Contracts by Email: Writer Beware

Important business transactions are regularly decided and agreed upon via email these days.   Email is instantaneous, easy, (mostly) secure, and with the proliferation of smart phones, allows big decisions to be made as quickly as one can type on her Blackberry.  Despite the obvious advantages of  email in business, there is a very real danger of inadvertently binding oneself to a contract through informal email exchanges.  If an email or chain of emails contains an offer of a deal by one party, and the other party responds by email accepting the deal, then there’s a good chance that a contract has been formed, despite the fact that no signatures are exchanged (and even if one party had no intention of entering into a contract in the first place).

A Cautionary Tale from New York

A court in New York recently recognized that a series of emails exchanged between two parties constituted a valid modification to one party’s existing employment agreement.  Stevens v. Publicis, S.A., et al., 50 A.D. 3d. 253, 854 N.Y.S. 2d 690 (N.Y.A.D. 1 Dept. 2008).  Specifically, one of the emails exchanged between the parties included a detailed proposal of employment duties, and it was followed by an email from the other party accepting the proposal.  Stevens, 50 A.D. 3d 253.   The court found that the parties had agreed “in writing” to modify one of the parties’ duties under the employment agreement, and the emails were “signed writings” because they included the parties’ names and signature blocks at the end of their emails.  The court reasoned that the parties’ names signified an intent to authenticate the contents and satisfied the requirement of the employment agreement that any modification be signed by all parties.

Another Case In Massachusetts

In another case, the court  bound two parties to settlement terms that were exchanged via email by the parties’ respective attorneys.  The first email, written by one party’s attorney, summarized the settlement terms.  This email was followed by a one-word reply from the opposing attorney stating  that the terms were “correct.” Here, the court ruled that the emails constituted a sufficiently complete and unambiguous statement as to the terms of the settlement agreement, and that both parties intended to be bound by that communication of settlement terms.  Basis Technology Corp. v. Amazon.com Inc., 71 Mass App. Ct. 29, 878 N.E.2d 952 (Mass. App. Ct. 2008).

Takeaway

As these two cases demonstrate, although email may be an informal means of communication, the substance of emails is subject to the same level of scrutiny as signed writings.  As such, it is very important to be particularly cautious when discussing a possible business deal in an email.  At bottom, if all you intend is to negotiate issues leading up to a formal written and signed contract, make sure you clearly state that in your emails.

If you have any questions regarding the formation or enforcement of contracts, please call one of our experienced attorneys at Acumen Law Group.

Authored by Dominika Szreder Fard, Esq. and Shoko Asaka, Law Clerk

Illinois Home Repair and Remodeling Act: A Cautionary Tale for Contractors

The Illinois Home Repair and Remodeling Act, 815 ILCS 513, is a statute obligating residential contractors to (i) have a written contract, (ii) include certain terms in the contract, such as price, insurance, and dispute resolution, (iii) provide the homeowner with a brochure informing them of certain rights, and (iv) obtain a receipt for giving the brochure.   Recent appellate court decisions involving the Act reveal an inconsistent landscape with respect to a contractor’s ability to recover monies owed where the Contractor fails to comply with the Act’s strictures.  Ultimately, the issue of whether a contractor can recover its fees from a homeowner  may depend on  which judicial district the issue is litigated in.  A map of the various judicial districts may be viewed here.

Fourth District

In 2007, the fourth district in Smith v. Bogard held that a contractor’s failure to comply with the Act is an absolute bar from recovery, i.e., prevents him from recovering any payment including mechanics liens, breach of contract claims, unjust enrichment claims and the like.

First District

In the first district, the court in K. Miller Construction Company, Inc. v. McGinnis provided that a contractor’s failure to comply with the Act still prevents the payment recovery based on a mechanic’s lien claim and breach of contract claim; however, the contractor may recover payment based on a claim for quantum meruit (unjust enrichment, which provides that even if there wasn’t a contract, the owner benefited from the work and should have to pay for that work).

Second District

In a decision subsequent to K. Miller Construction, the second district held in Artisan Design Build, Inc. v. Bilstrom that a contractor’s failure to provide the homeowner with the brochure required under the Act does not remove the contractor’s right to recover in either equity (quantum meruit) or law (breach of contract, mechanic’s lien, etc.).  So what do these decisions mean for residential contractors and homeowners?

