‘No Oral Modification’ (“NOM”) clauses are contractual terms prescribing that an agreement may not be amended unless made in writing and signed by or on behalf of the parties. NOM clauses are commonly included in commercial contracts to ensure certainty of the contractual terms as the existence of modifications made orally are difficult to prove and may give rise to misunderstanding as to the exact terms of the modifications.

A typical NOM clause reads as follows:

No variation, supplement, deletion or replacement of or from this agreement or any of its terms shall be effective unless made in writing and signed by or on behalf of each of the parties.

This article discusses the decision of the Singapore Court of Appeal (“SGCA”) in Charles Lim Teng Siang and another v Hong Choon Hau and another [2021] SCGA 43 (“Charles Lim”) on the recognition of oral variations in the face of NOM clauses similar to the one above.

Background

On 17 September 2014, the appellants entered into a sale and purchase agreement (“SPA”) to sell shares to the respondents who were associates of the ultimate buyer. The SPA provided, inter alia, that the completion date would be on 17 October 2014 (“Completion Date”).

The Completion Date passed but the share transaction was never completed. On 3 September 2018, the appellants filed a legal action against the respondents claiming for, inter alia, damages for breach of the SPA as a result of the respondents’ failure to complete the sale of the shares.

The respondents contended that the SPA had been orally rescinded by mutual agreement through a telephone call that took place between the first appellant and the first respondent on or about 31 October 2014 (“Oral Rescission”). The appellants denied that the SPA was rescinded pursuant to the alleged telephone call.

High Court Decision

The High Court Judge accepted the respondents’ evidence that the SPA had been rescinded by mutual agreement through the telephone call between the first appellant and the first respondent on 31 October 2014. The appellants appealed against the High Court decision, introducing a new argument that the Oral Rescission (if proven) was invalid by virtue of Clause 8.1 of the SPA, being the NOM clause.

Principal issues on appeal

The two principal issues on appeal before the SGCA were:

  1. Whether the NOM clause (i.e. Clause 8.1 of the SPA) applies to the Oral Rescission; and
  2. If it did, what is the legal effect of the NOM clause on the Oral Rescission.

Court of Appeal Decision

The SGCA held that Clause 8.1 of the SPA did not apply to the Oral Rescission as the plain language of the clause itself stipulates four particular forms of modifications which must be made in writing, namely variation, supplement, deletion and replacement. Rescission does not fall within the meaning of any of these four terms.

Further, the SGCA affirmed the High Court’s decision that the parties had orally agreed to a mutual rescission of the SPA via the telephone call on 31 October 2014. The SGCA observed that even if the Oral Rescission was deemed to be invalid by operation of the NOM clause, the appellants would, in any event, have been estopped from enforcing the SPA because the Oral Rescission constituted a clear and unequivocal representation by the appellants that they would not enforce the SPA.

Legal effect of NOM clauses

Although the SGCA's finding that the Clause 8.1 did not apply to the Oral Recission, the five-judge coram proceeded to make several observations regarding the different schools of thought developed by case law in relation to the legal effect of NOM clauses on oral variations.

The Sumption Approach

The UK Supreme Court in Rock Advertising Limited v MWB Business Exchange Centres Limited1 (with Lord Sumption delivering the grounds of judgment) held that a NOM clause will be given full effect such that any subsequent modification to the contract will be deemed invalid unless it complies with the formalities stipulated in the NOM clause (“the Sumption Approach”). The UK Supreme Court was of the view that there were legitimate commercial reasons for including NOM clauses in written agreements such as (i) to prevent attempts to undermine written agreements by informal means; (ii) to avoid disputes arising from misunderstandings as to whether a variation was intended and its exact terms; and (iii) to introduce a measure of formality to make it easier for corporations to police internal rules which restrict their employees’ authority to agree to any variation.

