In the past, contract negotiations were typically part of a deliberative—if not formal—process, whether that process was carried out in-person, over the phone, by exchange of letters, or any combination of these types of communication. But those days are long gone. E-mail reigns supreme as the most popular form of communication in today’s hyper-fast business world. But using e-mail as the primary means of negotiating and memorializing a contract is not without risk. The examples detailed below are but a few of the increasing number of cautionary tales involving e-negotiations.
Bryant v. Way, a 2011 case in the Delaware Superior Court, involved a bitter business divorce of two commercial real estate brokers (collectively, the “Brokers”; individually, “Plaintiff” and “Defendant”). The dispute centered on a separation agreement allocating the Brokers’ property listings and commissions. The Brokers negotiated the terms of the separation agreement almost exclusively through e-mail. No lawyers were involved. At the start of their e-mail negotiations, Plaintiff proposed that the separation agreement be memorialized in a formal contract signed by them both. In an e-mail, Plaintiff wrote:
If you’re in agreement, I would like both of us to sign off on this document, which also needs to state the financial arrangement of deals on the list as well as role and responsibility of each of us for …, and specifically detail ongoing payment to the both of us for as long as we retain the listing(s).
On the heels of this e-mail, Defendant e-mailed Plaintiff a proposal for dividing their joint property listings, including certain listing involving University of Delaware (the “State Listings” or “State Commissions”). Plaintiff responded the following day, writing in part:
I’m in agreement to have only you lease and receive sole compensation for [certain listings] under the following circumstances: that we split all State [Listings] (renewals, expansions, new transactions) that occur in any of the bldgs [sic] there … through 6/30/2011.
About four hours later, Defendant responded with an e-mail rejecting Plaintiff’s proposal to split the State Commissions through June 30, 2011. By e-mail, Defendant advised:
No – I have been the primary point person on this and have done all of the work, dealt with the headaches and followed up with everyone. The end date for State Transactions will be 6/30/10.
Soon after, Plaintiff responded to the above e-mail, stating “I will not back off my position of  receiving 50% compensation for State of DE deals (only) … on or before 6/30/11.” Less than thirty minutes later, Defendant replied: “This is final and agreed to.” Plaintiff promptly responded with an e-mail of his own, restating his earlier suggestion that the Brokers “signoff” on a fully integrated contract detailing the terms of their termination agreement; except this time Plaintiff was more precise in making a signed writing a condition to a binding termination agreement: “I suggest that a document be prepared by [employer] that reflects the same that all parties can attest to and execute.” In an e-mail sent just one minute later, Defendant offered to “print out the email and sign it.”
In the four weeks that followed the Brokers’ e-mail correspondence, the Brokers together with their employer pieced together a formal document (the “Memorandum Agreement”) which outlined all the essential terms of their separation, including allocation of the State Commissions. The final version of the Memorandum Agreement stated in relevant part:
Below are the deals to be split equally and their respective dates: …
State [of Delaware] Transactions that are signed by 6/30/10.
In this way, the Memorandum Agreement made clear that any State Commissions generated after 6/30/10 would belong solely to Defendant. Plaintiff reviewed and signed the Memorandum Agreement without objecting to the 6/30/10 cutoff date. After he signed the Memorandum Agreement, Plaintiff thought nothing more of the matter until several months later, when he learned at an office meeting that the State Listings had closed and Defendant would receive the entire State Commissions. By this time, the 6/30/10 cutoff had passed. Plaintiff immediately complained to his employer that he was owed 50% of the State Commissions paid to Defendant. But the employer turned him away, explaining that the company was duty-bound to comply with the 6/30/10 cutoff date specified in the Memorandum Agreement.
Plaintiff then brought suit against Defendant and his employer, seeking to recover his pro rata share of the State Commissions. He argued that the Brokers’ e-mail correspondence formed a fully binding and enforceable contract, and that the subsequent Memorandum Agreement was an unenforceable attempt to modify the e-mail agreement.
On cross-motions for summary judgment, the Delaware Superior Court ruled for Defendant. Specifically, the Court found that the e-mail correspondence did not form a binding contract because the same e-mail correspondence reflected the Brokers’ intention to reduce the e-mail correspondence to a final enforceable memorandum. But importantly, this decision came only after the parties endured the considerable time, expense and anxiety associated with having to litigate the enforceability of the e-mail correspondence. In short, there were no winners.
