Oddly enough I’ve received a few calls all on the same topic recently. Though the facts generally differ, the situations basically all involve negotiations regarding a deal of one sort or another, where my guy is either talking or e-mailing someone about the business terms of a deal. In some cases, its been clearly stated that there will be a written agreement that will be signed to put the deal in place, in others, this isn’t the case (though it could be argued that that was the understanding). Then, in each case, something goes off the tracks and my guy decides he doesn’t want to go through with the deal. And then, in response, the other side makes rumblings about having a deal, and breach, and lawsuits… which is about the time my phone rings.
So what’s the deal with situations like this? Can you form a binding contract through an exchange of e-mails, or even through a simple phone call or discussion? Absolutely. There’s nothing preventing two people from forming a contract through e-mails or oral discussions. There are a few exceptions (e.g. real estate, other statutory things) but generally if you say “We have a deal” then, my friend, you better be prepared to live with it.
Even scarier is the fact that this can still be the case even if both of you refer to a written agreement that will be drawn up later. There have been cases in the past where the courts have found that the business folks were in agreement on all the major business points, and that the signing of a written contract later on was a mere formality, and was not required in order to have a binding contract. So, if you go back and forth on e-mails and hammer out prices, scope of services, term, etc. and then say that you have a deal to the other side, and you just need to hand it over to the lawyers to get it papered, well, you may already have yourself a binding contract, whether or not you actually want it, or decide you don’t want it later on.
The moral of the story? If you want to make absolutely sure you don’t have a binding contract until you have a real contract signed by both you and the other side, make sure that’s what you say – “We don’t have any obligation or contract until our lawyers finish the paper and we sign it.” Or say its conditional on agreeing to a definitive agreement. Or that everything is non-binding until you sign an agreement. Don’t say “we have a deal” or “agreed” or anything like that. Because if you do, that’s exactly what you’ll have. And then if you don’t want to go ahead, well, you’ll likely be calling me, or another lawyer.
Editorial comment: It always surprises me that these situations result in rumblings of lawsuits, etc. Very often, the rumblings are from a rather pissed off business person who has spent a fair bit of time on a deal that has fallen through. Most people will understand that even if someone says in an e-mail or conversation that they have a deal, that some kind of paper will need to be signed. And if that hasn’t happened, there are likely good reasons and it will likely be an unpleasant transaction if it actually starts off with one guy suing the other. For this reason, its rare that a situation like this will end up with someone actually suing someone else. That being said, if the stakes are high enough, it will happen. And it has happened (which is why there is case law on the subject). So why take the risk?