A recent case has highlighted the risk of employees inadvertently creating legally binding contracts by email.
The case highlights the importance of ensuring that employees are trained to understand when and how a binding contract can come into force, and the importance of clarifying, both internally and externally, the extent of an employee’s authority to enter into contracts on behalf of their employer.
The case considered the enforceability of an email agreement for the supply of cosmetic products made between employees at Athena Brands Ltd (“Athena“) and Superdrug Stores Plc (“Superdrug“). The arrangement, agreed over email by a ‘Senior Brand Manager’ of Athena and a ‘Buyer’ for Superdrug, was that Athena would supply product to Superdrug at a set price during a 12 month period and in return, Superdrug would commit to purchase a minimum amount of stock during this 12 month period (at a total value of circa £1.3m).
In the email correspondence, the Superdrug employee stated “Please go ahead with the below…” [referring to the email chain which referenced the purchase of a minimum amount of stock by “committing to yearly quantities”].
Superdrug’s position
Superdrug ceased purchasing around four (4) months into the arrangement and Athena claimed for the shortfall of the minimum volume contract.
In response, Superdrug argued that:
- the email exchange did not create a contract because Superdrug’s procedure of submitting a specific purchase order was not followed;
- given the informal circumstances in which the exchange had taken place, no contract had been formed, and certainly not one that committed Superdrug to purchase a minimum amount of stock.
Superdrug also pointed to the fact that its standard practice was that purchase contracts would only be entered into by issuing purchase orders, and that it was standard practice in the industry not to agree significant volume commitments up front.
Superdrug also argued that the ‘Buyer’, who had negotiated the arrangement, did not have actual or ostensible authority to enter into such an agreement.
The Court’s Decision
The court found there was clear acceptance by Superdrug of the obligation to commit to purchase a minimum amount of stock, and there was a contractual commitment in place.
There was nothing in the discussions between the parties, nor any clear method of contracting in the industry, that might contradict, in the eyes of Athena or an objective observer, Superdrug’s apparent agreement to purchase a minimum quantity or its employee’s intention to bind Superdrug.
On the question of the Superdrug employee’s authority to contract, the court noted that no relevant restriction, as to the employee’s authority, was identified to Athena, and in fact guidelines referred to the employee as the person who would discuss and agree terms of trade. Therefore, it was not unreasonable for Athena to rely on this held-out authority.
Conclusion
Despite the relative brevity and informality of the contents of the emails exchanged between the Athena’s ‘Senior Brand Manager’ and the Superdrug’s ‘Buyer’ respectively, this exchange was found to be sufficiently clear to create a liability of £1.3m on the part of Superdrug.
This decision emphasises the importance of:
- making clear to employees the extent of their powers and responsibilities when acting on their employer’s behalf;
- ensuring any limits of authority are communicated to third parties;
- training your employees, so that they understand when a contract may be created, and are able to craft email correspondence and pre-contract communications and discussions carefully; and
- clear communication and systems and controls being put into place to help reduce the risk of contracts being created outside of due process.
How we can help
Through our strategic partnership with Ward Hadaway law firm, Ward Hadaway provide bespoke contract law training to businesses of all shapes and sizes. Their classroom based training is tailored to the nature of the business and the products/services that you supply, and covers how contracts are formed, how to use your contract processes, and key risk areas within commercial contracts.
