By: Daniel Tartaglia, Esq.
You better think twice before hitting the send button on your next email. This is the lesson to be learned by reading a recent New York Appellate Court decision. In Naldi v Grunbger, 80 AD 3rd 1, October 5, 2010, the Appellate Division First Department held that an email sent by a broker in connection with a real estate transaction satisfied the New York statute of frauds (General Obligations Law § 5-703) for purposes of creating an enforceable contract. In an email to Buyer's broker the Seller's broker wrote (or should we say typed) that in connection with a $52 million purchase, the Buyer had a "...right of refusal on any legitimate, better offer during a 30 day period." In reliance on this the Buyer began performing costly due-diligence. Upon learning that the Seller was pursuing a sale to a third party in the amount of $50 million, the original Buyer sent the Seller a letter purporting to exercise the "right of first refusal" referenced in Seller's Broker's email. The Seller rejected the offer and sold the property to another buyer.
Although the Appellate Division ultimately sided with the Seller and rejected the Buyer's argument because it concluded that the parties had failed to reach an essential agreement on the purchase price, the Appellate Division held that an e-mail would have been sufficient to bind a seller had an agreement been reached on the purchase price.
In its reasoning, the Appellate Division first noted that the New York legislature had enacted the Electronic Signatures and Records Act (ESRA), which provided that:
[U]nless specifically provided otherwise by law, an electronic signature may be used by a person in lieu of a signature affixed by hand. The use of an electronic signature shall have the same validity and effect as the use of a signature affixed by hand. ESRA § 304[2]
After ESRA was enacted, Congress enacted the Electronic Signatures in Global and National Commerce Act (E-Sign) in 2000, which provided that:
(1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and that (2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.
In response, ESRA was amended in 2002 to conform the definition of the term "electronic signature" to E-Sign's definition of the same term.
Based on the foregoing, the Appellate Division held that "E-Sign's requirement that an electronically memorialized and subscribed contract be given the same legal effect as a contract memorialized and subscribed on paper is part of New York law..." and went on to state that "[e]ven in the absence of E-Sign and the 2002 statement of legislative intent, given the vast growth in the last decade and a half of the number of people and entities regularly using e-mail, we would conclude that the terms "writing" and "subscribed" in GOL § 5-703 should now be construed to include, respectively, records of electronic communications and electronic signatures..."
The import of the Naldi decision on real estate practitioners is clear:
• Any e-mail communication transmitting an offer, counteroffer, term sheet, contract, lease or other similar real estate related communication should be accompanied by an appropriate disclaimer to the effect that the e-mail in question may not form the basis of a binding agreement without the express written confirmation of the parties in a separate written agreement; and
• Any communication by a broker on behalf of its principal should require that the broker indicate on all e-mail communications that the broker is not authorized to bind the principal without the principal entering into a separate agreement with the counterparty to the e-mail.
Clients may find that, without appropriate safeguards, unscrupulous counsel and other parties may seek to use the Naldi decision to gain leverage over a counterparty embroiled in a contested real estate transaction by alleging that a binding agreement arose through an e-mail exchange.
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