Contract formed through exchange of emails
PROTON ENERGY v ORLEN [2013]
This case does not make new law but it is a reminder that contracts can be formed in ways other than the execution of a formal written contract. The Court considered whether a binding contract had been concluded between the parties, based on a review of their negotiations which was largely through an exchange of emails. It found that there was a binding agreement as, even though not all of the terms had been finalised, the parties had agreed on all of the essential terms.
Facts:
- Proton Energy (P) sent an email to Orlen (O) making a “firm offer” to sell O a certain quantity of crude oil, specifying the price, delivery period and the ports of delivery.
- Emails were exchanged later the same day and P agreed three out of four changes proposed by O and stated in relation to the fourth, “Contractual price is fixed as per the confirmed offer. All other contractual terms not indicated into the offer shall be discussed and mutually agreed between the parties on contractual negotiations”.
- O replied by return email saying, “confirmed”.
- P contracted at once to purchase the necessary oil from its supplier.
- A draft contract and comments on its terms were then exchanged but two weeks later, the parties fell out. O had failed to open the required letter of credit or to take delivery of the cargo, which P treated as repudiatory breaches of contract.
- The issue for the Court was whether the parties had entered into a binding agreement or was it simply an agreement to agree with uncertain terms and hence unenforceable?
Decision:
- The Court held that a contract had been formed as it viewed the parties as having agreed on all the terms that they objectively regarded as essential to form a binding agreement when they exchanged the initial emails.
- The reasoning behind the Court’s decision can be summarised as follows:
- ‘Firm offer’: The language used in the exchanges was one of commitment. The offer was expressly stated to be a "firm offer". The language requested a binding commitment – a definite acceptance or rejection – in reply. O gave a definite “confirmed” acceptance.
- Industry practice: The deal was described as a, “classic deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later”. The judge recognised that business practice means parties will not always conduct all aspects of their dealings to fit the conventions of English contract law.
- Urgency: P made the urgent nature of the deal very clear. The offer was intended to expire at close of business on the same day and demanded an immediate, binding commitment from both parties.
- Subsequent conduct: Once accepted, fulfilling the order would be required immediately afterwards. P had contracted with its own supplier extremely quickly and O had taken steps to facilitate delivery of the oil.
Points to note:
- This case followed the decision in RTS v Müller [2010], which confirmed that a contract may come into existence, even if certain terms have not been finalised, if an objective appraisal of the parties' words and conduct leads to a conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.
- A similar outcome was also reached in Newbury v Sun Microsystems [2013]. In that case, the Court held that a letter from S to N setting out the terms of a proposed settlement and a subsequent letter of acceptance from N in accordance with those terms, constituted a binding agreement. Although S’ letter stipulated that the settlement was to be "recorded in a suitably worded agreement", the Court considered that this was not a reference to terms that were yet to be negotiated and agreed, but simply an indication that the settlement reached would subsequently be "committed to writing as an authentic record". Once N had accepted the terms in the letter, S was therefore not in a position to negotiate further terms which it had attempted to do. If the letter had included the words ‘subject to contract’, it would have been clear that S intended further negotiations to follow before a binding settlement was reached.
- Contracting parties should therefore be careful that during negotiations they are not acting in a way which could be construed as making a contractual commitment to each other before they wish to do so. All that is required is a binding offer outlining essential terms which is accepted in the same terms. Wording such as ‘firm offer’ should be avoided if a party does not intend to be bound by it.
- Using ‘subject to contract’ can help to avoid a binding contract provided it is applied consistently and the parties’ actions do not contradict the intent behind this. If one party does not intend to be bound by any terms received from the other party during any stage of negotiations, it should raise an objection without delay. This was undoubtedly a borderline decision but it does emphasise the possibility of contracts being formed earlier than one might have anticipated.