Should an automated email message affect when a person becomes legally bound by an agreement concluded by electronic means? That is just one of a number of questions under consideration by the Scottish Law Commission as it consults on draft legislation to codify and reform the rules on formation of contracts under Scots law.
The fundamentals of Scots contract law are under the spotlight as part of a large project being undertaken by the Scottish Law Commission to assess whether the law of contract in Scotland is keeping pace with developments internationally.
The project to review Contract Law in Scotland in light of the Draft Common Frame of Reference (DCFR) – the latter being an academic initiative under the aegis of the European Commission to develop model principles of European private law – has already yielded one statute on counterpart execution and a further bill on third party rights which is now at an advanced stage in the legislative process at the Scottish Parliament.
The latest fruits from the Scottish Law Commission’s contract law project are a proposed bill to codify and reform the rules on formation of contracts under Scots law: a public consultation on a working draft of the Contract (Formation) (Scotland) Bill was launched last week, with responses due by 3 November 2017.
For banks and other financial institutions with standardised or commoditised legal documentation, the draft legislation raises a few interesting issues, particularly around (1) how their documentation, systems and processes should provide for a customer to communicate their acceptance of an offer letter and (2) what circumstances, such as a merger or group reorganisation by the financial institution, might result in an offer letter ceasing to be capable of acceptance by the customer.
Calling time on the Postal Acceptance Rule
One of the notable reforms proposed under the draft bill is the abolition of the Postal Acceptance Rule – a common law rule that an acceptance sent by means of postal service takes effect when posted, rather than when it is delivered.
Having been imported into Scots law from England when Charles Dickens was just a lad, this 19th-century rule belongs to a bygone age where the postal system was the primary means of communication between parties transacting at a distance. In the digital age, there is clearly no longer a justification for retaining special protection for acceptances sent by post.
Communicating in the digital age
In place of the old Postal Acceptance Rule, the draft bill proposes that any notification to a person relating to the formation of a contract (i.e. an offer, acceptance, counter-offer, withdrawal, rejection, revocation or declaration) is to take effect on reaching that person. A notification reaches someone when it is made available to that person in circumstances where it is reasonable to expect them to be able to obtain access to it without undue delay.
For acceptances sent by electronic means, such as email, server down-time and other technological and infrastructure issues might prevent an electronic communication from becoming instantly available to be accessed by the recipient and so, under the scheme proposed by the draft bill, could delay the point in time when an acceptance becomes effective and legal relations are established.
If an email containing the acceptance of an offer is successfully delivered to the recipient’s server, but the recipient has set an automated message stating that he or she is on holiday for a specified period and is not checking emails while out of the office, when is it reasonable to expect that person to be able to access the email without undue delay – and therefore when does the acceptance become effective? Could an out-of-office message affect the point in time when a contract is concluded?
At scarcely more than 6 pages in length, the draft bill is brief and does not provide all the answers to these questions. However, the scheme of the draft bill is simply to set out default rules and to allow maximum freedom of contract to prevail so that contracting parties have autonomy to decide how and when they form legal relations.
To avoid uncertainties if the draft bill becomes law, banks and other financial institutions would be well advised to ensure that their offer letters clearly stipulate how acceptance is to be communicated and that their systems and processes record when an acceptance has reached them (whether by electronic means or otherwise).
Material change in circumstances
Another reform proposed by the draft bill is the codification of a more obscure common law rule, again dating from the 19th century, namely that an offer lapses if a material change in circumstances occurs before it has been accepted. The application of this rule has tended to be limited to situations where a person making an offer dies or loses legal capacity because of mental illness. The effect of the rule is that the offer can no longer be accepted.
The proposal to codify this rule raises the question of how the rule applies to corporate entities nowadays, for example in the context of a group reorganisation or a merger of banking businesses or building societies.
In such mergers and reorganisations, the ability to manage pipeline business (e.g. offer letters which have been issued by the institution being merged or reorganised, but which have not yet been accepted by the relevant customers at the point of merger or reorganisation) is an important consideration.
The draft bill would not prejudice a merger or reorganisation being effected using statutory powers, such as a ring-fencing transfer scheme under the Financial Services and Markets Act 2000, due to a carve-out in the draft bill which allows other enactments to apply as intended. Though if the merger or reorganisation takes effect through non-statutory means, by contractual arrangements and conventional conveyances, the interaction of the codified rule under the draft bill with the terms of the relevant offer letters would require more scrutiny.
One to watch
Although the overall policy aims of the Contract (Formation) (Scotland) Bill look unlikely to change, the bill is just a working draft at this stage and the responses which the Scottish Law Commission receives to its public consultation could further shape the content of the draft bill which is ultimately laid before the Scottish Parliament. For the time being, the draft bill is one to watch with interest.
For more information on the issues covered in this briefing note and the impact on documentation in Banking and Finance transactions and Financial Products and Services, please contact Peter Alderdice and Andrew Kinnes.