Scenario

Consider the following scenario: a contractor finishes his work under a home-repair contract with a homeowner, and is owed $10,000 for the job by the homeowner, but fails to provide a copy of the brochure, or fails to comply with other provisions of the Act.  In the fourth district, the homeowner will not have to pay the $10,000 even if his house is completely repaired according to the contract.  In the first district, the contractor may recover the payment because the homeowner in fact benefited from the contractor’s work, but the recovery amount may be less than $10,000.  Finally, in the second district, the contractor can recover the payment, either in law or in equity.

Conclusion

Although the judicial decisions in the first and second districts are more favorable to contractors, they are only controlling over law suits filed within these districts.  Given the inconsistency of rulings between the various appellate districts, it is likely that the Illinois Supreme Court will intervene and issue an opinion on the matter.  Until that time, however, contractors  should strictly comply with the Act.

The best way to ensure that you are in compliance is to consult with an Illinois attorney who is familiar with the Home Repair and Remodeling Act.   If you have any questions regarding the Act or construction law generally, please call one of our experienced attorneys at Acumen Law Group.

Authored by Bardia Fard, Esq. and Shoko Asaka, Law Clerk

The Illinois Credit Agreements Act: A Lender’s Best Defense, A Debtor’s Greatest Obstacle

In Illinois, if any aspect of an agreement is deemed to be a “credit agreement” under the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq. , and if the credit agreement is not a writing signed by both parties, then debtors may be barred from asserting certain claims, counterclaims, and defenses against the lender.  Klem v. First National Bank of Chicago, 275 Ill. App.3d 64 (1995).  A credit agreement is defined as any agreement by a creditor to lend money, extend credit, or forbear repayment for commercial purposes.  Under the Act, credit agreements, or amendments thereof, are unenforceable  unless both parties sign the agreement or amendment.  In this regard, the Act has a particularly harsh effect on debtors trying to sue lenders for deceptive  statements or conduct made in relation to a credit agreement.  The Act expressly precludes debtors from asserting claims/defenses like fraud, part performance, and equitable estoppel based on a lender’s oral statements or conduct.

When Does the Act Apply?

The Act applies to any commercial credit agreement or other non-credit agreement that is an integral part of a commercial credit agreement, e.g., a guaranty.  The Act’s requirements can be characterized as a much stricter incarnation of the common law statute of frauds, as the Act requires a writing signed by both parties in order for a credit agreement to be  enforceable.  This requirement not only applies to the initial credit agreement but also extends to any modifications and amendments of such agreement.  Even if only a portion of an agreement involves a credit agreement, the Act still applies.   The application of this Act by Illinois courts provide commercial lenders with significant protection, while leaving debtors vulnerable to unscrupulous lender conduct.  So what does this mean?

Scenario 1: Oral Statements

Let’s assume there is an existing loan agreement between a lender and a debtor, and before the agreement matures, the lender orally agrees to extend it for another two years over the phone.  The lender even sends the debtor an email summarizing the terms of the oral promise.  As a debtor, should you rely on this oral promise?  The answer is no.  The promise has to be in writing and signed by both lender and debtor to be enforceable.   Otherwise, the lender can change its mind and demand that the debtor pay the full amount on the original maturity date.  In this scenario, the debtor would have no recourse against the lender because of the Act.

Scenario 2: Reliance on Oral Statements

Now let’s assume that a lender induces a debtor to execute a $1 million promissory note, payable to the lender.  The lender orally promises that the debtor’s liability on the note will be extinguished upon the lender’s investment in the debtor’s company, which the lender promises it will make.  Relying on this promise, the debtor also invests his own $1 million in the company.  The lender later decides not to invest in the company and demands payment on the promissory note.  Can the debtor claim fraud by the lender?  Breach of contract?  Promissory estoppel?  No, no and no.  Fortunately for the lender, and unfortunately for the debtor, all of these claims/defenses are barred because they relate to a un-memorialized and un-signed credit  agreement, leaving the debtor personally liable to the lender for $1 million.

In Conclusion

If you are a debtor, before entering into any commercial loan or credit agreement, ensure that the agreement is in writing and signed by both you and the lender.  Any amendments or modifications to the agreement — however minor — also must be in writing and signed by both parties.  If in doubt as to whether the agreement is a “credit agreement” under the Act, put it in writing and have both parties sign it.  If you don’t, you risk being denied certain legal protections against the lender.

Conversely, if you are  a lender, ensure that your credit agreements contain a choice of law and venue selection provision mandating that disputes be litigated under Illinois law  in Illinois courts.  Lenders should take advantage of the broad protections afforded under the Act.

If you have any questions regarding commercial loans or credit agreements, please call one of our experienced attorneys at Acumen Law Group.

Authored by Bardia Fard, Esq. and Shoko Asaka, Law Clerk