The Postal Acceptance Rule and E-mail Communications: Instantaneous or Delayed?, Study notes of Communication

Download The Postal Acceptance Rule and E-mail Communications: Instantaneous or Delayed? and more Study notes Communication in PDF only on Docsity! Acceptance of Offers by E-Mail - How Far Should the Postal Acceptance Rule Extend? Kathryn O'Shea* and Kylie Skeahan** Abstract Since the inception of the postal acceptance rule in 1818, numerous alternative methods of communication have been developed, including the telephone, telex, telegraph, facsimile and e-mail. This article examines whether the postal acceptance rule will be applied to acceptances communicated by e-mail. In resolving this issue the authors consider how an e-mail is transmitted, the ambit of the postal acceptance rule and its underlying policy considerations and how the Courts have resolved this issue in relation to other modern forms of communication. I. Introduction It is well established that the general rule governing the acceptance of an offer is that acceptance is not effective until it is communicated to the offeror.1 However, an equally well established exception to this general proposition is the postal acceptance rule. Although the postal acceptance rule is deeply entrenched within our legal system, the scope of the rule and its applicability to modern forms of communication are issues which have not been conclusively determined by the courts. Since the initial formulation of the postal acceptance rule, communication technology has dramatically changed. As each new method of communication has emerged, the courts have been compelled to determine the applicability of the postal acceptance rule. The development of e-mail means that this issue has once again arisen for consideration. Due to the increase in the use of e-mail as a tool of commerce, it is essential that this issue be resolved to enable contracting parties to utilise this new technology with a degree of certainty. * LLB (Hons) (QUT); Articled Clerk - Hopgood & Ganim, Solicitors & Notary; Part time tutor - Queensland University of Technology. Editors' note: QUT Medallist (1997 Graduation ceremony). ** B Info Tech (Dist), LLB (Hons) (QUT); Articled Clerk - Clayton Utz Solicitors; Part time tutor - Queensland University of Technology. 1 Byrne & Co v Leon Van Tienhoven and Co (1880) 5 CPD 344. KATHRYN O'SHEA & KYLIE SKEAHAN (1997) 2. The Postal Acceptance Rule. a. Development of the postal acceptance rule The origin of the postal acceptance rule may be traced back to 1818 and the case of Adams v Lindsell.2 The most renowned formulation of the rule is that propounded by Lord Herschell in Henthorn v Fraser, where his Lordship stated: Where the circumstances are such that it must have been within the contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted.3 Essentially, the effect of the rule is that an offeree's acceptance will be effective the moment the acceptance is correctly posted and it is irrelevant whether the acceptance is delayed or in fact never reaches the hands of the offeror.4 The conse- quences which flow from the application of the rule are of particular importance in situations where either the time or place of formation of a contract are at issue. Indeed, the courts have been concerned with locating the place of formation of a contract in the majority of cases which have considered the applicability of the postal acceptance rule to 'modern' forms of communication.5 b. Exclusion of the postal acceptance rule Although the rule is deeply entrenched in our legal system, it can easily be excluded by parties to a contract. The postal acceptance rule can be displaced if the parties either expressly or by implication from the terms of their contract require that acceptance be received by the offeror.6 The ease by which the rule can be excluded is exemplified by the case of Bressan v Squires J In this case, clause 1 of an option agreement provided that "This option may be exercised by you by notice in writing addressed to me at any time on or before 20th December 1972." The plaintiff posted a notice of exercise of the option addressed to the defendant on 18 December 1972, which the defendant received on 21 December 1972 (1 day after the prescribed time period). The plaintiff sued the defendant claiming that he had validly exercised the option to purchase the 2 (1818) B&Ald 681; The rule was first applied in Australia in the case of Tooth v Fleming (1859) Legge 1152. 3 Henthorn v Fraser [1892] 2 Ch 27 at 33. 4 Ibid ; Household Fire and Carriage Accident and Insurance Company (Limited) v Grant (1879) 4 ExD 216. 5 For example: Entores Ltd v Miles Far East Corporation [1955] 2 QB 327, Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1982] 1 All ER 293. 6 Holwell Securities Ltd v Hughes [1974] 1 All ER 161, Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1994) 63 SASR 235, Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74 7 [1974] 2 NSWLR 460. 