Seemingly Informal E-mails Can Constitute Binding Contracts

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In a prior post, I discussed how a letter of intent could constitute a binding agreement even if the parties contemplated that they later would execute a full-blown contract.  Last month, the Federal District Court in Boston went one step further and ruled that a series of e-mails constituted a binding agreement to settle a litigation even though a settlement agreement and related documents never were executed.

In Hansen v. Rhode Island’s Only 24 Hour Truck & Auto Plaza, Inc., the parties were fighting over who was entitled to $250,000 being held in escrow, and they entered into settlement negotiations.  Those negotiations culminated in the following email sent by plaintiff’s counsel:

Eric Hansen will accept Defendants’ settlement offer that the escrow funds … will be split as follows: $235,000 to Plaintiff and $15,000 to Defendants.  … I also understand that the settlement will include mutual releases from all parties and a dismissal of the pending action with prejudice and without costs. To move this along, I will send you a draft settlement agreement (and other settlement documentation) tomorrow.

Defendants’ counsel responded to this email the next day, saying: “Glad we were able to get it done,” and counsel thereafter went back and forth on drafts of a settlement agreement and related documentation.  While plaintiff’s counsel eventually sent out what appeared to be a final version of such documentation for signature, a few hours later the defendant corporation was placed into receivership.  Further, not only did the Receiver refuse to execute the settlement paperwork, but he also repudiated the entire settlement structure.

Although the plaintiff’s counsel attempted to confer with the Receiver, no resolution was reached, leading the plaintiff to file an action in order to obtain a court order enforcing the prior agreement reached via email.  After determining the Massachusetts law applied, the District Court ruled as follows:

An enforceable settlement agreement arises when the parties to be bound mutually assent to all material terms, even if those terms are not memorialized in a final writing. … In this case it is manifest from the email exchange that the parties entered into a valid settlement agreement.  Both parties clearly expressed mutual assent to the terms when plaintiff’s counsel wrote that ‘Eric Hansen will accept Defendants’ settlement offer’ and defendants’ counsel responded ‘Glad we were able to get it done.’

The District Court went on to explain its ruling by noting that the continued effort to obtain a signed document was not an attempt to create a settlement agreement.  Rather, it merely was a process designed “to formalize the agreement” that already existed and was binding upon the parties. (Also, while the agreement in this case did not have to be in writing to be enforceable, as was pointed out in another prior post, an email can satisfy the signature requirement of the Statute of Frauds.)

While in-house counsel may not often directly negotiate litigation settlements, they do often resolve disputes before formal litigation has been commenced.  Accordingly, if you find yourself in such a position, be sure to determine whether you want your e-mail, text or other communication to constitute the entirety of a settlement or merely a portion or outline of the settlement terms.  Once you make such a determination, it then behooves you to make that intention expressly clear in the communication itself (e.g., “This email [is/is not] intended to create a binding settlement agreement”).  Failing to do so may needlessly leave the door open to another dispute down the road.