Façade of No-Oral Variation: The Need for Writing in Contract Variation

Ross R-S. Pey

Introduction

NOM clauses or ‘no-oral modification’ clauses are clauses that prevents contractual parties from modifying a contract orally. In MWB v Rock, Lord Sumption, writing for the majority in the Supreme Court (UKSC), held that NOM clauses are effective in English contract law and will be enforced strictly. By contrast, in Charles Lim Teng Siang v Hong Choon Hau[1] (hereafter ‘Charles Lim’), the Singapore Court of Appeal (SGCA) held that Lord Sumption’s approach of strictly applying a NOM clause was too restrictive. Instead, Chong JCA discussed obiter that a NOM clause only creates a ‘presumption’ of no-oral variation which may be rebutted by evidence of the parties’ actual intention. 


With respect, as a matter of common law, the SGCA in Charles Lim was wrong for two reasons. Firstly, the SGCA conflates the interpretation and application of NOM clauses. Secondly, the presumption of no oral variation is redundant as it repeats the work of the estoppel defence.

 

To support the above argument, this article will proceed in three parts. First, in Section I, this article will examine the application of NOM clauses in MWB v Rock. In Section II, this article will analyse the obiter discussion of the SGCA in Charles Lim. Finally, in Section III, this article will draw on Sections I and II to argue that Charles Lim was incorrect in its treatment of NOM clauses.

 

I. The Treatment of NOM Clauses

In MWB v Rock, the UKSC was faced with a difficult question:[2] their Lordships were essentially asked to what extent a NOM clause is binding on contractual parties. This question was important as, in the process of contract formation, parties may have agreed to a NOM clause in order to distribute risks prospectively and maintain certainty in future contract variation. However, as change is the only constant, parties may in the future find themselves in a position where a NOM clause is itself one-sided and not conducive to reaching a commercially sound solution.

 

In answering the question for the majority, Lord Sumption relied on the following propositions. Firstly, Lord Sumption noted that, as a general rule, the common law does not impose any formal requirements on contract variation[3] aside for the provision of consideration.[4] Consequently, it follows that parties can negotiate a NOM clause in order to override the common law rule to designate a mechanism for contract variation.[5] Thus, Lord Sumption reasoned that if parties tied themselves to a NOM clause, the Courts would enforce the NOM clause strictly as parties had contracted out of the common law.[6] Hence, a NOM clause is fully effective if present. This is because freedom of contract grants party autonomy to enter any bargain. Consequently, once a bargain is entered, parties are bound.[7]

 

Pausing here, it is worth noting Lord Briggs’ concurring opinion. Although agreeing with the outcome, Lord Briggs holds that a Court may be entitled to find a ‘strictly necessary implication’ within a NOM clause to allow oral variations.[8] If not, the NOM clause would be applied with full force.

 

Interestingly, the difference between the positions taken by Lord Sumption and Lord Briggs only arises with regard to the common law. In equity, Lords Sumption[9] and Briggs[10] agree that if parties made a clear oral promise that a contract be varied, parties can be estopped from relying on theNOM clause, resulting in oral contract variation.

 

II. The Obiter Dicta in Charles Lim (SGCA)

The facts in Charles Lim are relatively straightforward. There, parties entered into a share purchase agreement.[11] Parties then sought to rescind the agreement orally notwithstanding a NOM clause. The SGCA thus faced two questions. Firstly, was the NOM clause effective to block oral rescission?[12] Secondly, and more pertinent to this article, can an express oral promise to vary a contract take effect notwithstanding a NOM clause?[13]

 

In its ruling, the SGCA resolved the case by unanimously holding that the boilerplate NOM clause was, when properly construed, confined to oral variation and does not apply to oral rescission.[14] Nonetheless, the SGCA went on to answer the second question by noting, obiter, that a NOM clause only creates a presumption of no oral modification.[15] This is because the Court was concerned with changes in future circumstances where commercial interests might be better served by oral variations.[16] Finally, the SGCA converged with MWB v Rock to hold that, in equity, a clear oral promise would estop reliance on a NOM clause.[17]

 

III. Why the SGCA was Wrong in Common Law

With respect, the SGCA went on a frolic on its own. The article makes two contentions: that the SGCA conflates interpretation and application and that its reasoning here obliterates the need for estoppel. However, the article recognises that the procedural posture of Charles Lim might explain this result and render Charles Lim distinguishable.

 

Firstly, this article argues that the SGCA conflated the construction and application of NOM clauses. In Charles Lim, the strict application of a NOM clause can be modulated if:

 

“at the point when parties agreed on the oral variation, they would necessarily have agreed to depart from the NOM clause had they addressed their mind to the question, regardless of whether they had actually considered the question or not.”[18]

 

With respect, the language here is highly similar to that of the officious bystander test for implying a term in fact[19] rather than listing a set of prospective factual requirements that can justify the strict application of a term. Thus, it is suggested that the SGCA has conflated two sequential issues of construction and application into one question of application. In other words, instead of asking “what is the scope of the NOM clause as agreed to” before asking “what is the effect of the NOM clause”, the SGCA simply asks “whether the effect of the NOM clause be modulated”.

 

Admittedly, this argument is open to objection. Some readers may attack the distinction drawn above on the basis that it is too fine to be properly made and that any attempt at distinguishing interpretation and application is ultimately no more than legalistic nit-picking. This criticism has some merit because, in practical terms, lay parties involved in a contract are only concerned with the effects of the NOM clause. In answering this question directly, the SGCA would directly address commercial parties’ concerns and provide an express solution.