13 QUTLJ Acceptance of Offers by E-mail who correctly argues that an offeror's agreement to use the post as a means of communicating acceptance "...surely does not establish a relevant agency. Even if it is possible to regard the post office as his agent to carry the letter (which still seems unreal, with a prepaid letter), there is surely no agency to receive it and so conclude a contract on his behalf, which is what would be needed to justify the rule."16 The most frequently cited justification for retention of the rule is that of business convenience, which stems from the need to create certainty in contractual relations. If acceptance is complete upon proper posting, this effectively allows the offeree to structure his or her affairs on the basis that a binding contract is formed on postage.17 Additionally, it has also been held that upon posting an acceptance the offeree has done all that he or she can do to communicate acceptance to the offeror and should therefore not be held responsible for any events which may occur after the offeree effectively loses control over the letter of acceptance.18 Although the business convenience justification has been the subject of criticism on the basis that it unfairly favours the interests of the offeree, Thesiger LJ in the case of Household Fire Insurance Company v Grant19 presents a persuasive case in favour of the postal acceptance rule on this basis: There is no doubt that the implication of a complete, final, and absolutely binding contract being formed, as soon as the acceptance of an offer is posted, may in some cases lead to inconvenience and hardship. But such there must be at times in every view of the law. It is impossible in transactions which pass between parties at a distance, and have to be carried on through the medium of correspondence, to adjust conflicting rights between innocent parties, so as to make the consequences of mistake on the part of a mutual agent fall equally upon the shoulders of both. At the same time I am not prepared to admit that the implication in question will lead to any great or general inconvenience or hardship. An offeror, if [he] chooses, may always make the formation of the contract which [he] proposes dependant upon the actual communication to [himself] of the acceptance. If [he] trusts to the post [he] trusts to a means of communication which, as a rule, does not fail, and if no answer to [his] offer is received by [him], and the matter is of importance to [him], [he] can make inquires of the person to whom [his] offer was addressed. On the other hand, if the contract is not finally concluded, except in the event of the acceptance actually reaching the offeror, the door would be opened to the perpetration of much fraud, and, putting aside this consideration, considerable delay in commercial transactions, in which dispatch is, as a rule, of the greatest consequence, would be occasioned; for the acceptor would never be entirely safe in acting upon his acceptance until [he] has received notice that his letter of acceptance had reached its destination.20 16 S Gardner Trashing with Trollope : A Deconstruction of the Postal Rules in Contract' (1992) 12 OJLS 170,173. 17 Re Imperial Land Co of Marseilles (Harris' Case) (1872) 7 Ch App 587, Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344. 18 Dunlop v Higgins (1848) 1 HL Cas 381; Re Imperial Land Co of Marseilles (Wall's Case) (1872) LR 15 Eq 18. 19 (1879) 4 ExD 216. 20 Ibid at 223-224. KATHRYN O'SHEA & KYUE SKEAHAN (1997) Although it has been argued that the efficiency of the modern postal system undermines the traditional policy considerations used to justify the postal accept- ance rule, the rule has not been abandoned and will still apply to acceptances communicated by post if the parties to the contract contemplate that the post may be used as a means of communicating acceptance. However, as discussed below, the courts have shown an unwillingness to extend the scope of the rule to modern, virtually instantaneous forms of communication. 4. Modern Forms of Communication Technology has rapidly advanced since the 1800's when the postal acceptance rule was initially formulated. Prior to the advent of e-mail and the Internet, communica- tion technologies such as the telephone, telex, telegram and facsimile had been developed. As each of these technologies became a tool of commerce the courts were forced to grapple with the application of the postal acceptance rule. a. Telephone In Entores v Miles Far East Corporation21 Denning LJ drew a distinction between the telephone and the postal system on the basis that communications via the telephone are virtuously instantaneous and are therefore analogous to face to face negotiations between the offeror and offeree. It is well established that acceptance of an offer by telephone is subject to the general rule that acceptance is not effective until communicated to the offeror.22 b. Telegrams The application of the postal acceptance rule to telegrams (or telegraphs as they are also known) was first addressed by the English Courts in Cowan v O'Connor.23 This case held, with remarkably little reasoning or justification, that where an acceptance is communicated to an offeror by telegram, a contract is formed when the telegram is given to the post office for dispatch.24 This decision is based on the assumption that the sending of a telegram is analogous to the mailing of a letter, however it has been criticised in subsequent decisions25 due to the inadequacy of the reasons provided by the court. The applicability of the postal acceptance rule to telegrams was also assumed in the case oiBruner v Moore,2* but again the Court failed to provide comprehensive reasons for the adoption of this position. 