- Abstract
- The scenario
- 1. Introduction
- 2. The Law and Contractual Acceptance
- 3. Time and place in contract formation
- 3.1 Time
- 3.2 Place
- 5.1 Time
- 5.2 Place
- 5.3 Deemed receipt
Email contracts –When is the contract formed?
SIMONE W B HILL*
Abstract
It is important to know when and where a contract is formed as that can have an impact on the rights of the parties and in ascertaining jurisdiction over the contract in the case of a dispute. It is not clear when email contracts are formed. If the postal acceptance rules were applied to email contracts by analogy with snail mail, an email contract would be formed when the acceptor sent the acceptance by pushing the send button on his/her computer. If the postal acceptance rule is not applied, under normal rules of contract, the contract will be formed when the offeror receives the acceptance.
There a re no good reasons for applying the postal acceptance rule to email. The postal acceptance rule is an exception to normal contract principles which was adopted because of the time delay between posting and receipt of a letter and because having posted a letter, the person who has posted it loses all control over it. There are no good reasons for extending the postal acceptance rule to an instantaneous means of communication such as email, especially as the sender of a message is in the best position to determine whether the message has been received or not.
The Electronic Transactions Act 1999 (Comm) does not settle the matter. It defines the time of receipt of an electronic message as the time when it enters the addressee’s information system and the place of that receipt as the addressee’s principal place of business or the place of business most closely connected with the transaction regardless of where the addressee’s computer actually was. However, if does not specify whether the sending or receipt of the acceptance completes the formation of a contract.
In the United States, the Uniform Computer Information Transaction Act lays down that contracts negotiated by ‘electronic message’ are formed when acceptance is received. Although this has only been accepted by two States, it is the appropriate rule. However, it is not clear that this rules will be accepted in Australia, where the time and place of formation of email contracts remains uncertain.
The scenario
If legal negotiations are made by email, when is the contract said to be formed? Is it when the email is sent by the offeree? Or when it arrives at the recipient’s/offeror’s mailbox? Or when the recipient/offeror reads the acceptance?
1. Introduction
The precise moment of formation of contract via email is a moot point. The need to ascertain the exact instant a contract is formed is crucial. Performance may be referenced to the moment of formation, whilst the place of formation is relevant in ascertaining jurisdiction in the event of dispute.
Recent legislation, namely the Electronic Transactions Act 1999 (Cth), has not provided a definitive answer. Indeed legal intervention into the area both locally and internationally has been deliberately non-committal on the subject. In part this has been “in order not to interfere with national law applicable to contract formation”. [1] In opposition to this global trend the United States, in the form of the Uniform Computer Information Transaction Act (UCITA) (formally Art 2B of the Uniform Commercial Code) has, at least partly, legislated to settle the question.
UCITA aside, the question of when a contract is formed via email rests entirely in the hands of the common law, with the possibility that the antiquated postal acceptance rule may be applied to this communication method. In an attempt to answer the question at hand, one needs to consider the scenario of email contracts within the context of the basic principles of contract formation.
2. The Law and Contractual Acceptance
The ordinary rule is that a contract is not made, that an offer is not accepted, until the acceptance of the offer has been communicated. [2]
The crucial moment in formation of contract is the acceptance : it is at that moment a contract is said to be ‘formed’. Because of the integral role of acceptance in the formation of a contract, the law generally requires that the acceptor/offeree actually communicate his/her acceptance of the offer to the offeror. By requiring actual communication there can be no doubt that the offeror and offeree are in agreement as to terms, and both parties are aware that contractual obligations have commenced. [3]
There are exceptions and adaptations of this actual communication rule which impact upon both when and where the contract is formed. The impact of the rule itself, along with its various modifications, has very real consequences for parties attempting to form a contract via email.
3. Time and place in contract formation
As discussed above, a contract is formed at the moment acceptance takes place. This paper focuses on two subsequent effects: that the time and place of acceptance are therefore the time and place of contractual formation (also referred to as when and where questions).
3.1 Time
The precise timing of a contract may be crucial. For example, if parties are agreeing to buy an item at market price ‘as at the formation of this contract’, pinpointing the exact time the contract is formed will be necessary to the performance of that contract. Timing may also be relevant in ascertaining whether, for example, a purchase attracts a particular duty or allows the purchaser to claim a government rebate.
