In this case, the NSW Court of Appeal considered whether the common law “postal rule” relating to the formation of contracts would, as a general principle, apply to payments so that payment is completed once it is placed in the post.

Key learnings

The judgment in this case clearly indicates that the postal rule, which applies to the formation of contracts, cannot automatically be extended to different legal transactions, such as payment of a debt. The Court of Appeal indicated that the principle embodied by the postal rule should not be extended without strong justification and could not find any justification to do so in this case. While it was open to the parties to agree that a particular payment would be completed by placing it in the post, they had not done so in this case and, therefore, ordinary principles should apply and payment would only be completed once it had been received and accepted by the other party.

Case note

This case related to a failed investment scheme relating to a tea tree plantation. Under the scheme, individual investors who had borrowed money to invest in the scheme may have been indemnified against their repayment obligations, provided that they had made payments under the applicable loan agreement “punctually”. Some individual investors argued that they had satisfied this condition by placing the required payments in the post before the applicable due date.

It is generally understood that a contract can be formed once a party has placed its acceptance of another party’s offer in the post. Despite the fact that this “postal rule” has some pragmatic appeal where parties are communicating at a distance, because it provides some certainty as to the time at which a contract comes into being, the NSW Court of Appeal in this case found it difficult to justify as a matter of principle. Although they proceeded on the basis that the rule continued to apply, the Court suggested that the rule may be open to question in the future.

In any case, the Court found that there was no similar general rule for other legal transactions, such as the payment of a debt. In particular, the Court found that there is no general rule that a payment will be completed simply by placing the means of payment in the post. Notwithstanding this, the Court said that it is open to the parties to a contract to agree on a case by case basis that a debt is to be paid by placing payment in the post (in effect creating a postal rule for payment by agreement). However, where the parties have simply agreed that the post may be used for the purposes of making payment, payment is not completed simply by placing the means of payment in the post.

In the present case, the loan agreement indicated that investors could remit the relevant repayment by cheque or electronic transfer. This meant that the investors could, if they wished, send a cheque by post to make the relevant payment but did not necessarily mean that the act of posting the cheque would itself be treated as payment of the debt. Actual payment would only occur once the cheque had been received and accepted by the other party. It followed from this that an investor could not discharge the obligation to make payments punctually simply by placing a cheque in the post before the due date for payment.

To see the full judgment in this case, please click here.