Avoiding the perils of the ‘accidental’ contract

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Steer clear of email, other forms of casual communication

Lightning-fast technologies now allow businesses to informally discuss and exchange key information about products, deliveries, quality and price — and conceivably enter into binding contracts with astounding alacrity.

But what happens when the parties fall into an “accidental” contract, or contract amendment, when one side of the deal walks away from a casual series of emails thinking that a legal enforceable agreement has been made?

Some attorneys might think that this phenomenon is just an exercise better fit for discussion in a contracts law classroom. But in fact there is a growing body of case law around the country, at both the state and federal level, where existing theories of contract law primarily are being used to add sense to an ever-swelling shopping cart of new communications technology.

In a 2011 federal case involving $1.2 million in damages out of the Southern District of Florida, CX Digital Media Inc. v. Smoking Everywhere Inc., the court ruled that an alleged agreement in a series of informal computer emails can create an enforceable contract, even in the face of an existing No Oral Modifications, which also required mutual signatures for changes.

Quarles and Brady LLC partner Jessica Franken said this is a real issue for many businesses throughout the state. Her firm is embroiled in litigation between a client manufacturing company and a Wisconsin business service provider which denies that a series of emails was the basis of a contract.

The case has been in litigation for almost a year.

“There was a series of emails,” Franken said. “There were contract terms that also came from a series of proposals and documents.”

The supplier allegedly had been silent about any problems under the “new” contract until litigation started. But now the supplier contends there was no contract to begin with because the emails and other documents were not enough to create a contract.

The law and its capacity to address new technologies and challenges constantly is tested.

From the drafting of the Uniform Commercial Code, to recent efforts in the 1990s to get a handle on electronic contracting, University of Wisconsin law professor Shubha Ghosh described how the legal community and lawmakers have tried to deal with evolving contract issues of the day head-on.

In some instances, such as the UCC, the collective efforts of leading legal minds in the 1940s and 1950s provided clarity and uniformity to basic and evolving questions about the nature of sales and contracting, the sale of goods, essential terms, and how to standardize transactions and create uniformity around the country.

“However, the movement in the 1990s to develop uniform rules for electronic contracting was a different matter,” said Ghosh, noting that there was not a UCC-like similar tide of acceptance and uniformity around the country.

Yet when the issues at the core of these technology disputes closely are examined — whether the parties meant to agree, what material terms are in the emails, whether there was a proper signature — Ghosh suggested some of the underlying controlling principles have a lot in common with contract disputes of old.

In years past, Ghosh described how one company might have its own form used to order goods. Their supplier had their own form and invoice documents. Whatever terms were in common were kept. Those terms that were contrary were knocked out, a “battle of the forms.”

“What we have now is really just a souped-up version of battle of the forms,” Ghosh said.

But with most, if not all, key business employees toting smartphones, accessing differing communications platforms and using Skype, the best way that Wisconsin businesses can protect themselves is to be aware of the issue before it becomes a problem, said Erin Keesecker, an associate at Whyte, Hirschboeck, Dudek SC, and a member of the firm’s business and commercial litigation team.

Keesecker has come up with a few “rules of thumb” for businesses to steer away from the dangers of the “accidental contract,” which she presented in a recent article to be published in her firm’s internal client publication.

First, take time to review your written contracts, she said, “particularly those negotiated a long time ago,” Keesecker cautioned. Sometimes the parties have changed terms, or terms need to be updated, and might not represent the existing contractual relationships in place now.

Second, review the processes used to modify your contracts to make certain your firm is comfortable with the relative ease (or difficulty) of modification. Make changes if necessary.

Third, discuss with key personnel the idea of steering clear of email, instant messenger and other such casual communications when discussing contract terms or modifications.

“Do not underestimate the power of an email or IM exchange to modify these terms.” Keesecker said.

Lastly, businesses should not have a “false sense of security” from what is in a written contract, she warned.

“Even if a contract has a No Oral Modification” clause, Keesecker said, “behavior of the parties is much more important.”