No oral modification clauses – a primer

No oral modification clauses (NOM clauses) are a common feature of commercial contracts. They seek to invalidate modifications to a contract unless they are made in writing. A typical NOM clause may read as follows:

“This agreement may not be supplemented, amended, varied or modified except by an instrument in writing signed by the authorised representatives of all the parties to this agreement”.

NOM clauses are a mechanism to:

1. Avoid vexatious arguments that an agreement has been varied orally or by the conduct of contracting parties – such arguments may be raised to fend off summary judgment;
2. Avoid disputes about the exact terms of the variation; and
3. Enable organisations to monitor whether their employees have agreed to variations without authorisation.

NOM clauses and entire agreement clauses may seem similar, but they are strictly speaking, different. A NOM clause nullifies subsequent oral modifications to a contract once it has been entered into, whereas an entire agreement clause nullifies prior collateral agreements (including those made orally).

An enlarged five-judge coram of Singapore’s highest court (the Court of Appeal (SGCA)) in Charles Lim Teng Siang v Hong Choon Hiau [2021] 2 SLR 153 (Charles Lim) has recently considered the vexed question of whether NOM clauses should be strictly applied. The SGCA decided that they should not be, and considered that NOM clauses merely raise a rebuttable presumption that in the absence of an agreement in writing, there would be no variation.

This marks a break with the position in the United Kingdom (UK), where the majority of the UK Supreme Court in Rock Advertising v MWB Business Exchange Centres Ltd [2018] UKSC 24 (Rock Advertising) has held that such clauses should be given full effect. This is a strict approach, and significantly reduces the ability (or risk) of parties orally modifying their agreements.

This update examines the SGCA’s decision and provides key takeaways.

Charles Lim v Hoong Choon Hiau

Background

The appellants entered into a sale and purchase agreement (SPA) to sell shares to the respondents. The SPA provided that time would be of the essence, and contained a NOM clause which provided that “No variation, supplement, deletion or replacement of any term of the SPA shall be effective unless made in writing and signed by or on behalf of each party”.

The date of completion passed but the share transaction was never completed. The appellants did not serve the notice to complete for 3 ½ years. They eventually commenced a suit claiming damages for breach of the SPA. The respondents’ main defence was that the SPA was orally rescinded by mutual agreement in a telephone conversation between the first appellant and the first respondent. The first appellant denied that the telephone conversation took place.

The lower court (namely, the Singapore High Court where the trial took place) accepted the respondents’ evidence, and held that the SPA had been orally rescinded by the said telephone conversation between the first appellant and the first respondent.

On appeal to the SGCA, the appellants raised a new argument, contending that:

1. The alleged oral rescission, even if proved, was invalid because it contravened the NOM clause; and
2. In any event, there had been no mutual agreement to rescind the SPA.

The respondents’ position on appeal was that:

1. The NOM clause did not apply to rescission;
2. The evidence showed that there was a mutual agreement to rescind the SPA; and
3. The appellants were estopped from enforcing the SPA.

The SGCA’s decision

Whether the NOM clause applied to rescission

The SGCA held that the NOM clause did not apply to the rescission of the SPA. The SGCA noted that the clause expressly stipulated four particular forms of modifications that must be made in writing, namely, variation, supplement, deletion and replacement, which had in common the notion that the SPA would remain valid and in force. The SGCA pointed out that rescission clearly did not fall within the meaning of any of those four terms, further adding that if parties intended for the NOM clause to exclude oral rescission, this could be expressly provided for.

The SGCA agreed with the High Court’s finding that the parties had orally agreed to rescind the SPA through the said telephone conversation.

Legal effect of NOM clauses

Even though it was not strictly necessary to do so, the SGCA proceeded to discuss its provisional views on the legal effect of NOM clauses, given the importance of the issue. The court examined the current schools of thought on this matter. There are broadly speaking, three of them:

1. First, the approach taken by the majority in Rock Advertising (with grounds delivered by Lord Sumption, with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed) under which any subsequent modification to the contract must comply with the formalities stated in the NOM clause. A NOM clause can hence only be removed by an agreement of the parties that complies with the formalities set out in the NOM clause (Sumption approach).
2. Second, the approach developed by Lord Briggs who issued a concurrent judgment in Rock Advertising, under which the parties’ oral agreement specifically to depart from a NOM clause will be treated as valid. Such oral agreement may be express or by necessary implication. But in situations where an oral variation is made without express reference to the NOM clause, a strict test should be applied before the court finds that parties had, by necessary implication, agreed to depart from the NOM clause (Briggs approach).
3. Third, the approach endorsed by the SGCA in its earlier decision in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979 (Comfort Management), under which a NOM clause merely raises a rebuttable presumption that in the absence of an agreement in writing, there would be no variation (Comfort Management approach). Comfort Management was decided just before Rock Advertising, and the SGCA then did not have the benefit of considering the UK Supreme Court’s ruling in Rock Advertising. Incidentally, the approach in Comfort Management was the approach adopted in English decisions pre-dating Rock Advertising. They are the English Court of Appeal’s decisions in I-Way Ltd v World Online Telecom UK Ltd [2002] EWCA 413 (see [11]-[12] per Sedley LJ and [17] per Schiemann LJ), and Rock Advertising (see Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 55), which was later reversed by the UK Supreme Court on appeal.

