Risks of Electronic Contracting

How easy is it to enter into a multi-million dollar (or more) contract via e-mail?  As easy as clicking "send" on an e-mail, it would seem.

Under the Texas Uniform Electronic Transactions Act (UETA), parties can enter into a legally binding agreement by e-mail or other electronic communications, even for matters that traditionally were required to be in writing, such as agreements to purchase real property, including oil and gas interests.  Under UETA, if the parties intend to enter into an agreement electronically, an otherwise enforceable agreement will not be unenforceable solely because it was entered into electronically.

A recent court case, 2001 Trinity Fund, LLC v. Carrizo Oil & Gas, Inc., which was decided by a Texas state appeals court in Houston, illustrates the danger of negotiating the terms of a business transaction over e-mail.  In that case, the trial court analyzed a series of e-mail messages between two oil and gas companies and concluded that the e-mails collectively constituted a binding legal agreement to amend and revive their existing participation agreement.  The e-mails including statements such as:

• “I agree in principle, but need to have this interest flow directly back to me.”

• “[i]f you are in agreement in principle, then I’m assuming we can work out the mechanics.”

• “That will work.  I will call before the day is over and give you an exact time.”

• “Yes, has been my final answer.  I will give you the final date ASAP.”

• “As I told you before, I intend on being involved in the drilling program.”

The trial court initially awarded one of the parties over $10 million in damages for the other party’s breach of the alleged electronic agreement. That trial court verdict was later overturned on appeal when the appellate court reached the opposite conclusion, finding that the evidence was legally insufficient to support the jury’s conclusion that an electronic agreement existed.

Nonetheless, the takeaway is obvious.  When in discussing a business transaction via e-mail or other electronic means, one should make sure it is crystal clear whether or not the party desires or intends to enter into an electronic agreement, or if the party does NOT have such desire or intent.  Otherwise, courts may be deciding whether or not an electronic agreement exists, and you may not like its decision.