'But we were just negotiating:' Understanding when a string of communications (even emails) may establish a binding contract
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Editor's Note: Justin M. Lewis is a member of the Real Estate Practice Group at Ward and Smith, P.A.
The first draft of an agreement is rarely agreed to and signed by both parties. After an initial offer is made, the other party will typically propose revisions upon which it conditions its acceptance of the offer. The negotiation between the two parties may go on for quite some time and may consist of several marked-up drafts of the agreement and revisions to the agreement shown in track changes, as well as phone calls, emails, and letters regarding the material provisions of the agreement. While the ultimate goal of both parties is to reach an agreement and sign one "final" version of a contract containing all agreed-upon terms and conditions, if the parties are not careful, their correspondence alone may establish a contract, enforceable under the Statute of Frauds, even if a "final" formal version is never signed.
The Statute Of Frauds
Most states, including North Carolina, have one or more laws that require certain agreements to be in writing and signed by any individual or entity against whom the agreement will be enforced. The primary purpose of such statutes is to prevent fraud resulting from the "selective memories" of the parties involved. Accordingly, the statutes are commonly called "Statutes of Frauds."
If the subject matter of a contract brings it within the protection of a Statute of Frauds, the Statute will prevent one party from enforcing the terms of a contract against another party who did not agree to those terms in writing.
The various Statutes of Frauds are intended to prevent the creation of an enforceable contract until both parties agree to the terms in writing and "sign" a contract, but a contract does not necessarily have to consist of one hard copy document signed in pen by both parties.
What Types Of Agreements Need To Be In Writing?
In most, if not all, states, including North Carolina, a Statute of Frauds requires that all contracts or agreements to sell or convey land, or any interest in or concerning land including easements, options to purchase, rights of first refusal, and certain leases, must be in writing and signed by any party against whom enforcement is sought. However, many people do not realize that more than just contracts and agreements involving real property must be in writing and signed in order to be enforceable. For example, the following types of agreements must be in writing in order to be enforceable:
• Generally, contracts for the sale of goods for the price of $500 or more, except:
When the goods are specially manufactured goods;
When payment or delivery of the goods has been made and accepted; or,
If the party against whom enforcement is sought admits in court that a contract was made;
• An agreement that, by its terms, cannot be performed within one year;
• An agreement to pay the debt of another, sometimes called a "guaranty";
• An agreement by a debtor to pay a debt which has been discharged by bankruptcy; and,
• Commercial loan commitments by a bank, savings and loan association, or credit union for loans in excess of $50,000.
When Is The Contract Created?
A written agreement does not need to be formal; an agreement handwritten on an index card may be sufficient. Nevertheless, the handwritten agreement still must:
Evidence a "meeting of the minds"; and,
Contain all of the terms and conditions necessary to make the particular agreement enforceable.
To determine whether there has been a "meeting of the minds," courts look to the parties' intent. While there are no magic words, if the writing in question clearly establishes an offer by one party and an acceptance of that offer by the other party, there has been a meeting of the minds.
In addition to a meeting of the minds, the agreement must also contain all the material provisions and cannot leave any material provisions open for future agreement. For example, a lease with an option to purchase agreement must contain a purchase price or a definitive method to determine the purchase price. If the lease provides that the landlord and tenant can each hire an appraiser to determine the value of the property and the average of those two appraisals will be the purchase price, the lease is valid and enforceable. If, however, the parties simply promise to agree later on a purchase price, the lease will be held void for uncertainty and indefiniteness. Such agreements are referred to as unenforceable "agreements to agree."
What Constitutes A "Written Contract" Under The Statute Of Frauds?
We typically think of a contract as one more or less "formal" document signed by all the parties to the agreement, but the Statutes of Frauds do not require all the terms of a contract to be set out in one document. North Carolina courts have held that a series of emails and letters between two parties regarding the negotiation of the purchase of land can, when taken as a whole, create a written contract under the applicable Statute of Frauds. As long as the correspondence is from a person authorized to enter into the contract and contains a meeting of the minds and all the material provisions of the deal (offer and acceptance), a legally-enforceable contract may be created without either party signing one document containing all those terms.
For example, two parties are working on the terms of a settlement agreement regarding the purchase of land. The parties and their attorneys exchange several letters and emails which identify the parties and which contain a description of the property, the purchase price, and the date by which the sale must close. The correspondence also contains language that evidences offer and acceptance based on the terms contained in the various written communications. Although a single, formal contract containing all of the terms agreed upon is never signed, a written contract may have been created and will not be void under the Statute of Frauds.
Who Can Sign The Agreement?
A written agreement must also be "signed" by the proper parties in order for the agreement to be binding. While this may seem simple, issues commonly arise when someone other than the actual party to the contract signs it.
In the example given above (which is based on an actual North Carolina case), the correspondence which led to the creation of a contract was mainly between the parties' attorneys and not the parties themselves. Under the Statute of Frauds, a contract may be signed by a party's agent and, in North Carolina, there is a presumption in favor of an attorney's authority to act on behalf of a client. That means that the party trying to assert the Statute of Frauds as a defense will have the burden of proving that the party's agent, the attorney, did not have actual authority or "apparent authority" (authority appearing to a reasonable third party to exist based on the facts and circumstances even though the particular attorney/agent does not have actual authority) to act for that party. This may be quite difficult to prove. Other agents who may or may not have "apparent authority" (even though they may not have actual authority) can be, for example, a vice-president, comptroller, sales agent, purchasing agent, and so on. Often it is very beneficial to a negotiating party to specifically state who has authority, and who does not have authority, to bind the party, in order to protect itself from agreements "signed" by a person with only apparent, but not actual, authority.
In most cases, the Statute of Frauds will provide a defense to the enforcement of agreements which were not agreed to in a writing and signed by the parties to be charged. But what constitutes a written contract and signature has expanded beyond the traditional concept of a signed, written contract.
The next time you find yourself negotiating the terms of a contract, be careful to establish early in the negotiations that no agreement will be valid and enforceable unless and until one written contract containing all the terms of the agreement is signed by both parties and who has the authority to sign a contract for you or your business.
© 2014, Ward and Smith, P.A.
Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Justin M. Lewis practices in the Real Estate Practice Group where he concentrates his practice in commercial real estate, leasing, and community associations law. Comments or questions may be sent to firstname.lastname@example.org.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.
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