21 [1955] 2 QB 327 at 332. 22 The New Zealand case of Union Steamship Co v Ewart (1893) 13 NZLR 9 applies this principle. 23 (1888) 20 QBD 640. 24 Ibid. 25 See Leach Nominees Pty Ltd v Walter Wright Pty Ltd [1986] WAR 244 at 251 per Master Seaman QC. 26 [1904] 1 Ch 305 at 316. 13 QUTLJ Acceptance of Offers by E-mail Despite this lack of judicial reasoning, subsequent decisions have proceeded upon the basis that acceptance by telegram will be complete when it is given to the post office.27 Consequently, it appears that the postal acceptance rule will extend to communication of an acceptance by telegram. c. Telexes The extension of the postal acceptance rule to modern forms of communication has primarily been considered in relation to telexes. In Entores v Miles Far East Corporation28 it was held that a telex is a "virtually instantaneous" method of com- munication.29 As a result, when an acceptance is sent by telex "it is not until [the offeree's] message is received that the contract is complete".30 The decisive factor which motivated Lord Denning's decision not to extend the application of the postal acceptance rule to telexes is the ability of the contracting parties to ascertain whether the acceptance has been received by the offeror. He reasoned that where an instantaneous method of communication is used, usually one party will know if some part of the acceptance has not been received, which effectively removes the risk of a party proceeding upon the mistaken assumption that an acceptance has been communicated. This reasoning circumvents the policy considerations (such as certainty and business convenience) which have tradition- ally been relied upon to support the existence and continued application of the postal acceptance rule. In 1982 the House of Lords reconsidered this issue in the case of Brinkibon Ltd v Stahag Stahl mbH.31 In this case Lord Wilberforce recognised the extensive and differing uses of telex communication.32 He also noted that in some instances, there may be considerable delay between the time when a message is sent by the offeree and the time that it comes to the attention of the offeror: The senders and recipients may not be the principals to the contemplated contract. They may be servants or agents with limited authority. The message may not reach, or be intended to reach, the designated recipient immediately: messages may be sent out of office hours, or at night, with the intention, or on the assumption, that they will be read at a later time. There may be some error or default at the recipient's end which prevents receipt at the time contemplated and believed in by the sender. The message may have been sent and/or received through machines operated by third persons.33 While no universal rule can apply to all situations, the case before the court 27 Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1982] 1 All ER 293 at 295. 28 [1955] 2 QB 327. 29 Ibid at 332. 30 Ibid. 31 Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1982] 1 All ER 293. 32 Ibid at 296. 33 Ibid. KATHRYN O ' S H E A & K Y U E SKEAHAN (1997) 5. E-mail and the Postal Acceptance Rule In light of the above discussions, the inevitable question remains: Will the courts apply the postal acceptance rule to e-mail communications? The answer to this question seems dependant upon whether the courts classify e-mail as a virtually instantaneous method of communication. a. What is e-mail? Essentially, 'e-mail' is a generic term that is used to describe, a variety of forms of electronic messaging. Technically, a distinction may be drawn between EDI46 and e-mail on the basis that EDI involves the exchange of data as opposed to text-based messages. However, for the purposes of this article, the term 'e-mail' is referred to in its generic sense as it is unnecessary to maintain the above distinction in the context of an analysis of the legal implications of using e-mail as a mechanism to form contracts. Before embarking on an analysis of the legal principles relating to the formation of contracts and their applicability to contracts purportedly formed by e-mail, it is essential to examine the process involved in sending an e-mail. There are various methods by which an e-mail may be transmitted by a sender to a recipient and perhaps the most commonly employed method is transmission via the Internet. The illustration below displays the passage of an Internet e-mail, however it is also possible to have a direct e-mail link between two computers. 1 3 Server Server Recipient's Computer 46 EDI refers to Electronic Data Interchange or Electronic Document Interchange. 13 QUTLJ Acceptance of Offers by E-mail 1. E-mail is composed by sender 2. Sender activates command to "send" e-mail. 3. E-mail is stored on sender's ISP's47 server. 4. The e-mail is transmitted over the Internet. This may involve the e-mail being transferred between numerous servers before it reaches the recipient's ISP. 5. The e-mail is stored on the recipient's ISP's server until it is downloaded by the recipient. 