A High Court ruling that an exchange of emails between two companies could create a binding contract serves as a timely reminder to businesses to avoid accidentally creating contracts when negotiating by email.

In Golden Ocean Group Limited v Salgaocar Mining Industries, the parties held detailed negotiations about the terms of a contract and related guarantee by exchanging emails. Each exchange of emails either accepted or rejected the other parties' points until all the points were resolved and the parties were in agreement. Despite both parties expecting their emails to be drawn up into a formal document (and indeed a formal contract was drawn up but never signed) the High Court found that the exchange of emails showed an agreement on all the important points and could create a binding contract. The Court also held that an exchange of emails could satisfy the requirements in the Statute of Frauds 1677 that a guarantee must be recorded in writing and signed.

Typically a contract is a signed agreement with terms that are subject to detailed and precise negotiation. However, contracts are flexible and can be created in a variety of ways which creates a real risk that they may be created when they are not intended.

Dispelling some common myths about creating contracts

• If I don't sign anything then there cannot be a binding contract

Only a few specialist contracts (such as guarantees and contracts for the sale of land) need to be signed to be binding. Most types of contracts do not need to be signed or even put in writing.

Even if a signature is required, this does not mean that the signature must be with a pen. "Signature" means voluntarily making one's mark on a document. Stamping a document, placing photocopies of signatures on an agreement and even inserting one's name at the bottom of an email could all be considered signatures.

• Emails or documents marked "subject to contract" can never form a binding contract

Marking a document "subject to contract" is a good way to prevent contracts being accidentally created. It creates a presumption that negotiations are continuing and there is more work to be done before a binding agreement is reached.

However, if parties start to perform the contract before the formal terms are agreed then this presumption may be overturned. This may result in a partly agreed contract with gaps, where certain issues have not been finalised and is a common area of commercial disputes. The safest approach is to finalise the agreement before starting work. Commercially this may not always be possible but businesses should be aware that by starting to carry out their side of the contract they run the risk of waiving the protection offered by the "subject to contract" provision.

• All the terms of a contract must be in one place

Contracts can be spread over several documents. In the Golden Ocean case the terms of the contract were contained in multiple emails sent over the course of a month. Contracts can even been part written and part oral.

When the terms of an agreement cannot be found in one place, it makes it very difficult to know what has been agreed. To avoid this problem, written contracts should contain an entire agreement clause which prevents a claim that contract terms exist outside the final version of the agreement.

• Only directors and senior managers can create contracts that are binding on companies

Anybody who reasonably represents that they have authority to act on behalf of a company can bind that company to a contract. This person could be an employee or even a third party agent. Authority can be given to a person in writing or by conduct. For example, an employee that negotiates contracts on behalf of a company but fails to state that they need approval from a more senior manager could be held to have authority to conclude that contract.

A good practice is for employees to make clear (preferably in writing) early in the negotiations that they have no authority to conclude the contract. Alternatively, this could be included in the standard wording that is automatically inserted in the footer of every email.

• To vary a written contract, the variation must also be in writing. To vary a deed, the variation must also be by deed

Contracts and deeds can both be varied by a further contract. The variation agreement can be oral or in writing (there are, however, specific statutory rules for contracts relating to the sale of land that are not considered by this briefing). The key requirement is that both parties must be giving new promises or fresh consideration for the variation to be legally binding.

If the original contract or deed has a clause that requires the variation to take a particular form (ie. be in writing and signed) then these formalities must be followed. However, bear in mind that an exchange of emails could be a contract in writing and email sign-offs can amount to signatures.

This article was first written by Bond Pearce and has been reproduced with their permission. Bond Pearce are a leading UK business law firm, to find out more go to www.bondpearce.com.

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