 

Nevertheless, this criticism is not persuasive because the presumption of oral variation creates commercial uncertainty regarding the application of NOM clauses. Instead of expounding a bright line rule that a NOM clause unequivocally prevents oral variation subject to agreed formalities as in MWB v Rock[20], the SGCA is effectively telling commercial parties that a NOM clause operates equivocally and in a fact-dependent manner by allowing the trial judge to weigh facts showing reliance on the NOM clause.

 

The second reason why the presumption of no-oral variation is problematic is because this presumption renders estoppel redundant. As recognised in MWB v Rock[21] and in Charles Lim[22], the doctrine of estoppel can serve as an exception to the correct and strict application of a NOM clause. Although neither of the two judgements discussed the requirements of this estoppel in depth, Lord Sumption cites Actionstrength Ltd v International Glass Engineering[23] to suggest that an unequivocal representation to orally vary a contract in a context beyond mere informality is required. This probable requirement for estoppel is surprisingly similar to the requirements to rebut a presumption of no-oral variation in that it requires:

 

“the party alleging oral variation to rebut the presumption that there is no oral variation, and to do so, [the alleging party] would need to adduce more cogent evidence to prove an oral variation.”[24]

 

Thus, by introducing the test of a rebuttable presumption of no oral variation, the SGCA is likely repeating equitable doctrine of estoppel in the common law of contract. This raises questions as to whether the rebuttable presumption is necessary as a matter of common law.

 

Pausing here, one might argue that the loosening of the common law rule is indeed beneficial. This is because the loose standard allows Courts flexibility in assessing whether it is practical just to allow oral variation, particularly when circumstances have changed. However, this ‘practical justice’ mode of reasoning is unpersuasive because it provides less guidance to the treatment of NOM clauses. If the Courts fashion a remedy in equity to allow oral variation, the Courts can rely on well-established principles of estoppel[25] and case law such as Actionstrength Ltd v International Glass Engineering[26] to justify its outcome. Thus, although some uncertainty will inevitably arise as a Court treads into new waters, its reliance on trite principles can guide practitioners and lower courts in future disputes through reliance on the same, well-known principles. By contrast, the SGCA introduced a discretionary test at common law to determine whether a NOM clause can be departed from. Similar to fashioning of a new remedy in equity, some legal uncertainty will arise as the Courts are facing such facts for the first time. However, unlike a remedy inequity, the Court in Charles Lim introduces excess uncertainty because, in allowing a discretionary test at common law, the Court essentially created a test out of thin air where there has been little to no precedent or commentaries on the matter. As such, practitioners and lower courts may find it more difficult to apply this test as there are comparatively fewer sources, as compared to estoppel, to guide legal reasoning.

Although criticising the obiter discussion in Charles Lim, this article recognises that the procedural posture of Charles Lim may explain this unorthodox rule. There, the NOM clause actually at issue was a boilerplate provision.[27] Thus, it is possible that the presumption of no oral variation is a technique employed by the SGCA to impliedly control boilerplate NOM clauses to balance the rights of parties in a standard form contract. Nevertheless, this explanation is only partially satisfactory since, as discussed above, the presumption of no oral variation creates commercial and excess legal uncertainty.

 

Interestingly, this may be sufficient to distinguish Charles Lim on the basis that the obiter discussion may be confined to boilerplate NOM clauses where parties may not have the opportunity to negotiate the exact terms and scope of application. This has profound implications since, if true, the common law may potentially have developed two distinct sets of rules regarding NOM clauses. The first set would be the rule expounded by Lord Sumption in MWB v Rock where, as a general rule, all NOM clauses are to be applied strictly. However, if it transpires that the NOM clause is a boilerplate provision, the NOM clause may only generate a presumption of no-oral variation, assuming that Charles Lim is indeed correct.

 

Conclusion

In some respects, the debate around the applicability of NOM boils down to a single question — What is the expectation created by a contractual clause? If, as this article suggests, orthodox principles are applied, it follows that a NOM clause is conclusive of an expectation and should be applied to the fullest extent of its text. But, if the dictum in Charles Lim is correct, then it is arguable that NOM clauses are a type of ‘quasi-contractual clause’ where the NOM clause is mere evidence of a contractual expectation. Thus, such clauses give a façade of full application unless and until a trial Court decides otherwise. This is problematic because this distinction introduces legal uncertainty surrounding the validity of contractual bargains. Thus, moving forward, it is suggested that more research should be pursued in the context of NOM clauses to better ascertain such clauses’ true impact in common law and their relationship to estoppel.

 

 

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[1] [2021] SGCA 43

[2] Technically, the UKSC had to answer two questions — the first on NOM clauses and the second on consideration. However, as the UKSC upheld the NOM clause, the second question was left unanswered.

[3] MWB v Rock [2018] UKSC 24 at [12]

[4] Stilk v Myrick [1809] EWHC KB J58

[5] Supra, note 3 at [12]

[6] Ibid at [12]

[7] Ibid at [11]

[8] Ibid at [31]

[9] Ibid at [16]

[10] Ibid at [31]

[11] Supra note 1 at [1]

[12] Ibid at [2]

[13] Ibid at [2]

[14] Ibid at [34]

[15] Ibid at [38]

[16] Ibid at [54]

[17] Ibid at [85]

[18] Ibid at [54]

[19] Shirlaw v Southern Foundries [1939] 2 KB 206 at 227

[20] Supra note 3 at [11]

[21] Supra note 3 at [14]

[22] Supra note 1 at [85]

[23] [2003] AC 541 at [9] and [51]

[24] Supra note 1 at [56]

[25] Amalgamated Investment v Texas Commerce [1981] 3 All ER 577 at [584]

[26] [2003] AC 541 at [9] and [51]

[27] Supra note 1 at [1]