6. The recipient reads the e-mail. Internet e-mail is, in many ways, similar to the process which occurs when sending a letter via the conventional postal system. Once a message is "sent" or "posted" by the e-mail sender it may pass through a variety of different computer systems owned by a number of third parties. At the time of sending the e-mail the sender has no means of knowing the path that the message will take before it is received by the recipient's computer system. Quite often this involves the e-mail being sent between countries or States notwithstanding the fact the sender and recipient may be in adjacent buildings. Key similarities between the systems of communication are the intervention of third parties and the inability to foresee the pathway of the message or letter once it is "sent" or "posted".48 However, where organisations make extensive use of EDI a direct e-mail link may be established between them. This arrangement is more akin to facsimiles as the two computer systems are directly connected over telephone lines. b. Control over e-mail messages There are a wide variety of commercial e-mail software packages currently available on the market and it is not intended to examine the full functionality provided by each available software package. However, for present purposes it is important to note the possible extent of control and status monitoring which a sender has over his or her e-mail messages. In relation to other methods of communication, issues of control and knowledge have proven to be decisive factors in determining the applicability of the postal acceptance rule.49 Many modern e-mail systems allow a sender to monitor whether an e-mail has been received, opened or deleted by the recipient. Like facsimiles, these confirma- tion messages do not provide conclusive evidence of receipt, however they provide at least some information about the status of the e-mail. Depending upon the e-mail system involved, the sender may be advised of the time when the e-mail is received by the recipient's ISP, downloaded to the recipient's computer system or actually 47 Internet Service Provider. 48 Issues of distinction between the systems, such as retraction and status monitoring are consid- ered below. 49 For example, see the discussion in relation to telexes by Denning LJ in Entores v Miles Far East Corporation Pty Ltd [1955] 2 QB 327. KATHRYN O ' S H E A & KYLIE SKEAHAN (1997) opened by the recipient. It is also possible for users to delete e-mails which have been sent but not yet opened by the intended recipient depending upon the restric- tions imposed by the recipient's ISP and computer system. To a large extent the sender is in control of the e-mail up until the point it is read by the recipient, or at least is able to monitor the progress of the e-mail. While the functionality provided by e-mail systems varies, it is unlikely that a Court will make a determination regarding the applicability of the postal acceptance rule based solely upon the functionality of the particular system used by the sender. c. Is e-mail instantaneous? There has been a considerable amount of conjecture to date as to whether e-mail is or should be considered to be an instantaneous form of communication. This debate has largely been driven by the 20th century cases which have shown a tendency to determine the applicability of the postal acceptance rule by classifying all means of communication as either instantaneous or non-instantaneous. There appears to be some confusion as to what is required to constitute a "virtually instantaneous" communication.50 Recently, it has been suggested that issues such as incorrect addressing of e-mail, failure to read e-mail by recipients and delay in the internal distribution of e-mails by organisations demonstrate that e-mail is not an instantaneous means of communication.51 With respect, these factors are external to the e-mail communication network and are not determinative of the "instantaneous" nature of e-mail communications. Where there is a direct link between computers it is suggested that the e-mail system is a virtually instantaneous form of communication notwithstanding the fact that there may be delays between the sending and receipt of an e-mail message. In this arrangement the e-mail does not pass into the control of third parties and the only delay which may be experienced results from either the processing power of the computer systems used or the bandwidth of the communication network. There is a strong argument analogous to that applied to telexes that this form of commu- nication is virtually instantaneous. However, with Internet e-mail (which provides a greater degree of flexibility of use) considerable delays may occur between when a message is sent and when it is received by the recipient. These delays result from the complex path over which the e-mail is sent. For example: If person A in Australia sends an e-mail message to person B in the United States of America, usually there will be no direct link between the computer systems. However, for the message to be sent by A to B a link must be found. In a simple situation, this link could occur through C's computer system as C's system may have links to both A and B's systems. However, in the majority 50 This is the test applied in Entores v Miles Far East Corporation Pty Ltd [1955] 2 QB 327. It was accepted in the case of telex, that sending and receiving a message did not occur simultaneously, however it was accepted as an instantaneous means of communication. 51 B Clark The E-Mail Acceptance Rule' (1997) June Proctor 13. 