By: Thomas Cardelli, Esq., Chris Doyle, Esq., Vani Gujuluva, Esq. & Jennifer Paine, Esq.
Cardelli Lanfear P.C.
In this e-business age, it is not uncommon for contract negotiations to take place purely online through the use of emails.
For example, in a hypothetical fact pattern, a representative of Seller Co. sends an email to a representative of Buyer Inc. containing a quote for certain goods. Buyer Inc. replies with an email containing a purchase order that references the quote issued by Seller Co. In addition, the purchase order states that any disputes arising from the sale are subject to arbitration. Have these parties formed a contract? If so, is Seller Co. bound by the arbitration clause?
Variations on this fact pattern are becoming more commonplace. Without uniform guidance on issues specifically relating to electronic contract negotiation, the law applicable to these transactions is largely established on a state-by-state basis. Today, courts are coming to terms with how to apply the Uniform Commercial Code (“UCC”) to electronically formed contracts.
I. OFFER AND ACCEPTANCE (ELECTRONIC FORMATION)
Parties often use email as a means to negotiate a deal that will later be reduced to a single, formalized document that is more traditionally thought of as “a contract.” However, what they may not know, until a lawsuit is imminent, is that their emails can and often do create an enforceable contract. A contract can be created and “signed” electronically via an exchange of emails where there is evidence of an intent to enter into an agreement. In cases where one party alleges that a contract has been formed through an email exchange, courts are often called upon to determine whether the email exchange constitutes an enforceable agreement or merely an invitation to negotiate a formal written contract. This article will discuss the factors that determine that outcome.
Intent to be Bound
With regard to a contract for the sale of goods, UCC § 2-206 (Offer and Acceptance in Formation of Contract) is expansive. “[U]nless otherwise unambiguously indicated by the language or circumstances an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances… .”
Furthermore, UCC § 2-204 (Formation in General) also broadly provides: “(1) a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.”
Thus, a plain reading of the text of § 2-206 and § 2-204 indicates that an exchange of emails may be sufficient to constitute an offer, acceptance and the formation of a contract.
For example, in Republic Bank, Inc v West Penn Allegheny Health Sys, the Tenth Circuit Court of Appeals upheld the trial court’s finding that the parties’ email exchange constituted a contract for the sale of a $750,000 CT Scanner. In reaching this conclusion, the court held that “taken as a whole, the evidence convinced the district court that [seller’s email] response was indeed intended as an acceptance.” Specifically, the court found that the email exchange included an explicit statement communicating an offer (“our offer is as follows”) and language consistent with an acceptance (“I met with the bank president this morning and he gave me approval to sell the [CT Scanner]… as offered below. There is still some question regarding the cooler unit being moved….We can discuss that issue. Please let me know if you work through a purchase order system or if we need to put together a sales agreement”), including numerous statements communicating an understanding that the email exchange created a binding contract without any objections from the other party or attempts to correct any misunderstanding.
- If you do not intend to be bound without a formal written agreement, include explicit language to that effect in email negotiations; for example stating an objection or correcting misunderstandings.
- If you do intend to be bound without a formal written agreement, be explicit about stating offers, acceptances or specific agreements.
Email as “Signed Writing”
UCC § 2-201 (Formal Requirements; Statute of Frauds) requires that a contract for the sale of goods $500 or more be evidenced by a writing signed by the party against whom enforcement is sought in order to be enforceable. The issue of whether electronic contracts and signatures are valid has largely been resolved by the Uniform Electronic Transactions Act (UETA). Together with its federal counterpart, the Electronic Signatures in Global and National Commerce Act (ESIGN), UETA and ESIGN have made it clear that contracts with electronic signatures are not invalid simply by virtue of their electronic form. UETA and ESIGN render transactions that occur electronically equally enforceable as paper contracts with manual signatures.
- Do not rely on absence of a formal signature or the fact that there is no formal writing as an indication that a contract has not been formed. Applicable law provides that an email signature can constitute a “signed writing” to satisfy the Statute of Frauds and that electronic contracts can be valid.
