Modern day contract formation - the good, the bad and the ugly of email

Together we are Forbes

Article

09 March, 2021

Not so long ago, companies had to deal with mountains of paperwork, meetings always held in person, and communication both internally and externally was not so easy. These days, technology has helped businesses come a long way by simplifying and streamlining how we communicate and eliminating many of the delays that arose in a world of stop-start communication. This has been amplified recently by the social distancing regulations in place because of the Covid-19 pandemic, which has accelerated the pace of implementation and use of technology in business.

How most businesses now connect is through email, and email can even be used to simplify the creation of legally binding contracts. As we know, for a contract to be considered legally binding four key components must be met: offer, acceptance, consideration, and an intention to create legal relations. The ability to create contracts by an exchange of emails is hugely practical for modern businesses, however, there are drawbacks to this method of contract formation. In particular, the possibility of parties accidentally entering a contract following an email exchange, or a lack of clarity of terms could cause issues further down the line.

A recent example of this is the case of Athena Brands Ltd vs Superdrug Stores PLC [2019]. A brand manager at Athena and an employee of Superdrug with the job title of "buyer" exchanged email correspondence regarding a face cream that Athena would supply to Superdrug. The brand manager sent an email to the buyer asking him to confirm that he was placing the order and committing to a minimum yearly quantity of the product. The buyer responded by email telling the brand manager: "please go ahead with the below". The products did not sell as well as Superdrug had hoped and therefore, they stopped the orders before the 12 months was complete. Athena brought a claim against Superdrug for breach of contract, on the basis that Superdrug had not complied with the terms set out in the email.

Another point to note in this case is that the contract was entered into by Athena and a buyer within Superdrug. Due to this, an additional element is required in which the buyer for Superdrug must have Superdrug's authority to negotiate and enter contracts on their behalf. In the context of a contract, authority can be actual or apparent. In this case, Athena argued that they relied on apparent authority (i.e. it appeared to Athena that the buyer for Superdrug had due authority to act on behalf of Superdrug and the buyer for Superdrug conducted itself in such a way that demonstrated that it had the approval to act on behalf of Superdrug). If the court deems the buyer for Superdrug acted within the scope of this wider authority, Superdrug would then be bound by the minimum yearly quantity as outlined within the emails.

In addition to arguing that the buyer did not have authority to bind Superdrug (either actual or apparent), Superdrug also argued that the company was not under any binding commitment, concerning minimum order obligations as their standard purchase procedures, including issuing a purchase order, were not followed. In this case, no specific purchase order was created for the agreement between the buyer for Superdrug and Athena. The High Court held that:

  • a contract had been made by the exchange of emails, which bound Superdrug to purchase the specified minimum quantities of the product, even though no specific purchase order for the products had been completed by Superdrug;
  • the buyer for Superdrug was held to have apparent authority based on their role and actions to negotiate terms of the trade, and there was no evidence that Athena had been informed that the buyer for Superdrug lacked the authority to agree to a minimum quantity commitment; and
  • Athena acted reasonably in relying on the buyer for Superdrug's confirmation as binding Superdrug to the contract terms, and nothing in the evidence could show that Athena had acted unreasonably in doing so.

It is important to remember that a contract is not always a physical document that includes specific details of a deal that is signed by each party. Modern-day technology has allowed the four key elements of a contract to be met virtually and as a result, contracts can now be entered into with ease. This case highlights the importance of businesses following internal policies when discussing and negotiating any form of contract by email. The inclusion of terminology such a "subject to contract" and ensuring you clarify the authority of yourself or another individual to commit or enter into a contract can save you from a similar fate to Superdrug. In Superdrug's case, it could have saved them around £1.3 million worth of face cream.

For more information contact David Filmer in our Commercial department via email or phone on 0333 207 1132. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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