The Empty Dotted Line: What Happens When the Contract is Not Signed?
You own a manufacturing business. You spent a good part of last year putting together a private-branding and distributorship agreement with a new customer and a new distributor. Most of it was over email. Now the distributor is not doing its job. You pull the contract, and your stomach sinks when you realize the customer never signed it. Is the contract valid? Can you sue the distributor?
Often, the answer is yes. Contracts are usually formed by signing, but unsigned contracts may be enforceable as well. We would look at whether the other party accepted the terms of the agreement by performing its obligations. We would look at whether the emails are considered signed writings under electronic transaction laws. Finally, we would look at the custom in that industry.
The NC Business Court has ruled that all parties to a contract were bound, although not everyone signed it.
In Hawes v. Vandoros, eleven people jointly owned two investment beach houses. In 2007, they refinanced the loans, but one married couple (the Schermerhorns) never signed the “contribution agreements” between the owners which provided that each owner would pay his or her pro rata share of the monthly loan payments.
Two other owners (the Bakatsias) eventually defaulted on their pro-rata payments, and tried to argue that the Contribution Agreements were invalid and unenforceable because not all of the owners signed them.
The NC Business Court found that the Schermerhorns accepted the terms of the Contribution Agreement by performance — they consistently made their monthly payments even though they never signed the agreement — and that the Contribution Agreements were therefore valid and enforceable between the co-owners.
The Court ruled that “a signature is not always essential to the binding force of an agreement.” In the absence of a statute requiring a signed contract, the contract “need not be signed, provided it is accepted and acted on, or is delivered and acted on.”
I strongly recommend, however, that having signed contracts is the best business practice. It avoids all the gut-wrenching analysis (and expense) to try to prove there is an enforceable agreement.