The recent debacle over MRI machines is a case on point. Most readers will be familiar with the particulars of the so called ‘scan scam’. [4] In short the date of the federal budget announcement, May 12 1999, was set as the cutoff date for the purposes of qualifying for lucrative Medicare payments. Whether or not this information was in fact given to interested parties prior to the official budget announcement is not relevant for our purposes. Analysing the situation contractually, radiologists who had entered into a contract to purchase a machine prior to that date attracted payments of almost $1 million per year. Favourably establishing the precise moment of formation of contract in this case was the difference between qualifying for the payments or not.
When it comes to the negotiation and formation of a contract via email, it is not hard to imagine global scenarios where accurately identifying the precise moment of contract formation would be vital. From trading futures to a simple purchase via the internet, ascertaining the moment of acceptance and hence formation may directly impact upon the price paid, or more generally, the contractual rights and obligations of the parties.
To demonstrate the point, take a simple purchase of shares by email. Generally, the price paid for shares is set ‘at the time of formation of contract’. Applying the basic principles of contract law, this means the moment of acceptance. The purchaser sends his email offering to buy shares, and the seller emails her acceptance of the offer. What happens if between the sending of an acceptance and the actual receipt by the offeror the price of the shares in question changes dramatically? The impact on the price to be paid for the shares will be significant, depending upon whether the contract is said to be formed when the acceptance is sent, or when the acceptance is received. Again, the importance of ascertaining the precise moment of contractual formation is demonstrated.
3.2 Place
The instant of acceptance has relevance not only for time, but also for place. In simple contracts, the moment acceptance occurs is the moment of formation of contract, not just in relation to when but also in relation to where. Hence the place where acceptance takes places is said to be the place where the contract is formed. This has jurisdictional consequences for possible subsequent litigation.
For a court to have jurisdiction in an action in contract, the contract must be either i) made within the jurisdiction, ii) governed by the law of the forum or iii) broken within the jurisdiction. [5] It is the first of these qualifications that is most relevant to this paper. To establish that a court has jurisdiction for an action on a contract formed by email, it must be demonstrated that acceptance took place within the jurisdiction.
Again, the importance of distinguishing the precise moment of acceptance is highlighted. In contracts formed by email it is unclear whether acceptance takes place at the time the acceptance is sent by the offeree, or when it is received by the offeror. The jurisdictional consequences are enormous. As an example, take a sale of goods where the contract is formed via email. If we take it as given that the offer is made by the buyer, and the acceptance is made by the seller, the sending of the seller’s acceptance is the critical transaction. If acceptance is said to take place when the acceptance is sent, then the buyer’s forum is the relevant jurisdiction, whilst the opposite is true if we conclude it is actual receipt which forms the contract.
4. The Postal Acceptance Rule
Standing as a true exception to the general rule that acceptance must be communicated to the offeror for contractual formation, is the antiquated postal acceptance rule. The rule was developed almost two centuries ago to address perceived problems when parties formed contracts via post. In short, the postal acceptance rule deems a contract to be complete and binding at the time the acceptance is posted, rather than at the time the acceptance is actually received.
The rationale for the rule is thus : the nature of postal communication denotes a separation of parties by time and distance. When one party sends a communication via post, there is a time delay between dispatch and receipt. How is the dispatching party to know that their communication has been received? If each party felt that they were not bound by their assent to contractual terms until they received confirmation of the other’s receipt then the situation ‘might go on ad infinitum’. It was thought that ‘no contract would ever be completed’ by post unless a legal ruling was made on the matter. [6]
The postal acceptance rule is a legal lie : it deems that notification of acceptance has occurred when in fact it has not. It has been restricted to only two forms of communication : post and telegram. Courts have persistently refused to extend the rule to any other means of communication, including telephone, [7] telex [8] or facsimile. [9]
Whether the rule will apply to email is still an open question. It might be propounded that in concept, ‘snail mail’ and ‘email’ are similar. In both cases the sender ‘posts’ correspondence via a third party, correspondence arrives in the receiver’s ‘mail box’, and the message is not actually read until the correspondence is ‘opened’ by the recipient.
The consequence of applying the rule to email negotiations is thus: a contract would be formed when an acceptor/offeree pressed ‘send’ rather than when the offeror received the acceptance. Hence the time and place of the contract would be when and where the acceptance was sent.
However, none of the arguments which support the existence of the postal acceptance rule are applicable to email. Most importantly, there is no real time delay [10] between the ‘posting’ of and email, and the receipt. The mode of communication is more appropriately deemed instantaneous, and should therefore attract the rules relating to ‘virtually instantaneous’ communications :
The contract is only complete when the acceptance is received by the offeror : and the contract is made at the place where the acceptance is received. [11]
This instantaneous communication rule is a reaffirmation of the rule of general communication : that formation of a contract occurs when and where the acceptance is actually received by the offeror. It is this general communication rule, and not the postal acceptance rule which applies to other instantaneous modes like telephone, telex and facsimile.
