Instant Communications Can Yield Instant Consequences

Transacting business electronically is convenient and commonplace. Firing off text messages and instant messages to clients and potential business partners has become the norm. Before you hit send, however, it is important to consider the consequences and impact of what is being communicated in your seemingly informal exchanges. Though text messages and instant messages may seem relaxed, and almost “unofficial”, such communications can yield instant — and perhaps even unintended — consequences. Indeed, seemingly casual instant conversations — even those which contain “text speak” — have been deemed sufficient to create legally binding contractual obligations.

CX Digital Media, Inc. v. Smoking Everywhere, Inc., 2011 WL 1102782 (S.D. Fla. March 23, 2011) provides a cautionary tale. In CX Digital Media, a Florida federal court determined that a two-word instant message resulted in a contract amendment worth nearly $1.2M. Defendant, Smoking Everywhere, Inc., an electronic cigarette company wanted to generate web traffic to its site and increase sales of its electronic cigarettes. To achieve this goal, Smoking Everywhere approached CX Digital Media, Inc., an advertising solutions company, about promoting a free-trial offer on behalf of Smoking Everywhere.

Smoking Everywhere and CX Digital memorialized this undertaking into a written contract. The contract authorized CX Digital to refer internet traffic to Smoking Everywhere’s e-commerce site in order to purchase Smoking Everywhere’s products. Smoking Everywhere agreed to pay $45.00 in commission to CX Digital for each completed sale of its “Gold E-Cigarette Kit Free-Trial”. The contract expressly limited the commissions to 200 customers per day.

About a month after the execution of the contract, Pedram Soltani, an account manager at CX Digital, and Nick Touris, a vice president for advertising at Smoking Everywhere and the company officer who had signed the contract with CX Digital, engaged in an instant message conversation. The conversation went on intermittently throughout the course of a single day. Though much of the conversation addressed technical web link issues, the discussion briefly addressed the contractual limit on daily commissions.

Soltani and Touris exchanged the following messages:
Soltani: We can do 2000 orders/day by Friday if I have your blessing.
* * *
Touris: NO LIMIT.
Soltani: awesome!

Following this conversation, CX Digital stopped using the 200 sales/day limit set forth in the contract and began making an average of 1,200 referrals per day, with a peak of 2,896 sales/day. CX Digital billed Smoking Everywhere for the higher volume. Smoking Everywhere, however, refused to provide payment.

After a five day trial, the United States District Court for the Southern District of Florida, Miami Division, issued its Order Setting Forth Findings of Fact and Conclusions of Law. Therein, the Court, applying Delaware law, found that the instant message conversation set forth above, served as a valid modification to the written contract between Smoking Everywhere and CX Digital.

The Court determined that Soltani’s initial message (“We can do 2000 orders/day by Friday if I have your blessing”) constituted an offer to modify the contract to raise the daily limit to 2,000. Per the Court, Touris’ response of “NO LIMIT” varied from the terms Soltani offered and, therefore, constituted a counter-offer to remove the daily limit altogether. The Court characterized Soltani’s response of “awesome!” as an “enthusiastic acceptance” of Touris’ counter-offer.

Smoking Everywhere argued that the casual conversation between Soltani and Touris simply could not amount to a binding modification to the contract. First, Smoking Everywhere argued that, under Delaware law, an oral modification of a contract must be proved with “specificity and directness” and the brief instant message exchange did not satisfy this standard. The Court rejected this argument and characterized the instant message exchange as “narrow and straightforward”. Second, Smoking Everywhere argued that the modification was not enforceable under Delaware law because the contract expressly provided that it “may be changed only by a subsequent writing signed by both parties.” The Court determined that the common law rule, followed in Delaware, is that a contract may be modified by any mode of expression the parties see fit, notwithstanding the provision in the contract purporting to require that subsequent modifications be evidenced by writing. Third, Smoking Everywhere argued lack of consideration. The Court opined that in exchange for CX Digital’s promise to provide an unlimited number of sales to Smoking Everywhere, Smoking Everywhere made an implied promise to pay for those additional sales at the rate defined in the contract. The Court reasoned that Smoking Everywhere’s implied promise to pay is the consideration for CX Digital sending more sales. Lastly, Smoking Everywhere argued that Touris lacked authority to bind Smoking Everywhere to the modification. The Court determined that Touris had apparent authority to bind Smoking Everywhere because Touris was Vice President for Marketing for Smoking Everywhere and had negotiated and signed the original contract on behalf of Smoking Everywhere.

