’re signed in. If federal and state laws differ, the Contract Clause of the US Constitution takes precedence.
You might have noticed that signatures don’t feature on either of these lists. That’s because there are various different ways to accept a contract, and a signature isn’t always necessary for an email to become legally binding.
Let’s look at an example of when an email can become legally binding next.
Example of an email contract
Hello Anna, can you remodel my bathroom for me?
Hi Robert, yes, I can do that. It’ll cost you £8,000 and I can start on 2 March. Let me know if you’re happy to go ahead.
Thanks Anna. Yes, I’m happy to go ahead with this.
There we have an offer, an acceptance of that offer, and consideration. So this email chain has created a binding contract between Anna and Robert (assuming they both intend this to be a contract, and have the mental capacity to enter into it, of course). And if one of them later reneges on it, the other could sue them for breach of contract.
This does raise one problem though. What if you didn’t actually want to enter into a contract when you drafted the email? Can you avoid this?
How to avoid creating an email contract
One way to avoid creating an email contract is to explicitly state that the email isn’t intended to be a contract. One way to do this is by including the term ‘subject to contract’, which suggests that a contract needs to be created separately for this agreement to become legally enforceable.
Let’s explore what this might look like in practice. Imagine that email 2 above about that new bathroom said this:
"Hi Robert, yes, I can do that. It’ll cost you £8,000 and I can start on 2 March (subject to contract). Let me know if you’re happy to go ahead."
Those three little words – “subject to contract” – are really important. They make it clear that this email chain isn’t, in fact, a contract. You might even want to include this in the subject line as well, and/or in your email footer just to be safe.
Another way to avoid creating an email contract is by continuing to negotiate the terms it includes, rather than accepting them.
For example, imagine if email 3 above had said:
“Thanks Anna. Yes, I’m happy to go ahead with this. Could we have a chat about which suite I’d like?”
Now you could argue that a contract hasn’t yet been formed, as Anna and Robert are still negotiating the details.
What do the courts say about email contracts?
But do emails hold up in court? Well, it depends. Let’s go back to school for a moment and check out some case law to find out.
Athena v Superdrug
One of the most famous cases about when an email becomes a contract is a UK case called Athena v Superdrug. In this example, Athena argued that an exchange of emails with health and beauty retailer Superdrug had created a legally binding contract.
Athena and Superdrug had discussed a transaction to sell cosmetics for just over £1.3m.
The brand manager (Athena) emailed the buyer (Superdrug) asking for confirmation that Superdrug were placing the order and committing to a minimum quantity each year.
Superdrug replied telling them to go ahead. However, when the products didn’t sell well enough, Superdrug cancelled the order before the first 12 months were up. As a result, Athena then sued Superdrug for breach of contract.
But was there a contract to begin with?
Well, Superdrug argued that since they usually used a formal contract procedure that involved the creation of sales contracts, like purchase orders, no contract could be formed via email. They also said that they hadn’t intended to enter into a contract and that the buyer didn’t have the authority to commit to it – only to negotiate the terms.
However, the court decided that the email could constitute a contract, as there was a clear offer and acceptance within the email chain. The court also said that Athena had relied on the confirmation email from Superdrug to be legally binding, and that that was completely fair in this situation.
Let’s look at a US case next.
Forcelli v Gelco
The Forcelli v Gelco case was about whether or not an email summarizing the terms of a settlement for a car accident could be enforced as a contract.
For context, John Forcelli sued Gelco Corporation for injuries he got when a vehicle owned by the company collided with his. Gelco’s insurance company offered Mr Forcelli $230,000 to settle, first orally and then in an email sent to all parties involved. The email was “e-signed” by the individual representing Gelco’s insurer – at the bottom of the email she’d typed: “Thanks, Brenda Greene” (i.e. her name).
However, Gelco won the case a few days later and attempted to back out of the payment, arguing that the settlement was “not consummated” under New York law. But was the email enough to create a legally binding contract?
In short: yes. The judges in this case unanimously agreed that the email and electronic signature were just as binding as a signature on an agreement itself. Therefore, the email did become a legally binding contract, and Gelco couldn’t jump ship on the original promise.
But not all emails can constitute a legally binding contract. Let’s look at a case now where the court didn’t recognize an email chain as a contract.
Goel v. Gupta
In Goel v Gupta, the court ruled that an email chain didn’t constitute a legally binding contract.
In this example, a limited company went into administration. The administrators thought the company might have a legal claim against third parties. They discussed this with two of the company’s shareholders (through their solicitors) in emails, talking about assigning rights to the two shareholders to pursue the claim, for a certain amount of money.
Following this discussion, the shareholders claimed that the emails created a legally binding contract and that the administrator would do this at the price they stated. The administrator disagreed and said they would auction those rights. The shareholders asked the court to stop the auction.
Eventually, the High Court found that no contract had been formed in the emails. This was because the administrator hadn’t made an offer that the shareholders could accept, which meant that there could be no legally binding contract. After all, offer and acceptance are key components of a valid contract.
The court also said that the shareholders knew the administrators would instruct their own solicitors to put together an agreement to officially assign the rights to the claim, which would involve further negotiations. Because of this, the court ruled that even though the email exchange didn’t contain the words “subject to contract”, that was implied.
Need help with your contracts?
The important takeaway here is to avoid saying anything in an email that you wouldn’t put in a formally drafted contract.
Some other things you can do to help make sure a casual email conversation doesn’t tie you into anything much more serious include:
- Staying away from words like “accept”, “agree”, or “agreement” in your emails
- Using the phrase “subject to contract” like it’s going out of fashio
- Clearly stating any conditions you need to be fulfilled before you can enter into a contract
- Remembering that contracts don’t need physical signatures to be valid
While it’s not always necessary, the best way to ensure that you can rely on agreements with other parties is to get a signed contract in place. To find out more about how drafting, signing, and managing contracts can be made simple, fill in the form below.