A January 2008 decision of the Appeals Court of Massachusetts provides a cautionary tale regarding the use of e-mail when negotiating agreements. In Basis Technology Corporation v. Amazon.com, Inc. No. 06-P-1048 (Mass. App. Ct.), the Appeals Court of Massachusetts heard the appeal of Amazon.com Inc. ("Amazon") from the trial judge’s finding that e-mail messages exchanged between counsel for Amazon and counsel for Basis Technology Corporation ("Basis") constituted a binding settlement agreement between the parties.
The original dispute arose in connection with a services agreement entered into by Amazon and Basis in September of 1999. Pursuant to the services agreement, Basis agreed to provide Amazon with certain technical services related to the development of an electronic commerce system for the Japanese market. The services agreement provided that certain "business consulting" services were "out of scope" services which would be covered by separately negotiated contracts. Shortly after entering into the services agreement, Basis and Amazon entered into a stock purchase agreement pursuant to which Amazon agreed to purchase shares of Series A preferred stock in the capital of Basis and, as part of the transaction, acquired a seat on Basis’ board of directors.
In March 2003, Basis brought an action against Amazon in which it claimed breach of fiduciary duty, quantum merit, and violations under The General Laws of Massachusetts for non-payment for the performance of "out of scope" services. On March 23, 2005, after the third day of evidence at trial and following settlement discussions, counsel for Basis sent an e-mail to Amazon counsel which purported to confirm the "essential business terms of settlement between" the parties. The e-mail set out six (6) terms and ended with a request for Amazon counsel to contact the sender if the e-mail did not accurately reflect the settlement terms reached earlier in the day. The following morning, Amazon counsel sent an e-mail to Basis counsel with the one-word reply: "Correct". Later that morning, counsel for both parties reported to the court that they had reached a settlement of the dispute and the trial was ended.
Shortly following the end of the trial, the parties began drafting a settlement agreement to memorialize the terms of settlement set out in their e-mail correspondence. It was during this process that a further dispute arose regarding one of the terms of settlement involving the conversion of the Series A preferred shares held by Amazon to Common Shares. The parties became deadlocked and Basis filed a motion to enforce the terms of settlement, as evidenced by the earlier e-mail exchange. The trial judge granted the motion, with some modifications made to the terms of settlement.
In rejecting Amazon’s appeal and affirming the trial judge’s decision, the Appeals Court agreed with the trial judge that that the "essential business terms" were solved by the e-mail exchange and that the drafting of the settlement agreement was for the purpose of recording the settlement terms and "not to create them".
While the decision of the Appeals Court of Massachusetts has no binding effect on courts in Canada, it is not hard to imagine a Canadian court reaching a similar conclusion in a case based on similar facts. As such, the case illustrates that when negotiating the terms of a potential agreement via e-mail, one must take care to clearly indicate that communications that are not intended to serve as an offer capable of being accepted by the recipient are identified as such. Words such as "for discussion purposes only" should be used in such communications to signify that negotiations are continuing and that an agreement has not yet been reached. Similarly, phrases such as "we agree", or "I confirm our agreement" should be avoided where communication of an agreement is not intended. In cases where the key business terms have been settled but that no binding agreement is intended until a formal written agreement has been entered into, any summary of key business terms should include language such as:
The above listed terms are not intended to be legally binding on either party, nor do they represent a complete summary of the contractual, material, or commercial aims of the parties. Such a binding agreement will arise only if and when all material terms and conditions have been set forth in a definitive agreement and executed by both parties.