The case of Schwartz v. Chase, a 2009 Delaware Chancery Court matter, also illustrates the risk of negotiating a contract via e-mail. That case involved a motion to enforce an alleged settlement agreement negotiated by the parties’ lawyers, primarily through e-mail correspondence. Set below is the Court’s recitation of the pertinent e-mail exchanges between counsel:
Plaintiff’s counsel: I have reviewed your modified agreement with [the plaintiff’s] in-house counsel. She asked me to wait to discuss with [the plaintiff] until we are sure [the defendant] is willing to sign the [settlement] document. But we have no reason to believe that [the plaintiff] will object to your suggestions.
Defendants’ counsel: [The defendant] has approved the agreement. Please let me know about your client.
Plaintiff’s counsel: As to the Settlement Agreement, assuming no new issues, I will print out a couple of clean copies and have my client sign them. Any reason why I should not remove the paragraphs marked “reserved”?
Defendants’ counsel: No issues with removing the reserved paragraphs.
Plaintiff’s counsel: I just heard back from my client’s in-house counsel. Their preference would be to have [the defendant] sign the document and forward to us for signatures. Still a lot of distrust on my end.
Defendants’ counsel: Is [the plaintiff] ok with the agreement?
Plaintiff’s counsel: … I have now heard back from my client and he is comfortable with the changes you made to the Settlement Agreement. Please remove the reserved paragraphs and accept the remaining changes you made. Please deliver two signed copies to me. I will have [my client] sign both copies and I will return a fully executed copy to you.
Defendants’ counsel: I will try to get the [Settlement Agreement] to you tomorrow, but it may be Friday.
Plaintiff’s counsel: Anticipating the resolution of this matter, I have prepared a stipulation of dismissal for your review.
Defendants’ counsel: Attached is the initial redline I sent to you, a modified redline cleaning up the document … and a clean version incorporating all of the changes. If the document is acceptable to you as in the clean version, please let me know and I will forward to [the defendant].
Plaintiff’s counsel: Your revisions are fine. I found three additional small revisions. … With those minor revisions, we are comfortable with the [settlement] document.
Defendants’ counsel: [My client] asked me to inquire as to the amount of money in the company’s bank account. Would you please let me know ASAP? He is under the impression that $60k should be in the bank account.
Plaintiff’s counsel: This settlement is more tenuous than perhaps you may realize. My client has absolutely no faith that your client will sign the settlement agreement … I was told unequivocally on Friday that if we do not have a signed agreement in hand today that discovery is due … If I now go back to my client to ask how much money is in the checking account, I will get an answer, but I am absolutely confident that they will instruct me to rescind the offer and push forward for a court-mandated resolution.
Defendants’ counsel: Attached is a copy of the [settlement] agreement signed by [the defendant]. … [The defendant] has signed the agreement. Assuming the reps and warrants in para [sic] 6B are true and correct, please ask [the plaintiff] to sign the agreement, and we can exchange counterparts.
Plaintiff’s counsel: … I want to be clear … that your client cannot rely on my comments about how the [company’s] bank account has been used … Having said that is your client still committed to this agreement?
Defendants’ counsel: My client is committed as long as the reps and warrants are true and correct, which I assume they are. I respectfully ask that you ask [the plaintiff] to confirm that the reps and warrants are true and correct, and assuming they are, he can sign the agreement and we can schedule closing.
Soon after this e-mail correspondence, the plaintiff refused to sign the settlement document. The defendant then filed a motion to enforce the alleged settlement agreement, arguing that the attorneys’ e-mail exchanges formed a binding contract. After an evidentiary hearing and extensive post-hearing briefing on the defendant’s motion to enforce, the Delaware Court of Chancery held in favor of the plaintiff and denied the motion. Despite paying due consideration to Delaware’s strong policy favoring the voluntary settlement of contested suits, the Court found that the defendant failed to meet his burden of showing that (1) the parties agreed to all material terms, (2) all preconditions were satisfied, and the parties intended to be bound when the defendant alone signed the settlement document. In closing the Vice Chancellor stated: “Thus, while [the parties’ attorneys] had completed negotiations on many, if not most of the terms of a settlement, the parties did not reach the point that they both intended to be bound by the Agreement …”
Even though the plaintiff prevailed, the Court was critical of the manner in which the plaintiff “organized his litigation chain of command,” noting that, from the beginning, the plaintiff removed himself from the decision-making process and delegated the authority to his daughter, who, in turn, assigned the day-to-day authority to the plaintiff’s in-house counsel, who assigned that authority to the plaintiff’s attorney.
