17 April 2020

Think carefully before putting pen to paper (or, in this case, fingers to keypad…)

In the recent case of Athena Brands Ltd v Superdrug Stores Plc [2019] EWHC 3503 (Comm) the courts held that a binding contract was made by a simple exchange of emails between parties.

A Brand Manager at Athena and a Buyer for Superdrug entered into email correspondence regarding a cosmetic product that Athena would supply to Superdrug. The Brand Manager sent an email to the Buyer asking him to confirm that he was placing the order and committing to a minimum yearly quantity. The Buyer responded by email telling the Brand Manager to go ahead. The products did not sell well and Superdrug stopped the orders before the 12-months was complete. Athena brought a claim against Superdrug for breach of contract.

The court held that:

  • a contract had been made by the exchange of emails, which bound Superdrug to purchase the specified minimum quantities of the various cosmetic products even though no specific purchase order for the products had been completed by Superdrug;
  • the Superdrug Buyer had been held out as a buyer authorised to negotiate terms of trade and there was no evidence that anyone had told Athena that the Buyer lacked the authority to agree a minimum quantity commitment; and
  • there was no doubt that Athena had relied on the Buyer's confirmation as binding Superdrug, and nothing in the evidence was capable of showing that Athena had acted unreasonably in doing so.

Case

The case highlights the importance of businesses following internal policies when discussing and negotiating purchase agreements and being very careful when negotiating and discussing potential orders by email. As social distancing rules and regulations are implemented and individuals are required to resort more and more to electronic means of communication, particular attention must be paid to the exact words used in emails between counterparties.

Facts

The emails were between a Brand Manager at Athena and a Buyer for Superdrug in relation to the establishment of a new brand of cosmetic products that Athena would supply to Superdrug.

In the course of the email exchange, the Brand Manager asked the Buyer to confirm that he was placing orders and committing to the specified yearly quantity over a 12-month period. The Buyer emailed back saying to go ahead.

The Brand Manager's email dated 23 May 2017 stated,

"Just to confirm, you are placing orders and committing to the yearly quantity against all lines detailed below based on the ROS you have provided. We have agreed that you will call off stock, in exactly the same way as [another product] on an ad hoc basis within a 12 month period.

[Table of products, 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 by email on 25 May 2017 as follows:

"Please go ahead with the below, happy on [product name]…"

The cosmetic products sold much more slowly than anticipated and on 7 February 2018, Superdrug emailed to say that orders going forward would be unlikely. No further orders were made. Athena brought a breach of contract claim against Superdrug.

Legal background

The key elements for an enforceable contract are as follows: an offer, acceptance of the offer, consideration (for example, a promise or undertaking; in the current case, a payment in return for the supply of the products), intention to create legal relations and certainty of terms.

Where an employee seeks to contract with a third party on behalf of its employer, an additional element is required: Such employee must have the employer's authority to do so.
Authority can be actual or ostensible (i.e. it appears to a third party that an employee has due authority to act on behalf of its employer and the employer conducts itself in such a way that demonstrates that it has approved the employee's actions). If the employee acts within the scope of this wider authority, the employer is then bound by the employee's actions vis-a-vis third parties. The third party's belief in the ostensible authority of the employee must be reasonable.

The parties' positions

Athena asserted that a contract was made by the exchange of emails, which committed Superdrug to purchase specified minimum quantities of various cosmetic products and that the emails clearly showed an agreement between the two parties. Athena sought losses from the shortfall in the minimum quantities calculated at just under £980,000, plus interest and storage costs in relation to the unsold stock.

Superdrug contended that:

  1. it was not committed to purchase any products unless it issued a specific purchase order and was not bound to issue purchase orders for the alleged minimum or any other quantity;
  2. the parties did not intend to create legal relations; and
  3. the Buyer for Superdrug did not have actual or ostensible authority to commit to any contract - the Buyer's authority was limited to identifying suitable products to purchase and negotiating those terms with the prospective supplier.

Decision

Looking at the words used in the emails, the court found that:

  • there was a clear offer, followed by an acceptance of the proposals to commit to a minimum number of the goods in question. A contract had been made by the exchange of emails between the parties, which bound Superdrug to purchase the specified minimum quantities of the various cosmetic products even though no purchase order for the products had been completed by Superdrug;
  • the Superdrug Buyer had been held out as a buyer authorised to negotiate terms of trade, with no relevant restriction identified to Athena and there was no basis to assert that such terms could not include a minimum quantity commitment, if the Buyer on behalf of Superdrug, considered it commercially appropriate in the circumstances; and
  • there was no evidence that anyone had told Athena that the Buyer lacked the authority to agree a minimum quantity commitment, and even if he might, at some point during the negotiations, have stated that he did not intend to agree to such a commitment, he must have changed his position as he plainly had so agreed at the end of the negotiations.

Even though Superdrug asserted that according to established industry practices, well known to buyers and suppliers alike, retailers such as Superdrug do not buy large quantities of products on an upfront basis, the court rejected this argument and found that there was no such sufficiently definable industry.

There was nothing in the history of the negotiations between the parties capable of showing that Athena or an objective observer would have understood that the Superdrug Buyer’s apparent agreement to a minimum quantity was not, or could not be taken as being, what it seemed, or that in making it he did not intend to bind Superdrug. There was no doubt that Athena had relied on the Buyer's confirmation as binding Superdrug, and nothing in the evidence was capable of showing that Athena had acted unreasonably in doing so. Judgment was granted in favour of Athena.

Discussion

This case highlights that courts are willing to find the existence of a contract even in casual, informal emails.

It should be borne in mind that the courts will assess each set of facts objectively. This case highlights that short, informal email chains can have heavy consequences for businesses and can create legally binding obligations even though this may not be the intention of the parties to the emails.

As social distancing rules and regulations are implemented and individuals are required to resort more and more to electronic means of communication, particular attention must be paid to the exact words used in emails between counterparties.

Whilst it is understood in commercial terms that businesses do not always follow their systems (including purchasing systems) to the letter, now, arguably more than ever before, is the time to adhere to such systems as far as is practicable. Businesses should also consider whether their purchasing systems and procedures, and the training of employees in relation to the same, need review in light of the current circumstances.

Businesses and employees should be mindful that seemingly innocuous words such as, "Please go ahead with the below…" could inadvertently commit businesses to incurring significant costs or liabilities.

Also of note is the importance of clarifying the extent of an employee's authority to enter into contracts when acting on behalf of its employer - even if an employer's representative does not have authority to enter into binding commitments on the employer’s behalf, the courts may find that the employee has nevertheless bound the business if an objective observer would have come to the same conclusion and believed that the relevant employee had such authority. It may also be worth considering whether it is appropriate to specify in such contracts the category of persons who have authority to bind the employer. For example, the employer could specify that only a person who holds the title of 'director' has authority to enter into a binding contract on its behalf.

It is interesting that part of Superdrug's defence was that there was no 'intention to create legal relations'. The Buyer for Superdrug asserted in his evidence that it was not his job to raise a purchase order and he did not know how it was done. Even though that may well have been the case, under English law, the courts will look at the objective conduct of the parties and will disregard the subjective thoughts of each of the parties involved.

Leila is a Senior Associate in our Corporate team.

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