Another historical justification for the postal acceptance rule was the notion that the sender ‘lost control’ over the communication at the time of posting. [12] When an individual ‘posts’ a letter, once the letter is in the mail box they cannot retrieve it; nor are they in a position to know if the mail goes astray in transit. In email communications, the sender does not ‘lose control’ of the communication at the time of sending. In contrast to post, the person best placed to know if there has been a problem with the communication is the sender. If the message is not delivered successfully it will ‘bounce back’, or the sender will receive some form of notification that the communication has not reached the addressee. Some email systems allow the sender to retrieve the message even after it has entered the recipient’s mail box. It is hard under these circumstances to argue that the sender ‘loses control’ at the time of sending.
For these reasons it is argued that the postal acceptance rule should not apply to contract formed by email. [13]
5. Electronic Transaction Act 1999 (Cth)
The aim of the Commonwealth’s Electronic Transaction Act 1999 (the Act) is to ‘facilitate electronic transactions’. [14] The legislation validates digital or electronic versions of signatures and electronic documentation where ‘hard copies’ are required. See by way of example s. 8 (1) :
For the purposes of a law of the Commonwealth, a transaction is not invalid because it took place wholly or partly by means of one or more electronic communications.
The Act also addresses timing and place of dispatch and receipt of electronic communications. Although this Act was not specifically drafted to address contractual formation, any contract which is formed by ‘electronic communications’ (such as email) is necessarily affected.
5.1 Time
For the purposes of Commonwealth laws, the Act addresses the time of dispatch (s 14(1) and (2)) and time of receipt (s 14(3) and (4)) of electronic communications. Because the crucial time in formation of contracts is acceptance, and the general communication rule requires actual communication of that acceptance (and we argue that this rule applies to email acceptance), the receipt provisions are most relevant for our purposes. The time of receipt is deemed to occur ‘when the electronic communication enters [the] information system [designated by the addressee]’ (s 14(3)). The essence of the section means that receipt would occur in the case of email when the message enters the addressee’s electronic mailbox. Hence the question of when a communication is received is answered under the Act as receipt at the addressee’s mailbox. [15]
5.2 Place
The Act also addresses the question of where. Sections 14 (5) and (6) cover place of dispatch and receipt of electronic communications. These provisions are more complicated than those discussed above, and specifically address the issue of the ‘roving dispatcher/recipient’. As with the provisions dealing with time of dispatch and receipt, these sections of the Act are virtually mirror copies of the relevant UNCITRAL Model Law provisions. The section specifically recognises the importance of ‘place’ in relation to any subsequent jurisdiction issues, and demonstrates a practical appreciation of the problems unique to the communication mode.
Effectively, the Act distinguishes between the deemed place of transmission/receipt and the actual place where the message is dispatched and/or received. A message is deemed sent/received at the [originator’s/addressee’s] ‘place of business’ which has the ‘closer relationship to the underlying transaction’ (s. 14(6)(a)), or ‘the originator’s or addressee’s principal place of business (s.14(6)(b)). If the originator/addressee does not have a place of business, their primary residence is deemed to be the relevant ‘place of business’ (s.14(6)(c)). The rationale behind the provision is described in the Report to the Attorney General of the Electronic Commerce Expert Group as follows :
The principle reason for including this rule is to address the circumstance that often the information system of the addressee where the data message is received, or from which the data message is retrieved is located in a jurisdiction other than that which the addressee itself is located. [the provision ensures] that the location of the information system is not the determinate element, and that there is some reasonable connection between the addressee and what is deemed to be the place of receipt, and that place that can be readily ascertained by the originator. [16]
The report goes on to emphasise that it is the unique nature of the mode that gives rise to this ‘deemed place’ provisions, and it should not be extended to other forms of communication, telegram, telex and so forth.
This reluctance to extend the principles of the provision beyond computerised transmissions causes a conundrum. If a facsimile is sent electronically, directly from one’s computer to the receiver, it is a ‘computerised transmission’ and hence attracts the deeming provision. However, if one prints out the facsimile and sends it via a facsimile, it does not attract the provisions. This is not problematic if the recipient is at their ‘principal place of business’, but what if they are temporarily in another country, and have directed that the facsimile be sent to where they are physically located? If we apply the general communication rule (that is, a contract is formed when it is received by the offeror) the jurisdictional outcome will be different simply because of the application of law to the mode selected.
