The Court of Appeal has confirmed that a sequence of emails can be sufficient to create a legally binding contract and guarantee.
It has long been accepted that contracts can be created quite informally, eg. in conversation or by exchange of correspondence. However, Section 4 of the Statute of Frauds 1677 confirms that guarantees must be made in writing and must be signed by or on behalf of the party giving the guarantee.
The historically accepted wisdom was that this required one signed document. This wisdom was put to the test before the Court of Appeal in Golden Ocean Group Limited v Salgaocar Mining Industries PvT Limited.
In an exchange of emails in January and February 2008, Golden sought to negotiate a 10 year charter to Trustworth Shipping PvT Limited, with Trustworth’s obligations guaranteed by Salgaocar.
The negotiations were undertaken by agents on both sides and were, the Court of Appeal decided, concluded by emails of 2 February 2008 and 21 February 2008. Trustworth then backed out of the charter, and Golden sought to recover over US $50million from Salgaocar.
Salgaocar defended the action arguing that:
- Section 4 of the Statute of Frauds required there to be one document to create a valid guarantee;
- An email signature, at least in the form given, was insufficient.
The Court of Appeal rejected Salgaocar’s arguments, finding that there was no legal requirement for the guarantee to be in one, or even a limited number of documents, however convenient that might be.
Further, adapting the old legislation to modern business practices, an email signature, even one as informal as “Guy” (the agent’s given name), was sufficient to be a ‘signature’ if there was an intention to create a legally binding guarantee.
The practical consequences of the Court of Appeal’s decision are that businesses must be very careful when negotiating contracts and guarantees so as to avoid making unintentionally expensive commitments.
When negotiating contracts, parties should be aware that a legally binding agreement need not be set down in one hard copy document signed by senior management. It should be made very clear in correspondence that a contract will only be created when recorded in one hard copy document and signed in manuscript. Further, that agreement should contain an ‘entire agreement’ clause preventing the incorporation of terms not contained therein and no work should be undertaken until that agreement is signed.