Contracting into the 21st century – Contract (Formations) (Scotland) Bill
Abolishing the well-established Postal Acceptance Rule is only one of the proposed changes put forth by the Scottish Law Commission in the recent Contract (Formation) (Scotland) Bill.
The decision to reform and codify certain contract law principles has been driven by the publication of both the Discussion Paper on Formation of Contract, published in 2012, and the Draft Common Frame of Reference (the DCFR) in 2009. The DCFR is a report presented to the European Commission setting out the current contract law rules based on comparative research from across the European Union.
The Bill is remarkably succinct and codifies several principles already ingrained in Scotland’s legal philosophy, however there are a few key points which ought to be on everyone’s radar.
Abolishing the Postal Acceptance Rule
A transplant from English law, the rule provides that an unqualified acceptance takes effect when the acceptance is posted and not when it is received. Of course, the rule was conceived in an era when postal service was the only common means of communication between parties in different locations. The 21st century is a new-age digital era which requires updated and relevant protections to reflect today’s electronic communications. The abolition of this rule is perhaps one of the most noteworthy changes that the Bill seeks to effect.
The Replacement Acceptance Mechanism
The proposed rule states that a notification to a person (of an offer, acceptance, counter-offer, withdrawal, rejection, revocation or declaration) takes effect upon reaching that recipient. Such a notification is deemed to have reached a person when it is made available to the person in such circumstances as make it reasonable to expect the person to be able to obtain access it without undue delay.
The section expands by noting some commonly encountered circumstances, one of which refers to notifications sent by electronic means. The broad reference to “electronic means” is future planning for any technological developments not yet in existence.
What does this mean in practical terms?
Notifications sent by electronic means will be delivered when it becomes available to be accessed by the recipient. This begs several questions. What happens when you receive an “out of office” reply? What happens during the inevitable server crashes or server down-time? Is a notification of email delivery sufficient? Could an “out of office” automated response really become the point at which a contract is concluded?
The Bill is clearly seeking to set out a default rule rather than contemplate and legislate on every eventuality. This general test is designed to be flexible, enabling contracting parties to agree between themselves the details as to when they form legal relations. On a practical level, consideration ought to be given to the usual disclaimers in emails that such communications are not intended to be contractually binding. Are disclaimers now required for other media, for example, instant messages, WhatsApps, etc.?
It should be emphasised that in order to prevent any ambiguity in such matters, the best practice to adopt is to ensure that any offers clearly specify the way in which an acceptance must be intimated. It is also advisable that the point at which electronic communications become “accessible” is considered and agreed upon.
Codification of Exiting Rules
The remaining provisions of the Bill largely codify the existing law in relation to contracts. Despite the fact that there are no further significant developments in law, it does present an opportunity to reflect on the existing legal position and consider how it interacts with today’s legal backdrop.
An example being the provision concerning material change of circumstances. This provision restates the current law: an offer will lapse and can no longer be accepted if circumstances materially change before conclusion of the contract. Traditionally (and as referenced in the Bill), this principle is chiefly triggered in circumstances where the offeror or offeree dies or becomes incapacitated.
The Bill does not legislate for a situation where a material change occurs in a corporate context. Although the provision is clear that it will not prejudice any existing enactment or rule of law, further clarification would have been welcome. Mergers, corporate restructures, takeovers – will offers sent out and yet to be accepted remain intact or will they be swept up under this provision and lapse?
This is one of many considerations that ought to be taken into account as the Bill progresses through the formal stages. The reform and codification of the law of contracts has been long overdue and public consultation may see the proposed changes further evolve. The working draft of the Bill has been published for consultation and is available to be viewed here. The Scottish Law Commission welcomes comments and requires all responses before 3 November 2017.
This update was co-written by Deborah Allan.