Conundrums aside, if a contract is formed via email, and the provisions of the Act apply, a message is deemed to be ‘received’ at either the place of business having the closest relationship to the transaction or the principal place of business of the addressee. But the provisions do not conclude that the place for receipt of the email is necessarily the place for the formation of the contract. Whether this will be a natural consequence of the provision is yet to attract judicial consideration.
Furthermore, if it is deemed that the provisions in relation to place of receipt subsequently determine the place of formation, does this necessarily mean that that is also time of formation? Or will the where and when of contractual formation via email become two separately determinable matters? Such a development would forever overturn the long held contractual notion that the moment of formation subsequently dictates the answers to the where and when questions.
5.3 Deemed receipt
In common law and under the Act it is recognised that in some circumstances it is necessary to deem receipt. The Act specifies that in the event of an addressee (for our purposes the offeror) not designating an information system (email address) for the purposes of receiving communication, receipt occurs when the communication ‘comes to the attention of the addressee’ (s 14(4)). In contractual negotiations, acceptance would not occur until the offeror/recipient had actually read the email. This is an example of legislation requiring actual communication, and in effect upholding the general communication rule.
But what if the offeror/addressee is remiss in reading their email? Or they deliberately avoid logging on to check their correspondence? In common law, a person who does not receive a message, or in our case an acceptance, in a timely fashion because of poor business practices or deliberate evasion cannot rely on their tardiness to delay the time of the notice :
…if a notice arrives at the address of the person to be notified, at such a time and by such a means of communication that it would in the normal course of business come to the attention of that person on its arrival, that person cannot rely on some failure of himself or his servants to act in a normal businesslike manner in respect of taking cognisance of the communication, so as to postpone the effective time of the notice until some later time when in fact it came to his attention. [17]
The idea of positioning risk for the lack of, or delay in, actual communication because of the fault of the receiver has been addressed in relation to communications in virtually every mode and form. [18] There is no reason why these established principles would not apply to this contemporary form of communication, email. The Act’s drafters envisaged just such an interpretation of the ‘actual communication’ clause (s 14(4)), suggesting that a message need not be read to be considered received
An addressee who actually knows, or should reasonably know in the circumstances, of the existence of the communication should be considered to have received the communication. For example, an addressee who is aware that the communication is in their electronic mail ‘box’, but who refuses to read it should be considered to have received the communication. : [19]
Under these provisions of the Act, in the event of untimely delay on the part of the recipient, the when question is answered: when the offeror actual reads the message, or ought to have read the message.
6. Uniform Computer Information Transaction Act (UCITA)
Despite Australia’s reluctance to legislate directly on the issue of contract formation via email, our United States colleagues have seen fit to address the matter, at least partly, by way of UCITA. Specifically addressing the timing of contracts, the proposed Act provides that in contracts negotiated via ‘electronic message’ which includes email) a contract is formed when “acceptance is received” s. 203(4)(A).
Although specific and conclusive, the provision should not be read as evidence that this will become the legislative norm. UCITA is United States state based contract law aimed specifically at regulating transactions for goods such as software, online databases and digital information products. It has to date only been passed in two states, Virginia and Maryland, and has met with considerable criticism.
Despite its limited application, UCITA does demonstrate that at least some members of the global community recognise the most appropriate approach to email or electronic contract formation is to deem formation at the time of receipt of acceptance, and to up hold the general communication of acceptance rule.
7. What is the outcome for Australia?
If we apply the general rule that communication of acceptance must be actually received for contract formation, the question of when and where must be answered with: at the time and place the acceptance is received by the offeror. In terms of the common law and email this means where and when the acceptance arrives either in the mail-box of the offeror OR when the offeror actually reads the email. However, it is possible that instead of the general rule of communication, something equivalent to the postal acceptance rule may apply to contracts formed by email. This would revert the time and place of formation to where and when the acceptance was sent.
The distinction between receipt of message and actual notification is a subtle one. The Electronic Transactions Act 1999 (Cth) deems the time and place of dispatch and receipt of electronic messages, but does not necessarily conclude the time and place of notification, necessary for contract formation. The Act is only applicable to limited laws of the Commonwealth, and even in those instances it is of restricted assistance in pinpointing when and where an email contract is formed.
8. Conclusion
It is still a moot point just when contracts negotiated via email will be deemed ‘formed’. Consequently, the answers to the when and where questions are uncertain. To date there is no Australian legislation or case law on the issue. Until these questions are settled, contracting via email is fraught with uncertainty.
