5 Tips To Avoid A Breach Of Contract Lawsuit Via Email Contract

Don’t Hit Send! Your Digital Correspondence May Be Forming an Email Contract

In the age of smart phones, business deals are frequently negotiated via email rather than traditional letter correspondence. While the use of technology certainly streamlines the process, it can also result in unintended liability.

NY Court Rules Emails Created Binding Contract

Under the Uniform Electronic Transactions Act of 1999, which is now in force in all 50 states, a contract “may not be denied legal effect solely because an electronic record was used in its formation.” The statute also encourages courts to take a “liberal” approach when determining whether a series of emails should be considered a binding legal agreement.

In Stonehill Capital Management v. Bank of the West , 28 NY3d 439 (2016), the New York Court of Appeals ruled that an agreement to sell a distressed loan via the auction loan trading market was enforceable, even in the absence of a formally executed written contract. According to the court, the terms had been established and agreed upon through the documents and emails exchanged by the parties.

As detailed in the court’s opinion, Bank of the West (BOTW) solicited bids on a loan portfolio. The Offering Memorandum stated that the bids were non-contingent final offers that, if accepted by the seller, required execution by the bidder of a pre-negotiated asset sale agreement and an accompanying ten percent deposit. The Memorandum also stated that the loans sold at auction were “subject only to those representations and warranties explicitly stated in the asset sale agreement,” which was included in the Memorandum. Thus, the terms of the sale were pre-set.

In response, Stonehill Capital Management, LLC (Stonehill) submitted a bid. When BOTW accepted Stonehill’s offer, it confirmed the bid in a correspondence setting forth the sale price, the specific loan to be sold, the timing of the closing, and the manner of payment and wire transfer instructions. In subsequent correspondence, neither BOTW nor its counsel indicated that the “Loan Sale Agreement” (LSA) form or any modifications were unacceptable.

In future correspondence, counsel for BOTW did not mention any problems with the LSTA form that Stonehill had sent, but instead requested documentation from Stonehill to move the transaction along towards a mid-May closing date. Specifically, in one email thread, BOTW’s counsel said he was working on getting the documents to Stonehill the following Monday and requested a term sheet from a previous trade to further the process. After Stonehill responded that it could not return the term sheet requested because of confidentiality provisions, offering instead to send an LSTA form, BOTW’s counsel informed Stonehill that it could proceed as described.

BOTW ultimately decided not to go through will the sale, prompting Stonehill to file a breach of contract action. BOTW conceded that it accepted Stonehill’s bid and then refused to transfer the loan, but maintained it had no legal obligation to do so because the parties never executed a written sales agreement and Stonehill failed to submit a timely cash deposit. 

The New York Court of Appeals disagreed. It held that the “totality of the parties’ conduct, and the objective manifestations of the parties’ intent as evidenced by their expressed words and deeds, establishes as a matter of law the existence of the agreement.” As further explained by the court, “BOTW reconsidered the sale — not because of the failure to execute a written agreement or because Stonehill had not tendered the 10% deposit, but because BOTW concluded it would make more money by reneging on the sale. That choice was a breach of its agreement with Stonehill.”

Avoiding Unforeseen Contract Liability

Our attorneys have seen an increase in New Jersey and New York business litigation involving “high-tech” negotiations involving emails and text messages. To avoid a costly breach of contract lawsuit, below are five tips for negotiating a contract via email:

• Clearly state your intentions. The Court will analyze what you said, not your subjective intention when evaluating whether a valid contract has been formed. Therefore, it is imperative to memorialize everything in writing.
• Insist on a formal contract. When negotiating via email, make it clear to the other party that your electronic correspondence should be considered non-binding, and that any agreement is contingent upon the execution of a physically executed, formal written contract.
• Include a disclaimer in all email correspondence. Because employees may neglect to take proper precautions to protect against an accidental contract, it is advisable to include a blanket disclaimer in all business emails. Language may include that the sender is not authorized to bind the company or that the signature block does not constitute a valid legal signature for the purpose of contract formation.
• Address miscommunications promptly. If you suspect that the other party may be interpreting your email exchange as the basis for a binding contract, it is imperative to take swift action, in writing, to correct any misconceptions.
• Provide training to employees. Your staff should understand the hazards of accidental email contracts as well as the company’s policies for negotiating via electronic correspondence.

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Robert Levy, at 201-806-3364.