More recently, the Court of Chancery ruled that a settlement agreement could be enforceable even though it was not executed by all parties. According to the Court: [w]here a settlement agreement has been reached, the fact, alone, that it was the understanding that the contract should be formally drawn up and [executed], [does] not leave the transaction incomplete and without binding force, in the absence of a positive agreement that it should not be binding until so reduced to writing and formally executed." Whittington v. Dragon Group LLC, C.A. No. 2291-VCP (Del. Ch. May 1, 2013) (internal quotations omitted).
New York has had its share of similar cases. Kasowitz, Benson, Torres & Friedman, LLP v. Duane Reade, 950 N.Y.S.2d 8 (NY Supr. Ct. 1st Div. 2012) is an apt example. There, the appellate division of the Supreme Court of New York considered whether a series of e-mails between a law firm and its former client formed an enforceable fee agreement entitling the law firm to a success fee on top of the flat $1 million fee already paid by former client Duane Reade. The underlying facts have become all too common:
On September 8, 2006, the plaintiff (through one of its partners) e-mailed a proposed fee arrangement to Duane Reade’s in-house counsel, which stated in pertinent part: "[w]e can do the … case for a flat fee [of] $1 million, payable over 10 months as you suggested (exclusive of disbursements), plus 20% of amounts recovered above some number, as opposed to a percentage payable from dollar one."
On September 19, 2006, the plaintiff (through the same partner) sent an e-mail to the Duane Reade in which he stated, in relevant part, “I would love to have our fee arrangement in place by then so I can just tear into these guys.”
In an e-mail response the same day, Duane Reade’s representative wrote: “Go.”
The underlying representation ended in a settlement. The plaintiff law firm then demanded that Duane Reade compensate the firm for a portion of the success fee. The defendant refused and the law firm brought suit. Duane Reade moved for summary judgment. To a large degree, the outcome of the litigation pivoted on the meaning of the monosyllabic word “Go”. The trial court found that the three e-mails outlined above formed an integrated, enforceable fee agreement, but that the law firm was not entitled to an additional fee. The law firm appealed. Upon review, the appellate division affirmed the trial court’s ruling. In doing so, the majority observed that “[a]n exchange of e-mails may constitute an enforceable agreement if the writings include all of the agreement’s essential terms …” (citations omitted).
So what lessons can be drawn from the cases described above? The most obvious one, of course, is to be careful in using e-mail as the exclusive or main means of negotiating an agreement. More specifically, the cautionary tales instruct that it is essential to establish the rules of engagement at the outset of the e-mail negotiations. For instance, it is advisable to establish at the start of e-mail negotiations whether a formal, single and fully executed writing is a condition to forming a binding contract. It also important to make clear early on that, under no circumstances, do the parties or their agents intend for a series of e-mails to constitute a binding contract. Prudence also dictates that the parties identify the particular parties or individuals authorized to enter into a binding contract, and, if applicable, define the role and authority of any agent negotiating on behalf of his or her principal (e.g., “As Mr. Smith’s attorney, I am authorized to negotiate on his behalf, but under no circumstances do I have actual, apparent or implied authority to bind him to the terms of a contract without his written consent”).What lessons can be learned from the cases described above? Perhaps the most important is to avoid e-negotiations altogether. Alternatively, one is well-served by establishing the rules of engagement at the outset of the e-mail negotiations. For instance, establish at the start of e-mail negotiations whether or not a formal, single and fully executed writing are conditions to a binding contract. Expressly state that under no circumstances do the parties or their agents intend for a series of e-mails to constitute a binding contract. It is also important to identify at the outset the particular parties or individuals authorized to enter into a binding contract, and, if applicable, define the role and authority of any agent negotiating on behalf of his or her principal (e.g., “As Mr. Smith’s attorney, I am authorized to negotiate on his behalf, but under no circumstances do I have actual, apparent or implied authority to bind him to the terms of a contract without his written consent). This caution is especially recommended in light of the recent case law stating that settlement agreements need not be signed to be enforced.
The following tips should also prove useful:
- Use precise language. Avoid legalese.
- Pay attention to the subject line of your e-mail or the e-mail to which your responding (avoid recycling prior subject lines). When appropriate, consider using “FOR DISCUSSION PURPOSES ONLY” or similar language in the subject line.
- Whenever possible, distinguish essential terms from non-essential terms (e.g., price, time for performance, and closing date).
- Whenever appropriate, specify a date certain by which time the agreement must be finalized.
- Avoid expressing a conditional acceptance before (or “subject to …”) the client’s review of the terms.
- Unless a final agreement has been reached, close each e-mail exchange with an unequivocal statement that negotiations remain on-going and not all essential terms have been agreed-upon.
These lessons apply equally to practitioners and business people alike.