* Associate Lecturer, The University of Newcastle; Barrister-at-Law; and mother of Beatrix, Oscar and Frederick.
1 UNCITRAL Model Law on Electronic Commerce, with Guide to Enactment 1998 at [27]. Available on-line at : http//www.uncitral.org/english/texts/electcom/ml-ec.htm.
[2] Latec Finance Pty Ltd v Knight [1969] 2 NSWR 79 at 81. See also the definitive statement on the matter in Carlill v Carbolic Smokeball Co [1893] 1 QB 256 at 269. See also Felthouse v Bindley [1862] EngR 931; (1862) 11 CBNS 869; 142 ER 1037; Re National Savings Banks Assn (Hebb’s Case) [1880] UKLawRpKQB 51; (1867) LR 4 Eq 9; Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd [1957] HCA 10; (1957) 98 CLR 93; Bressan v Squires [1974] 2 NSWLR 460; Tenas Steamship Co Ltd v Owners of the Motor Vessel ‘Brimnes’ (The Brimnes) [1974] EWCA Civ 15; [1974] 3 All ER 88 at 115.
[3] See generally Tinn v Hoffman & Co (1873) 29 LT 271 at 279 and Carlill v Carbolic Smokeball Co [1893] 1 QB 256.
[4] See generally Mark Metherell’s piece in Sydney Morning Herald, 12 May 2000, pg 1.
[5] For succinct commentary on this area of the law, see PE Nygh Conflict of Laws in Australia, 6th ed, (Butterworths 1995), pp 50-55. See also developing arguments specific to the mode in International Jurisdiction and the Recognition and Enforcement of Foreign Judgements in Civil Matters, Issues Paper 3. This paper is issued by the Commonwealth Attorney General’s Department in response to the Special Commission of the Hague Convention on Private International Law. Both documents are available from http://law.gov.au/publications/pubs.htm.
[7] Entores Ltd v Miles Far East Corporation [1955] EWCA Civ 3; [1955] 2 QB 327; Aviet v Smith and Searls Pty Ltd (1956) 73 WN (NSW) 274; W.A Dewhurst and Co Pty Ltd v Cawrse [1960] VicRp 44; [1960] VR 278; Hampstead Meats Pty Ltd v Emerson and Yates Pty Ltd [1967] SASR 109.
[8] Entores Ltd v Miles Far East Corporation [1955] EWCA Civ 3; [1955] 2 QB 327; Express Airways v Port Augusta Air Service [1980] Qd. R 543; Mendelson-Zeller Co Inc v T & C Providores Pty Ltd [1981] 1 NSWLR 336; Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1982] 1 All ER 293.
[9] Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) 5 BPR 97325 (NSW CA).
[10] To demonstrate the point, consider the difference between sending a communication to the UK by snail mail or by e-mail. One takes days, the other moments.
[11] Entores Ltd v Miles Far East Corporation [1955] EWCA Civ 3; [1955] 2 QB 327, per Denning LJ at 334.
[12] Dunlop v Higgins (1848) 1 HL Cases 381 at 398; 9 ER 80; Re Imperial Land Co of Marseilles (Wall’s Case) [1872] UKLawRpEq 164; (1872) LR 15 Eq 18 at 25; Dick v United States (1949) 82 F Supp 326 at 329.
[13] For a lengthy discussion on why the postal acceptance rule should not be applied to e-mail, see : Simone WB Hill, ‘Flogging A Dead Horse – the postal acceptance rule and email’, (2001) 17 Journal of Contract Law 151. Some ideas canvassed in this paper are more fully and thoroughly covered in that publication.
[14] The Act is practically a wholesale adoption of the UNCITRAL Model Law on Electronic Commerce. The Model Law and accompanying commentary is available on-line at: http//www.uncitral.org/english/texts/electcom/ml-ec.htm
[15] However, the Act only specifies receipt : this does not mean that receipt for the purposes of the Act equates with ‘notification’ or ‘acceptance’ for the purposes of contract formation.
[16] Electronic Commerce : Building the Legal Framework, Report of the Electronic Commerce Expert Group to the Attorney General, 31 March 1998.
[17] Tenas Steamship Co Ltd v Owners of the Motor Vessel ‘Brimnes’ (The Brimnes) [1974] EWCA Civ 15; [1974] 3 All ER 88 per Megaw LJ at 113.
[18] See for example the delay in receiving an acceptance because of the supply of an incorrect address by an offeror : Re Imperial Land Co of Marseilles (Townsend’s Case) [1871] UKLawRpEq 189; (1871) LR 13 Eq 148.