13 QUTLJ Acceptance of Offers by E-mail to the offeror as is the case with telex, facsimile or e-mail communications. In these situations it is possible for the message to be placed within the custody and control of the offeror by delivery to its telex or facsimile machine or its e-mail server, but not to come to the attention of the offeror for some time. The following question therefore arises: Is mere receipt of the message into the offeror's custody sufficient for communication to occur, or is the further step of knowledge required? Some guidance on this issue can be found in the judgement of Lord Denning in Entires.57 In this case, Lord Denning thought that the only situations in which an offeror is bound by an acceptance communicated by a virtually instantaneous means of communication which he or she has not received, is where the non-receipt is due to the offeror's fault.58 In this situation, the offeror is estopped from denying com- munication. This approach adequately addresses the concerns of fraud and system failure. (For example: where an offeror deliberately abstains from receiving knowledge of the acceptance, the offeror is estopped from denying that communi- cation has occurred). However, where the e-mail is lost through a system fault or failure there are several possible outcomes. The functionality of current e-mail systems may alert the offeree to the fact that the message has not been delivered, in which case the offeree would be required to repeat the acceptance. If, despite the system failure, the offeror's system maintains a log of messages received, it would be appear to be incumbent on the offeror to request retransmission. If, however, due to the fault of neither party a message is not received, it appears that no binding contract would be formed.59 If this interpretation is followed, it seems that acceptance will not occur until the offeror has actual knowledge (or would be in a position to have actual know- ledge but for its own act or omission) of the acceptance. In the context of e-mail communications it has been suggested60 that accept- ance occurs at the point where the e-mail is received by the offeror's computer system on the basis of an analogy with telegrams. With respect, this analogy does not provide a great deal of assistance. As acceptance by telegram is effective when the offeree gives the telegram to the post office, if this analogy is applied, an accept- ance sent by e-mail would be effective when the e-mail is communicated to the offeree's e-mail server, as opposed to the offeror's. The argument in favour of acceptance upon actual communication is supported by the functionality provided by e-mail systems. As some e-mail systems allow a sender to retract a message up until the point when it is opened by the recipient, it would seem appropriate that acceptance should not occur until the message is read.61 57 Entores v Miles Far East Corporation Pty Ltd [1955] 2 QB 327 at 333. 58 Ibid. 59 Ibid. 60 C Reed 'Advising Clients on EDI Contracts' (1994) 10(3) Computer Law & Practice 90; C Reed 'EDI - Contractual and Liability Issues' (1990) 6(2) Computer Law & Practice 36. 61 However, this argument is not the same for facsimiles and telexes where it is not open for the sender to retract the message once it has been sent. KATHRYN O'SHEA & K Y U E SKEAHAN (1997) To decide otherwise could lead to the absurd consequence that an offeree may be legally bound by an acceptance which has been retracted by the offeree prior to the offeror gaining knowledge of the acceptance.62 6. Practice Points Despite the strong arguments outlined above against extending the postal accept- ance rule to e-mail communication, the law in this area "is very much in its infancy".63 Consequently, contracting parties cannot predict with any certainty when an acceptance transmitted by e-mail will be effective. However, this uncertainty can be avoided by parties to a contract if they exclude the operation of the postal acceptance rule. Although it is often assumed that a binding contract will not come into operation until the e-mail message is received by the offeror,64 to avoid any uncertainty the terms of an offer should clearly specify when an acceptance of the offer will be effective. The uncertainty surrounding the applicability of the postal acceptance rule to e-mail communications, can easily be avoided by careful drafting. 7. Conclusion In summary, while the postal acceptance rule remains deeply entrenched in our legal system, it is unlikely that the Courts will extend the scope of this rule to encompass acceptances communicated by e-mail. Consequently, the general rule that governs the acceptance of offers will apply and an acceptance which is sent by e-mail will not be effective until it is communicated to the offeror. This conclusion is consistent with the approach taken with other forms of virtually instantaneous communication and accords with the current policy of the Courts to restrict the scope of the postal acceptance rule. 62 The Courts have struggled with this issue in the case where an offeree retracts an acceptance sent by post by a faster means of communication. Dunmore v Alexander (1830) 9 Sh (Ct of Sess) 190; Wenkheim v Arndt (1873) 1JR 73. 63 C Reed 'Advising Clients on EDI Contracts' (1994) 10(3) Computer Law & Practice 90 at 96. 64 Ibid at 93 and EDI Association Electronic Data Interchange Agreement.