The SGCA expressed a preference for the Comfort Management approach. Its principal reasons are:

1. The Sumption approach was to the effect that once parties have agreed to regulate their legal relations, they are bound by those regulations. In other words, each party’s autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. The SGCA was of the view that fixing the parties’ intention at the time the contract was entered into overlooks the fact that parties to a contract ought to have the autonomy to change the terms of the contract later on if they all agree.
2. The Briggs approach accords with their view as it respects and upholds the parties’ autonomy to depart from NOM clauses if they decide to do so either by express agreement or necessary implication. But the SGCA opined that the Briggs approach suffered from one drawback, which was that situations where parties had expressly intended to, or by necessary implication, depart from the NOM clause will be very rare, with the result that a NOM clause will practically never be done away with.
3. A necessary implication under the Briggs approach may only be inferred in circumstances where subsequent to oral variation, the parties had to urgently perform their modified obligations such that they did not have the time to formalise the oral variation. These circumstances would in most cases also give rise to an estoppel. The Briggs approach may thus not meaningfully add much to the requirements under the doctrine of estoppel in practical terms.

The SGCA preferred a wider test as to when it can be necessarily implied that the parties had intended to depart from a NOM clause, namely:

“whether at the point when parties agreed on the oral variation, they would necessarily have agreed to depart from the NOM clause had they applied their mind to the question, regardless of whether they had actually considered the question or not.”

According to this view, there is no requirement that the parties have the NOM clause in mind when agreeing to the oral variation. To this extent, the test is wider than the one proposed by Lord Briggs.

Although the SGCA’s test is wider, it still requires “rather compelling evidence before the court will find and give effect to an oral variation”. A party seeking to give effect to an oral variation must therefore lead evidence to “rebut the presumption that there is no variation” and to overcome “the inherent difficulty in proving such an oral variation in the face of their express agreement to the contrary as prescribed in the NOM clause”.

The SGCA acknowledged that its approach may result in a NOM clause having “no real effect” but took the view that these difficulties should be resolved by a “proper application of evidential principles and not by the law of contract”. On this basis, once the party relying on the oral variation has discharged the burden of proof on it, the NOM clause “will cease to have legal effect because that would be the collective decision of both parties to the contract, ie, a function of the party autonomy principle in contract law”.

NOM clauses and equitable estoppel

For completeness, the SGCA also briefly observed that even had the NOM clause been effective, the appellants would have been estopped from enforcing the SPA because the respondents had relied on the oral variation in not completing the SPA earlier.

Key takeaways

The decision in Charles Lim demonstrates that the Singapore Courts are likely to adopt a strict interpretation of NOM clauses. As mentioned above, the NOM clause in Charles Lim was not engaged because it only provided for four specific forms of modification – “variation, supplement, deletion or replacement”. The SGCA held that rescission of the SPA did not fall within the meaning of any of these terms.

Existing contracts that contain NOM clauses may have to be relooked. If a NOM clause is to be included in the contract, and the intention is for the NOM clause to apply to the cancellation or rescission of a contract, this should be expressly provided for.

While the SGCA has confirmed that it was not expressing a “conclusive view” on the legal effect of NOM clauses given that it was not necessary to do so in order to dispose of the appeal, its pronouncements are weighty as the issue was considered by five judges of the SGCA instead of the usual three. It is likely that future courts in Singapore will follow the decision in Charles Lim for at least the immediate future. It will be interesting to see what impact that Charles Lim will have, if any, in the UK and other jurisdictions.

As the SGCA has stated that the Court will require “rather compelling evidence before the court will find and give effect to an oral variation”, evidence gathering is essential. Relevant evidence may include contemporaneous documents such as parties’ correspondence, meeting notes and evidence of parties’ objective conduct in the performance of the contract as orally varied. It would be a good practice to ensure that proper written records and paper trails are kept. In the absence of contemporaneous records, oral modifications can be difficult to prove, especially if the events took place years ago.

There may be certain contracts, such as those concerning construction and engineering, where parties may provide carve outs to NOM clauses, and agree that certain routine activities may be agreed to informally. Parties may also enter into contracts that will need to be frequently varied or should be amenable to swift alteration to account for factors such as volatile market conditions and time sensitivity.

Nonetheless, parties should be wary of the possibility that they may inadvertently agree to modifications to their contracts in their oral communications with the counter-party. Companies should consider implementing clear policies and guidelines in their day-to-day management of contracts so that daily discussions or off the record conversations do not have the unintended effect of modifying the terms of the contract.

In the final analysis, parties should bear in mind that it is a best practice to ensure that any variations are made or recorded in writing. This provides a measure of certainty for the parties, and may help to avoid unnecessary squabbles.

Please feel free to contact us if you wish to find out more about the issues raised in this note.