Contract formation by email and following purchasing procedures
How the case of Athena Brands Ltd vs Superdrug reminds us of the pitfalls
For a binding contract, we know that English law requires certain key components – those being, an offer, acceptance, consideration, and an intention to create legal relations. We also know that legally binding contracts can be formed over email – which is a hugely convenient practice for many businesses. However, creating contracts by exchanging emails comes with pitfalls that can cause problems if company procedures are not followed properly. Particular care needs to be taken to avoid accidentally creating a contract that one party did not intend or entering one on unclear terms. The case of Athena vs Superdrug decided in December 2019, clearly shows the dangers of businesses failing to follow their purchasing procedures.
The case involved an exchange of emails between a Brand Manager of Athena and a representative of Superdrug with the job title “Buyer”. The exchange of emails culminated in the Athena Brand Manager asking the Superdrug “Buyer” to confirm Superdrug was willing to commit to a 12 month supply of a new product range known as “Nature’s Alchemist” in May 2017. The message sent read as follows:
“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 [different product] on an ad hoc basis within a 12 month period……
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 Superdrug Buyer replied with an email saying, “Please go ahead with the below…”.
However, after sales of the new products slowed, Superdrug stopped placing orders in February 2018. Athena claimed Superdrug was bound to order a full years’ worth of stock.
Superdrug in turn argued that it was not under any such minimum commitment obligation because it had established purchase procedures in place that meant a purchase order had to be issued for there to be a binding commitment. It said that in the absence of a purchase order, there could not be a binding contract. It also argued, there had not been an intention to create legal relations, and, that even if there had been such an intention, the Superdrug Buyer who had responded to Athena, had neither the actual nor apparent authority to enter the contract. The Athena Brand Manager, it said, could not have understood the Superdrug Buyer intended to commit to the minimum commitment of 12 months’ stock, because it was not normal practice in the retail industry for such commitments to be given in this way. The Superdrug Buyer himself also asserted it was not his job to raise purchase orders and he also didn’t know how to do it.
The High Court however, decided in favour of Athena, saying none of Superdrug’s arguments had any prospect of success. The Superdrug Buyer was held out as someone who was able to bind Superdrug and Athena was not made aware of any such lack of authority. The Superdrug Buyer did therefore have apparent authority to bind the company. It also found there was no reason why the emails exchanged between the parties could not result in agreement to buy a minimum quantity, and based on all the evidence, Athena had acted reasonably in relying on the Superdrug Buyer’s confirmation.
The case clearly shows the need for businesses to ensure effective purchasing policies are put in place and that they are implemented properly. Staff should be fully trained in following the procedures, and in particular, they should understand their authority levels and how to prevent contracts being inadvertently entered into by their communications. A failure to do this could lead to unwanted commitments and a hefty bill – in Superdrug’s case to £1.3 million worth of face cream.