The SGCA did not agree with the Sumption Approach as the approach suggests that once parties have agreed to a certain set of rules, they cannot together agree to change those rules. This approach also assumes that the parties’ intention should be fixed at the time when the contract was entered into and overlooks the fact that the parties to any contract may orally agree to do away with the NOM clause in the future.

The Briggs Approach

Lord Briggs, who formed part of the majority in Rock Advertising, took a different view from the Sumption Approach. His Lordship opined that the parties can orally agree to remove a NOM clause from their bargain provided that both parties expressly agreed that it should be removed or if such an agreement was to be necessarily implied. Such an agreed departure will not be lightly inferred where the parties merely agree to an oral variation without express reference to the NOM clause (“the Briggs Approach”).

The SGCA shared the same view with the Briggs Approach as it upholds the parties’ collective autonomy to depart from NOM clauses if they decide to do so. However, the SGCA highlighted that the Briggs Approach suffers from one drawback, in that it will not imply that parties had intended to depart from the NOM clause unless it is proven that they had expressly intended to do so or unless such implication is necessary. The SGCA opined that it is unlikely for parties to enter into an oral agreement despite knowing of the NOM clause because they would be aware that such oral agreement is or could potentially be invalid.

The Comfort Management Approach

The SGCA in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd2 observed per obiter that a NOM clause merely raises a rebuttable presumption that in the absence of an agreement in writing, there would be no variation (“the Comfort Management Approach). Once the burden of proof to establish an oral variation is discharged, the NOM will cease to have legal effect as the parties would have arrived at the collective decision to orally vary the contract.

The SGCA in Charles Lim favoured the “rebuttable presumption test” expounded in the Comfort Management Approach which appears to be a wider test than both the Sumption Approach and the Briggs Approach. The SGCA took the view that it should not be strictly required for the parties to have specifically addressed their minds to dispense with the NOM clause when agreeing to an oral variation.

The Malaysian Position

In Malaysia, the High Court in Ng Sau Foong v Rhombus Food & Lifestyle Sdn Bhd & Anor3 favoured the Briggs Approach, albeit with a slight modification. In this case, the Court upheld an oral variation notwithstanding the existence of a NOM clause. Ong Chee Kwan J in his grounds of judgment drew a distinction between cases where a NOM clause is expressly posited during negotiation by the parties and cases where such a clause was inserted into the contract by the lawyers without the parties’ instructions. His Lordship expressed the view that in the latter situation, the court should more readily imply that the NOM clause is to be treated as having been done away with by the parties’ subsequent oral agreement to modify the contract.

The SGCA in Charles Lim considered the Malaysian High Court’s decision in Ng Sau Foong but maintained their preference for the Comfort Management Approach. The SGCA noted the distinction drawn by Ong J in Ng Sau Foong but took the view that contractual interpretation seeks to ascertain the objective intentions of parties as reflected by the express words of the agreement. It added that parties cannot deny responsibility for terms in the contract by shifting the blame to their lawyers for inserting terms in the contract without specific instructions.

Conclusion

The decision in Charles Lim illustrates the importance of ensuring that NOM clauses are carefully drafted to cater to the various types of contractual modifications in future, including rescission and termination if the same are intended.

In any event, parties should exercise caution in respect of oral discussions concerning variations and modifications of a contract and ensure compliance with the requirements of a NOM clause such that any discussion is not binding unless committed to in writing by both parties.

As a matter of practice, oral discussions with other parties about contractual provisions should be accompanied by file notes in writing to avoid any misunderstanding that may affect a party’s ability to prove a valid oral variation. As pointed out by the SGCA in Charles Lim, the difficulties in recognising oral variations ought to be resolved by the application of evidential principles since the burden of proof would rest on the party asserting an oral variation to prove the alleged oral variation on a balance of probabilities.

It is to be noted that the observations of the SGCA in Charles Lim as to the legal effect of NOM clauses are merely obiter dicta, and in any event are not binding on the Malaysian Courts. Nevertheless it will be interesting to see whether our courts will be receptive to the reasoning of the SGCA when called to determine the same issue in future.