What happens with someone like an employee appears to be negotiating a contract via email? It is possible for a third party, such as a lower-level employee, without actual authority to bind a company to a contract if the third party had the apparent authority to do so. “Where a principal has by his voluntary act placed an agent in such a situation that a person of ordinary prudence, conversant with business usages, and the nature of the particular business, is justified in assuming that such agent is authorized to perform on behalf of his principal a particular act, such particular act having been performed the principal is estopped as against such innocent third person from denying the agent's authority to perform it.”
In other words, if you are not careful, those doing your emailing could bind you to contracts without your authority.
- Appoint one person to negotiate contracts.
- Any third party communicating with the other party should clearly state in every email that he or she does not have authority to contract
- Require any contract to be signed only by specific individuals to be binding.
II. “Additional Terms” and UCC 2-207
In the hypothetical outlined above, Buyer Inc. attempted to add to the bargain an arbitration clause. If the court concludes that Seller Co.’s quote was an “offer” for the purposes of UCC § 2-206, has Buyer Inc. accepted the offer? If so, does the arbitration clause become a part of the parties’ agreement?
These questions are addressed by UCC § 2-207, which provides in pertinent part:
A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
The inclusive language in this provision has given rise to several frequently litigated issues. In particular, courts often address (i) whether acceptance was “expressly made conditional” on assent to additional or different terms, and, if it was not, (ii) whether the additional or different terms become a part of the agreement.
On the first question, courts have been reluctant to find that an acceptance was conditional on acceptance of additional or different terms.
In Foamade Indus. v. Visteon Corp., the Michigan Court of Appeals held that a buyer’s “sourcing confirmation” sent by email did not make buyer’s acceptance conditional on seller’s acceptance of buyer’s terms and conditions. The court noted that, although the “sourcing confirmation” stated that the buyer’s Terms & Conditions applied, the letter “contains no language that would suggest that [buyer’s] acceptance was conditional.”
- If you do not intend to be bound unless the counterparty accepts your additional or different terms, clearly state that this is your electronic communications. Do not commence performance of the agreement.
As to the fate of the additional terms, subsection 2 of UCC § 2-207 provides:
The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
Accordingly, between merchants, additional terms may become a part of the agreement even without any additional written confirmation by the offeror. However, such terms do not become a part of the agreement where they would “materially alter it.”
This issue was addressed in Glencore Ltd v Degussa Engineered Carbons LP. In Glencore, the seller contended that the buyer was bound by an arbitration clause contained in terms and conditions that were referenced by a contract sent as an email attachment. The court concluded that the arbitration clause was not a material alteration. In contrast to additional terms, “different” terms are “knocked out” of the agreement, and the UCC will fill gaps where necessary.
- If you intend the offer to be the full extent of the bargain, use language in your electronic communications to expressly limit acceptance to the terms of the offer.
- If the counterparty sends additional terms to which you object, notify the counterparty of your objections in your electronic communications.
While the law continues to adapt to electronically formed contracts, courts have taken on the challenge of applying traditional UCC contract-law principles in the electronic context. Companies and their employees need to understand the implications of the electronic communications and avoid surprise. In order to ensure that electronic communications are not misconstrued, parties should clearly communicate their intentions to the counterparty.
For more information about Cardelli Lanfear P.C., please visit the International Society of Primerus Law Firms.
 UCC § 2-206(1)(a) (emphasis added).
 UCC § 2-204(1) (emphasis added).
 475 F App'x 692, 699 (CA 10, 2012).
 Id. at 700.
 Id. at 699-700.
 UCC § 2-201.
 BancOhio, citing General Cartage & Storage Co. v. Cox 74 Ohio St. 284, 294, 78 N.E. 371, 372 (1906).
 2008 Mich. App. LEXIS 469, *22, 67 U.C.C. Rep. Serv. 2d (Callaghan) 495 (Mich. Ct. App. 2008).
 848 F Supp 2d 410 (SDNY, 2012).
 Id. at 430.
 See, e.g., Am Parts Co v Am Arbitration Ass'n, 8 Mich App 156, 161; 154 NW2d 5 (1967).