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June 8, 2016

Best Practices: Hit Send With Caution: Electronic Communications Can Modify a Written Contract and Lead to Results that Are Far from “Awesome!”

by Katherine D. Tohanczyn

It has been decided that informal communications, such a instant message (“IM”), can modify a signed contract. A Florida Court, applying Delaware law, held that an IM effectively amended a written contract, which contained a provision that required all changes to be made both in writing and signed by the parties. The result: a judgment in the amount of $1,235,655, plus costs, fees and interest.

In the case, Smoking Solutions and CX Digital had entered into a written contract, which authorized CX Digital to refer internet traffic to Smoking Solutions’ e-commerce site to purchase Smoking Solutions’ products. For each referral that purchased a product, Smoking Solutions was obligated to pay CX Digital a $45 commission, but the contract capped the commissions at 200 customers per day.

Over the course of a day, an account manager at CX Digital and a vice president for advertising at Smoking Solutions (and the same company officer who had signed the contract on behalf of CX Digital) communicated through IM. The relevant part of the conversation was as follows:

[CX] (2:50:08 PM): We can do 2000 orders/day by Friday if I have your blessing

[CX] (2:52:13 PM): those 2000 leads are going to be generated by our best affiliate and he’s legit

[Smoking Everywhere]: is available (3:42:42): I am away from my computer right now

[CX] (4:07:57 PM): And I want the AOR when we make your offer #1 on the network

[Smoking Everywhere] (4:43:09 PM): NO LIMIT

[CX] (4:43:21 PM): awesome!

Based upon the vice president’s comment that there was “no limit” on the commission that could be earned per day, CX Digital’s invoice the following month was for almost $1.3 million (an average of 1,244 sales per day). Smoking Everywhere refused to pay the bill on the grounds that it violated the contractual cap. CX Digital sued Smoking Everywhere for breach of contract, citing the IM conversation as evidence of an amendment to the contract.

The court in the case found that that the vice president’s “no limit” comment was a counteroffer to CX Digital’s proposal to raise the cap to the equivalent of 2,000 customers a day. Further, the court found that CX Digital accepted the counter offer by responding “awesome.” The court went on to find that the conversation was enforceable as an amendment because Delaware law allows parties to modify a contract without signatures, even if the face of a contract requires a signed writing.

Business representatives increasingly engage in informal communications, and in most cases, where a negotiation has taken place, those representatives will later reduce that agreement to a writing in the form of an addendum. Here, the parties did not go through those formalities, although shortly after the conversation in question, CX Digital acted in reliance on the modification, which resulted in a substantial judgment against Smoking Everywhere. As such, this case provides an important warning that companies should be careful about informal communications with any party. For banks, this conclusion is especially true with borrowers. Lenders can actively minimize their chances of inadvertently making or amending a contract by implementing companywide procedures regarding the use of electronic communications. They can also consider including a contractual provision specifically addressing whether contract modifications can occur through electronic communications in Commitment Letters or Term Sheets, although the enforceability of such provisions may be limited.

While this case focused on an IM conversation, lenders should be aware that text messages are a similar form of informal communication and could also be a valid means of modifying a written contract. So as technology becomes more advanced and more engrained into daily business practice, it is increasingly important to think before hitting send.

For more information regarding best practices for electronic communications, contact Katherine at at 267-470-1187 or at ktohanczyn@starfieldsmith.com.