"But We Were Just Negotiating:" Understanding When A String Of Communications (Even Emails) May Establish a Binding Contract
Techlaw: Parties negotiating the terms of a deal must understand when the negotiating stops and a binding contract has been created, even if there is only a string of emails.
The first draft of an agreement is rarely agreed to and signed by both parties. After an initial draft is circulated, the other party will typically propose revisions upon which it conditions its acceptance of the offer. The negotiation between the two parties may go on for quite some time. It may consist of several marked-up drafts of the agreement and revisions to the agreement shown in track changes, as well as phone calls, emails, and letters regarding the material provisions of the agreement. The ultimate goal of both parties is to reach an agreement and sign one "final" version of a contract containing all agreed-upon terms and conditions. However, if the parties are not careful, their correspondence alone may establish a contract enforceable under the Statute of Frauds. North Carolina courts have enforced email chains negotiating material terms in circumstances where a "final" formal version was never signed.
The Statute of Frauds
All States have laws that require certain agreements to be in writing and signed by any individual or entity against whom the agreement will be enforced. The purpose of these laws stems back to the original Statute of Frauds passed in 1677 in England to avoid "fraud on the court by perjury and subornation of perjury." The Statute of Frauds has been adopted into American law and has very modern implications despite its historical roots.
If the subject matter of a contract triggers the protection of a Statute of Frauds, the Statute will prevent one party from enforcing the terms of a contract against another party who did not agree to those terms in writing.
The various Statutes of Frauds are intended to prevent the creation of an enforceable contract until both parties agree to the terms in writing and "sign" a contract, but because of developments in contract law, the writing does not necessarily have to consist of one hard copy document signed in pen by both parties.
What Types of Agreements Need To Be in Writing?
In North Carolina, a Statute of Frauds requires that all contracts or agreements to sell or convey land or any interest in or concerning land, including easements, options to purchase, rights of first refusal, and certain leases, must be in writing and signed by any party against whom enforcement is sought. However, many people do not realize that more than just contracts and agreements involving real property must be in writing and signed in order to be enforceable. For example, the following types of agreements must be in writing in order to be enforceable:
Generally, contracts for the sale of goods for the price of $500 or more, except:
When the goods are specially manufactured goods;
When payment or delivery of the goods has been made and accepted; or,
If the party against whom enforcement is sought admits in court that a contract was made;
An agreement that, by its terms, cannot be performed within one year;
An agreement to pay the debt of another is sometimes called a "guaranty;"
A pre-nuptial agreement;
An agreement by a debtor to pay a debt that has been discharged by bankruptcy;
Commercial loan commitments by a bank, savings and loan association, or credit union for loans in excess of $50,000; and,
Contracts related to boxing matches or exhibitions held or to be held in North Carolina.
When is the Contract Created?
A written agreement does not need to be formal; an agreement handwritten on an index card or napkin may be sufficient. Nevertheless, a handwritten agreement is evaluated by substance over form and must:
Evidence a "meeting of the minds"; and,
Contain all the terms and conditions necessary to enforce the particular agreement.
To determine whether there has been a "meeting of the minds," courts look to the parties' intent. While there are no magic words, if the writing in question clearly establishes an offer by one party and an acceptance of that offer by the other party, there has been a meeting of the minds.
In addition to a meeting of the minds, the agreement must also contain all the material provisions and cannot leave any material provisions open for a future agreement. For example, an option to purchase agreement must contain a purchase price or a definitive method to determine the purchase price. If the option provides that the landlord and tenant can each hire an appraiser to determine the value of the property and the average of those two appraisals will be the purchase price, the option is valid and enforceable. If, however, the parties simply promise to agree on a purchase price later, the option will be held void for uncertainty and indefiniteness. Such agreements are referred to as unenforceable "agreements to agree."
What Constitutes a "Written Contract" Under the Statute of Frauds?
We typically think of a contract as one more or less "formal" document signed by all the parties to the agreement, but the Statutes of Frauds do not require all the contract terms to be set out in one document. North Carolina courts have held that a series of emails and letters between two parties regarding negotiating the purchase of land can, when taken as a whole, create a written contract under the applicable Statute of Frauds. As long as the correspondence is from a person authorized to enter into the contract and contains a meeting of the minds and all the material provisions of the deal (offer and acceptance), a legally-enforceable contract may be created without either party signing one document containing all those terms.
For example, two parties are working on the terms of a settlement agreement regarding the purchase of land. The parties and their attorneys exchange letters and emails that identify the parties and contain a description of the property, the purchase price, and the date by which the sale must close. The correspondence also contains language that evidences offer and acceptance based on the terms contained in the various written communications. Although a single, formal contract containing all of the agreed-upon terms is never signed, a written contract may have been created and will not be void under the Statute of Frauds.
How Can the Agreement Be Signed?
Traditionally, the use of a written signature would have been required before a contract would have been deemed enforceable. A signature is defined as affixing one's name to, with the purpose or intent to identify or to give it effect as one's act. An actual handwritten signature is no longer required, the standard for what qualifies as a signature continues to change, and a signature can occur in many other forms, especially with the use of email and other devices such as Docusign.
A valid electronic signature includes any electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record. This loose definition of what constitutes a signature does little to protect those in negotiations via email.
For instance, in a recent North Carolina case, an automatic signature box auto-populated at the end of an email qualified as an enforceable signature for purposes of the Statute of Frauds. The court found as long as the electronic signature resulted from a person's action, it was attributable to that person.
Using an automatic signature, usually pre-populated and not visible to the sender, can give rise to a claim under the Statute of Frauds. However, the sender must have the appropriate authority to sign the Agreement, which leads us to our final point below.
Who Can Sign the Agreement?
The proper parties must also sign a written agreement for the agreement to be binding. While this may seem simple, issues commonly arise when someone other than the actual party to the contract signs it.
In one example given above regarding email communication (based on an actual North Carolina case), the correspondence which led to the creation of a contract was mainly between the parties' attorneys and not the parties themselves. Under the Statute of Frauds, a contract may be signed by a party's agent, and, in North Carolina, there is a presumption in favor of an attorney's authority to act on behalf of a client. That means that the party trying to assert the Statute of Frauds as a defense will have the burden of proving that the party's agent, the attorney, did not have the actual authority or "apparent authority" (authority appearing to a reasonable third party to exist based on the facts and circumstances even though the particular attorney/agent does not have actual authority) to act for that party. This may be quite difficult to prove.
Other agents who may or may not have "apparent authority" (even though they may not have actual authority) can be, for example, a vice-president, comptroller, sales agent, purchasing agent, and so on. Often it is very beneficial to a negotiating party to specifically state who has authority and who does not have authority, to bind the party in order to protect itself from agreements "signed" by a person with only apparent, but not actual, authority.
In most cases, the Statute of Frauds will provide a defense to the enforcement of agreements that were not agreed to in a writing and signed by the parties to be charged. But what constitutes a written contract and signature has expanded beyond the traditional concept of a signed, written contract.
The next time you find yourself negotiating the terms of a contract, be careful to establish early in the negotiations that no agreement will be valid and enforceable unless and until both parties sign one written contract containing all the terms of the agreement and who has the authority to sign a contract for you or your business.