Email contracts: Forming a contract and employees’ authority to bind their employers

The recent case of Athena Brands Ltd v Superdrug Stores Plc [2019] EWHC 3503 (Comm) highlights the risks of negotiating by email and the importance of clarifying, internally and externally, the extent of an employee’s authority to enter into contracts on behalf of their employer.

We examine a case that looks at email contracts.

Background

In December 2019, the High Court heard an application for summary judgment regarding a dispute over the enforceability of an agreement for the supply of cosmetic products made between employees of Athena Brands Ltd (the Claimant) and Superdrug Stores Plc (the Defendant).

The Claimant was the manufacturer of a new cosmetic product called “Natures Alchemist”, and, after a period of negotiations, arranged with the Defendant to supply the product for resale on an exclusive basis. The negotiations appear to have been primarily between a “Senior Brand Manager” for the Claimant and a “Buyer – Body Skin, Suncare and Travel Accessories” for the Defendant.

The arrangement was agreed by exchange of emails between these two individuals. Its key terms were that the product would be supplied to the Defendant at a set price during a 12-month period, in which the Defendant could order consignments of stock at any time via purchase orders (a process described as “calling off stock”).

The Claimant’s position

The Claimant alleged that the agreement also included a commitment by the Defendant to purchase a minimum amount of stock during this period, at a total value of £1.3m. The Defendant contended that no such term was agreed. Indeed, it alleged that the email exchange did not form a contract at all and that it was not committed to purchasing any products unless and until it submitted a specific purchase order.

In the event, the product turned out to be less popular than anticipated and the Defendant ceased calling off stock 4-5 months into the arrangement. The Claimant therefore issued proceedings to recover the shortfall under the alleged minimum commitment, calculated at just under £980,000.

In its judgment, the court set out the wording of the relevant email exchange which formed the alleged agreement.

The email containing the proposed terms was sent by the Claimant’s employee to the Buyer at the Defendant on 23 May 2017 and said:

“Just to confirm, you are placing orders and committing to the yearly quantity against all lines detailed below…. We have agreed that you will call off stock… on an ad hoc basis within a 12 month period…. [there followed a table of products with quantities and prices] If you could drop me a note to confirm all the above ASAP that would be great, I shall then be in a position to push the button at this end.”

The Buyer replied on 25 May 2017, stating:

“Please go ahead with the below [referring to the claimant’s previous email and preceding chain], happy on Nature’s Alchemist…”

The Defendant did not dispute the emails’ contents or the fact that it had been sent by an employee. However, it contended that, given the circumstances in which the exchange had taken place, no contract had been formed, and certainly not one that committed the Defendant to a minimum amount of stock.

The Claimant made an application for summary judgment.

The Defendant’s position

In order to defeat the application for summary judgment, the Defendant had to prove that there was a real prospect of it successfully defending the claim at trial. It therefore sought to persuade the court that there was an arguable case that a contract had not been formed between the two parties. Its three grounds were that:

• The construction of the wording of the email exchange did not amount to agreement to the alleged terms;
• There was no intention of the parties to create legal relations; and
• The Defendant’s employee did not have actual or ostensible authority to enter into such an agreement.

Formation of a binding contract

For a legally binding contract to be formed, the following components are required: an offer; acceptance of that offer; consideration (i.e. an undertaking or promise, e.g. payment in return for the supply of a product); certainty regarding the key terms of the agreement; and an intention to create legal relations.

Where an agent (e.g. an employee) seeks to contract with a third party on behalf of a principal (e.g. an employer), an additional element is required: that the agent has the principal’s authority to do so.

Authority can be actual (express or implied) or ostensible. Actual authority requires agreement between the agent and principal for the agent to act on the principal’s behalf. This may be done expressly, e.g. via a company board resolution authorising a director or employee to perform a specific task, or impliedly, e.g. by the principal conducting itself in a way which demonstrates approval of the agent’s actions.

Ostensible authority is the appearance to a third party that an agent has due authority to act on behalf of its principal. An agent would have ostensible authority if its principal holds out the agent as having authority wider than its actual authority. If the agent then acts within the scope of this wider authority towards third parties, the principal is bound by the agent’s actions. However, in order for a third party to rely on the ostensible authority of an agent, the third party’s belief in the agent’s authority must be reasonable.

The Court’s Decision on email contracts

Treating the construction of the contract first, on an objective reading of the wording used in the emails, the court found there was clear acceptance of the Claimant’s proposal for the Defendant to commit to a minimum amount of Natures Alchemist products at the price given.

With regard to intention to create legal relations, the Defendant argued that the Buyer did not intend to give the minimum commitment, and that the Claimant’s employee could not have understood the Buyer to intend to agree such terms. The latter line of argument was on the basis that, according to established practice in the fast-moving consumer goods industry of which the Claimant’s employee would have been aware, retailers do not purchase significant quantities of new products upfront.

The court rejected the argument that there was a sufficiently definable industry in the consumer goods sector that might have a uniform and well-known method of purchase, under which minimum purchase commitments might be excluded. Further, there was nothing in the history of negotiations between the parties that might contradict, in the eyes of the Claimant or an objective observer, the Buyer’s apparent agreement to a minimum quantity or his intention to bind his employer.

On the question of the Buyer’s authority to contract, both the Buyer and the Defendant denied that he had express authorisation to give such a minimum purchase commitment on behalf of the Defendant. Turning to ostensible authority, the court first considered a set of guidelines provided by the Defendant to prospective suppliers, which detailed the process under which it purchased products for resale. These guidelines held out the Buyer as the person with whom terms of trading were to be discussed and agreed. However, they gave no indication of any limit on the terms that a Buyer might agree with a supplier, nor stated that such terms required ratification or confirmation by another member of staff. The court also noted that at no point had the Buyer explicitly informed the Claimant’s employee that he could not bind his employer to a minimum commitment (and even if he had done so in the past, by the time the relevant negotiations took place, he must have changed his position). The court therefore found that the Buyer did have ostensible authority to give the minimum purchase commitment, and it was not unreasonable for the Claimant to rely on that authority.

Based on the above reasoning, the court judged that none of the defences proffered by the Defendant had any real prospect of success and saw no possibility of further evidence being made available at trial that might make good its case. The court therefore granted summary judgment in favour of the Claimant.

Email contracts – Conclusions

Despite the relative brevity and informality of the contents of the emails exchanged between the parties in Athena Brands v Superdrug, this exchange was found to be sufficiently clear to create a liability of £1.3m on the part of the Defendant.

This decision is a good reminder that a legally binding contract requires the existence of a number of components, and that the court will exercise objective tests to determine its validity and enforceability. This means that in the course of negotiations by email, even if the style of communication appears casual, or if one of the parties does not intend to create a legally binding obligations, a court may find that a contract has nevertheless been made.

This case also highlights the importance of making clear to employees (and, where appropriate, to external parties) the extent of their powers and responsibilities when acting on their employer’s behalf, and the potential cost of failing to do so.

For expert legal advice on email contracts, or any contractual disputes, please contact our Litigation and Dispute Resolution team.