The Court went on to determine that even if the instant message conversation did not constitute an enforceable modification, Smoking Solutions was prevented from asserting the “signed writing” provision of the contract as a defense (due to promissory estoppel) because CX Digital relied on the instant message conversation to its detriment.

“Awesome!” — one enthusiastic IM that amended a contract to the tune of $1.2M.

A second cautionary tale comes from the Massachusetts Land Court. In St. John’s Holdings, LLC v. Two Electronics, LLC, LCR LEXIS 49 (Mass. Land Ct. April 14, 2016) the Court addressed the question of whether a text message can constitute a writing sufficient under the Statute of Frauds to create an enforceable contract. In general terms, the Statute of Frauds refers to the requirement that certain kinds of contracts be memorialized in writing, signed by the party to be charged, and contain sufficient content to evidence the contract. One type of contract that falls within the statute of frauds is contracts for the sale of land.

In St. John’s Holdings, a buyer and seller, through their respective and authorized brokers, were negotiating the purchase and sale of a commercial building. The negotiations between the two brokers included conversations, emails, phone calls, and text messages.

The brokers exchanged three different versions of a binding letter of intent (“LOI”) by email. Thereafter, the seller’s broker sent a text message to the buyer’s broker stating that if the buyer signed the final letter of intent and delivered it with a deposit to the seller, the seller would promptly execute the letter too. Specifically, seller’s broker texted:

Steve. [Seller] wants [buyer] to sign first, with a check, and then he will sign. Normally, the seller signs last or second. Not trying to be stupid or contrary, but that is the way it normally works. Can [buyer] sign today and get it to me today? Tim.

The buyer then signed the final letter of intent and gave a check to its broker to deliver to seller. That same day the seller received and accepted a more favorable offer from a third party and refused to countersign buyer’s LOI.

In litigation, seller filed a Special Motion to Dismiss buyer’s complaint. The seller argued that because the Statute of Frauds required that a contract for the sale of land be signed by the party who was to be bound, the buyer’s claim should be dismissed. The Court refused to dismiss the claim, finding that the text message at issue could constitute a signed writing under the Statute of Frauds sufficient to bind the seller to the agreement.

Though the seller did not physically sign the letter of intent, the Court found that the text messages, taken in context, constituted a signing of the letter of intent, and thereby satisfied the Massachusetts Statute of Frauds, which requires agreements to transfer interests in real estate to be in writing and signed by the party against whom they are to be enforced. The Court observed that the parties frequently communicated electronically and that their conduct throughout their course of dealings demonstrated an appreciation that the final exchange of text messages would memorialize the final LOI as an offer and acceptance. The Court further determined that the typed signature at the end of the text (“Tim”) sufficiently conveyed the sender’s intent to authenticate the message. The Court noted that the brokers’ included their names in messages containing material terms, but omitted names from informal discussions and that this practice signaled their intention to authenticate their “signed” statements by electronic means. The Court noted that “[t]he communications between [buyer’s broker] and [seller’s broker] before the text message evidenced a meticulous attention to provisions that would govern the agreement to purchase the [building].” The Court concluded that the final LOI, which contained all of the specific terms of a purchase and sale agreement, coupled with the “signed” text messages, could constitute an enforceable contract for the sale of the subject property.

These cases highlight the hazards of instant communications. In order to avoid the binding consequences that can stem from fast-paced and seemingly informal instant communications, the following precautions should be taken:

1. Think Before You Hit Send.

Think before you hit send. In situations where material terms have been previously discussed, pay particular attention to your messages so that you do not unwittingly seal the deal.

Educate your principals, officers and employees regarding the potential legal implications of electronic communication.

2. Take Precautionary Measures.

Determine the persons in your organization who are authorized to negotiate or enter into contract terms. Educate the authorized individuals on the legal implications of instant communications. Instruct those who are not authorized to be explicit about their lack of authority and to use disclaimers regarding such lack of authority in electronic communications.

Ensure that your contract forms contain provisions setting forth how such contracts can be amended or modified. In order to avoid inadvertent contract modification, consider explicitly limiting contractual modifications and amendment authority to specified officers of the company. Consider including a contractual provision specifically prohibiting contract modifications via electronic communications.

Though text messages do not usually include lengthy disclaimers, consider getting into the habit of including a short caveat in your instant communications, such as “negotiation only” or “subject to client approval”.

3. Preserve Your Instant Communications.
After taking the above precautions, do not forget to make efforts to preserve text messages and other instant communication to avoid surprises. Texting programs are available that allow for instant message streams to be emailed for easy archival. In the absence of a program, advise team members to take and maintain screenshots of important texts and negotiations.