07 / 27 / 2016

How to Avoid Forming an Accidental Contract

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Imagine your company manufactures and sells farming equipment. A potential buyer contacts you via email inquiring whether you have certain kinds of machines for sale. You gladly tell the prospective buyer that you do have the machines that he or she is looking for, and offer to sell a certain amount of machines for a certain price. The buyer says that they are willing to buy the machine for a substantially lower price and you begin to negotiate back and forth.

Meanwhile, a second buyer emails you, asking about the same machines, and is willing to pay more than your original asking price. Being a smart business person, you accept the second buyer’s offer and sell the equipment. But what about Buyer #1? Well, he decided to sue you for breach of contract!

It is no secret that over the last 20 years, email has fundamentally changed how we communicate in the business world. However, the speed and convenience of electronic communication has created a tendency for us to use informal language in our messages. For better or worse, courts have decided that such informal language can be sufficient to create binding contracts, even if one side did not intend to be bound.

How Are Contracts Formed?

To form a valid contract, the only things required are:

  • an offer
  • acceptance
  • mutual consideration, and
  • an agreement to be bound.

A physical document, notarization, or even signatures is not needed. The test for whether these elements have been met is objective. Courts determine whether a contract has been formed based solely on the words or conduct of the parties. Speculation of motives and intent is not considered when determining if a contract has formed.

Two Examples

  • Rejection of an Offer

The scenario explained above is similar to what occurred in Parker Drilling Co. v. Romfor Supply Co., 316 S.W.3d 70-72 (Tex. App.—Houston [14th Dist.] 2010, pet. denied). A buyer and seller were negotiating the purchase of mud pumps via email. The seller ended up selling the pumps to another party, and the potential buyer sued, asserting that there was already a contract for sale, but the parties were just hammering out the details. The Court decided that because the buyer’s emails to the seller altered several material terms of the seller’s offer (such as the number of items to be purchased and price), the buyer’s email constituted a rejection and counter offer, which was never accepted by the seller.

  • An Agreement by Both Parties

Conversely, in Green v. Midland Mortgage Co., 342 S.W.3d 689 (Tex. App.—Houston [14th Dist.] 2011, no pet.), opposing lawyers exchanged a series of emails in an attempt to resolve their respective clients’ dispute. After agreeing on an amount of money, the settlement was memorialized in a written document. Shortly after the memorialization, Green refused to abide by the settlement and Midland filed suit for breach of contract. Green defended himself by arguing that the memorialized document was not valid because it was not personally signed by him, so there was no contract that could have been breached. The Court disagreed with Green. The Court stated that since the series of emails did reflect an agreement by both parties to all the material terms of the settlement agreement, there was a contract formed between Green and Midland.

So What Do You Do?

So how do you protect yourself from “accidental contracts” or an over-eager litigant? Whether or not courts become more consistent and predictable in determining the existence of a contract through email exchanges, there are many things you can do to protect you or your business from “accidental contracts.”

  1. Expressly state in your negotiations that the other party’s performance is not a proper means of acceptance and that a written agreement must be hand signed by both parties for the contract to be valid. Be sure to include language that the signature block of your emails does not qualify as a signature.
  2. When exchanging messages, be careful when using certain terms such as “offer,” “accept,” “I agree,” or “no problem.”
  3. Be explicit on whether final acceptance of the contract is contingent upon some other source, such as upper management approval, or the occurrence of a certain event like satisfactory due diligence.

Email is not going anywhere, but the law is often slow at keeping up with the pace of technology, even when the technology is over 20 years old. The best way to protect yourself from accidental contracts is being clear and explicit in your communications. If you have questions about whether or not you entered into a contract, contact the business lawyers at the Vethan Law Firm.

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