CAN AN ORAL VARIATION SUPERSEDE A NO ORAL MODIFICATION CLAUSE?
In the recent decision of Charles Lim Teng Siang v Hong Choon Hau [2021] SGCA 43, the Court of Appeal opined in obiter that they would maintain their preference for the approach endorsed in obiter in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979 in the treatment of no oral modification clauses.
Salient facts. The first appellant, Charles Lim Teng Siang (“Mr Lim”), was a relationship manager with United Overseas Bank at all material times (at [3]). In 2014, he was the beneficial owner of approximately 15.49 million shares in a public-listed company known as PSL Holdings Ltd (“PSL”), of which 5.735 million shares were held by his wife, Yvonne Seow Ee Fun and 9.755 million shares were held by his mother, the second appellant (“Mdm Tay”), on behalf of Mr Lim.
In 2014, Mr Lim was introduced by one George Lim to Tedy Teow (“Mr Teow”) (at [4]). Discussions ensued and Mr Lim agreed to sell Mr Teow 35 million PSL shares for $10.5 million at 30 cents per share. Mr Teow informed Mr Lim that he would purchase the shares through his associates, the respondents, Hong Choon Hau (“Mr Hong”) and Tan Kim Hee (“Mr Tan”).
The Sale and Purchase agreement (“SPA”) was signed by Mr Lim and respondents on 17 September 2014 (at [4]-[5]) and signed by Mdm Tay the next day (at [6]). Cl 1.1 of the SPA provided that the Completion Date would be 17 October 2014 (at [5]), but the share transaction was never completed (at [7]).
This appeal is concerned with cl 8.1 of the SPA which provided that “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 Party.” (at [26])
This is because the key to the respondents’ defence was an alleged telephone call between Mr Lim and Mr Hong on or about 31 October 2014, during which the SPA was claimed to have been rescinded by mutual agreement (at [12]).
The decision below. The High Court accepted the respondents’ evidence that the SPA had been rescinded by mutual agreement through the telephone call, and that Mr Lim was authorised to act for Mdm Tay, while Mr Hong was authorised to act for Mr Tan (at [18]).
The appeal. On appeal, the appellants raised a new argument that the alleged oral rescission, even if proved, was invalid because it was in contravention of cl 8.1 of the SPA (at [20]).
As such, there were 4 issues on appeal as identified by the Court of Appeal (at [25]):
“(a) First, whether cl 8.1 of the SPA applies to an oral rescission.
(b) Second, if it does, what is the legal effect of cl 8.1 on an oral rescission.
(c) Third, whether the Judge had erred in finding that there was in fact an oral agreement between Mr Lim (on behalf of the appellants) and Mr Hong (on behalf of the respondents) to mutually rescind the SPA.
(d) Fourth, whether the appellants would have been estopped from enforcing the SPA in any event.”
This article will focus on the first two issues which concern the applicability of the NOM clause and its legal effect on an oral rescission.
Whether cl 8.1 applies to an oral rescission. Cl 8.1 of the SPA is commonly referred to as a no oral modification, or “NOM”, clause (at [26]). The effect of such a clause is to provide that “… any term in the SPA can only be deleted, replaced, supplemented or varied in writing and signed by or on behalf of all parties.”
The Court found that it was “patently clear that cl 8.1 does not apply to rescission”, as this was “self-evident from the plain language of the clause itself” (at [29]).
This is because Cl 8.1 expressly stipulates four particular forms of modifications which must be made in writing – variation, supplement, deletion and replacement.
These modifications all contemplate that the SPA will continue to remain valid and in force, such that the SPA would still remain to be performed, albeit on different terms.
However, rescission does not fall within the meaning of any of these four terms. If parties intend for a NOM clause to exclude oral rescission, this can be explicitly provided for (at [30]).
Therefore, cl 8.1 was not applicable and would not invalidate any (proved) oral rescission of the SPA.
The legal effect of cl 8.1. However, the Court of Appeal proceeded to discuss the legal effect of a NOM clause such as cl 8.1, albeit in obiter (at [35]).
The Court found that NOM clauses exists for several legitimate commercial reasons (at [36]), but those reasons do not offer a legitimate basis to prevent parties from varying a contractually orally where such an oral variation can be proved (at [37]).
The Court then considered at least three schools of thought in relation to the legal effect of a NOM clause (at [38]):
The Sumption approach: The approach taken by the majority in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] 4 All ER 21 (“Rock Advertising UKSC”). A NOM clause will be given full effect such that any subsequent modification to the contract will be deemed to be invalid unless it complies with the formalities stipulated in the NOM clause.
The Briggs approach: The approach developed by Lord Briggs in Rock Advertising UKSC. It is similar to the Sumption approach, save that where parties orally agree (whether express or by necessary implication) to depart from a NOM clause, such agreement will be treated as valid provided there is express reference to the NOM clause.
The Comfort Management approach: The approach which this court endorsed in obiter in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979 (“Comfort Management”). A NOM clause merely raises a rebuttable presumption that in the absence of an agreement in writing, there would be no variation. This approach was adopted from the decision of the English Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] 3 WLR 1519 which was reversed on appeal in Rock Advertising UKSC.
Under all three schools of thought, the doctrine of equitable estoppel is recognised as an exception such that a party may be estopped from enforcing a NOM clause if the other party had acted in reliance on the oral modification to his detriment (at [39]).
The Comfort Management approach. It suffices to state that, after careful consideration, the Court preferred the Comfort Management approach, which uses a wider test, being “whether 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” (at [54]).
The principal difference with the Briggs approach is that “in order for the court to infer that the parties had by necessary implication agreed to depart from a NOM clause, 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” (at [61]).
Subject to this difference, the “express and necessary implication” threshold under the Briggs approach would essentially be the same as the “rebuttable presumption” test under the Comfort Management approach (at [61]).
This approach requires the party alleging oral variation to rebut the presumption that there is no oral variation by adducing more cogent evidence to prove an oral variation (at [56]). The Court stated that this is not intended to operate as a “third standard of proof”, but merely serves to “reflect the inherent difficulty in proving such an oral variation in the face of [the parties’] express agreement to the contrary as prescribed in the NOM clause”.
Therefore, “… once the burden of proof is discharged, the NOM will cease to have legal effect because that would be the collective decision of both parties to the contract, i.e. a function of the party autonomy principle in contract law” (emphasis in original at [58]).
Conclusion. Many contracts contain a NOM clause, and ever so often, clients often ask if such a clause prevents them from agreeing to a modification of the contractual clauses if the requirements set out in the NOM clause are not met. This typically arises when a party says that a particular term of the contract has been orally modified in a meeting.
As the Court of Appeal has made clear, an NOM clause can be overridden by a later oral variation: this is consistent with respect for parties’ autonomy to contract.
However, it is always advisable to record any such variations in writing contemporaneously. Similar to any oral agreements, the key difficulty for oral modifications lies in proving the existence and terms of the oral variation in the first place, and in the absence of contemporaneous records, such oral modifications can be very difficult to prove, especially if the events take place years ago.
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