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I’m often asked whether the exchange of email messages can result in a binding contracts.  As is so often the case with legal questions, the answer is, it depends.  Generally speaking, an agreement must contain four essential ingredients to be regarded as a contract. Without each of them, the agreement will not be legally binding.

Offer:  There must be a definite, clearly stated offer to do something (i.e., “I will purchase your car for $1,000.00”).  However, what sounds like an offer may be an invitation to treat, which is essentially an invitation to other persons to make an offer, or an offer to consider offers (i.e., advertisements, price lists, estimates, etc.).

Acceptance:  Acceptance means that the offer was accepted exactly as it was stated without conditions. If any new terms are suggested this is regarded as a counter offer, which can be accepted or rejected.

Intent:  A contract requires that the parties intend to enter into a legally binding agreement.  In other words, they must understand that the agreement can be legally enforced. The intention to create a binding agreement is presumed, so the contract doesn’t have to expressly state that the parties intend for it to be binding.  This means that if the parties do not want to be bound by their agreement, they have to clearly state that fact in the agreement.

Consideration:  In order for a contract to be binding it must be supported by valuable consideration.  Consideration is essentially an exchange of promises (i.e., I promise to pay you $1,000.00 based on your promise to sell me your car).  While consideration usually involves the payment of money, it can be anything of value, including the promise not to do something.

As long as they contain those four elements, contracts don’t even have to be formally written.  They can be scrawled on the back of a cocktail napkin, or even be verbal, unless the law otherwise requires a writing (most contacts involving the transfer of real property must be in writing).

That brings us to the issue of contracts via e-mail.  Unlike a cocktail napkin, there’s no way to sign an e-mail, but all the other requirements summarized above can easily be found to exist in an exchange of e-mails.   For example, in the Tennessee case of Waddle v Elrod, two family members sued each other over the ownership of a parcel of land.  Just prior to trial, the parties met in an attempt to settle the dispute, and their respective attorneys exchanged emails.  One attorney’s message set forth proposed settlement terms, including the transfer of the land. The other replied with the phrase “that is the agreement” and typed his name at the bottom of the message.  The trial court found that the email exchange constituted a binding agreement with the attorney’s “signature” at the bottom of the email message rendering it a “signed memorandum” which satisfied the requirements for the sale of real property under Tennessee law.

In the Pennsylvania case of Republic Bank Inc. v West Penn Allegheny Health System Inc., there was a series of email messages between two parties agreeing to the sale of various pieces of medical equipment. The hospital offered to purchase equipment at specific prices, and the bank accepted the offer.  The hospital never purchased the equipment.  After selling the equipment at an auction, the bank sued the hospital for breach of contract.  The hospital argued that the arrangement was never set forth in a purchase order or similar document,  but the trial court found that a valid contract was formed through the email exchanges.  On appeal, the U.S. Court of Appeals for the 10th Circuit held that the bank’s reply was intended as an acceptance and that the hospital understood it as such based on its later internal communications.

Both of these cases demonstrate thatIn other words, all business owners should be careful to ensure that their emails include language specifically stating that a contract cannot be formed through an e-mail exchange, unless they’re willing to be bound.