Singapore’s stance: 'No oral modification' clauses

'No oral modification' clauses are a standard feature of commercial and construction contracts.

These clauses act as a mechanism to prevent any “variation, supplement, deletion or replacement” of a contract or any part of it, unless the modification is made in writing and signed by or on behalf of both parties to the agreement. 

Such clauses minimise the risk of contractual modifications being made informally and provide for certainty of terms.

The 2018 Supreme Court case of  Rock Advertising Limited v MWB Business Exchange Centres Limited set the standard for the English Courts’ approach to 'no oral modification' clauses, specifically that any oral modification to an agreement containing a ‘no oral modification’ clause is invalid.

This is a strict approach, which restricts the ability of parties to orally agree to contract modifications. Since the 2018 case the Supreme Court’s restrictive decision has been repeatedly applied in England.

In the recent Singaporean case of Charles Lim Teng Siang and another v. Hong Choon Hau, the Court of Appeal unanimously declined to follow prevailing English authority on  ‘no oral modification’ clauses and in doing so, the Singapore Court of Appeal  relied upon adverse commentary surrounding the Rock Advertising decision.

The Singaporean Court took a broader approach, holding that such clauses merely raise a rebuttable presumption that oral modifications are invalid.

Charles Lim Teng Siang and another v. Hong Choon Hau

On 17 September 2014, Mr. Lim entered into a Sale and Purchase Agreement ('SPA') with Mr. Hong and Mr. Tan for the sale of 35 million shares at a price of 10.5 million Singapore Dollars.

The completion date for the transaction, as per the SPA was 17 October 2014.

Clause 8.1 of the SPA stated 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.’ (A 'no oral modification' clause)

The parties did not transfer the shares nor make the payment, as required by the SPA.

Following a lapse in time of almost 4 years from completion of the SPA, the seller commenced proceedings against the buyer claiming damages for breach of contract. The buyer alleged that the parties had orally agreed to rescind the SPA during a phone call before the completion date. The seller denied this.

The High Court found that the contract had been validly rescinded, orally.

The case was appealed, and the Singapore Court of Appeal held that the legal issue to determine was whether the purported rescission was rendered  ineffective by Clause 8.1 of the SPA.

The  Court of Appeal, identified two key questions which would be utilised determine the legal issue:

  1. Whether the 'no oral modification' clause applied to rescission; and
  2. Does a ‘no oral modification’ clause prevent oral variation, if an oral variation is proved

On a simple reading of the 'no oral modification' clause, the clause did not cover rescission, because it was restricted to the 'variation, supplement, deletion or replacement of any term.'  The Court therefore held that clause 8.1 did not apply to oral rescission as it prohibited only “variation, supplement, deletion or replacement”

The Appeal Court upheld the High Court’s ruling: the parties had validly orally rescinded the SPA by mutual agreement.

The Singaporean Position

The Court of Appeal took the opportunity to clarify the Singapore law on 'no oral modification' clauses.

The Court summarised the current prevailing approaches as follows:

  1. the approach taken by the majority of the UK Supreme Court in Rock Advertising. Under this approach, a 'no oral modification' clause will invalidate a contractual modification unless that modification complies with the 'no oral modification' clause's specifications; and
  2. the approach endorsed by the Singapore Supreme Court in obiter in a previous case (Comfort Management. Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979) Under this approach, a 'no oral modification' clause merely raises a rebuttable presumption that, in the absence of an agreement in writing, there is no variation.

The Court decided that parties may validly orally agree to modify a contract despite a 'no oral modification' clause. In reaching its decision, the Court held that the strict approach the English Court had taken in Rock Advertising was too concerned with the parties' intentions at the time the contract was initially agreed. Instead, the Singaporean Court focused on the parties' autonomy as the 'master of their own contract', and held that if the parties decide depart from a 'no oral modification' clause which they agreed at the outset of the contract, then the Court should uphold their decision to do so.

The Court also highlighted the requirement for evidence of the variation before a Court would give effect to an oral variation.

It confirmed the position as follows:

  • The test should be whether at the point when parties agreed on the oral variation, they would necessarily have agreed to depart from the 'no oral modification' clause had they addressed their mind to the question, regardless of whether they had actually considered the question or not.

Is it time for the English Courts to re-think the position?

Allowing oral modifications comes at the expense of commercial certainty. Additionally, there are evidential difficulties that arise in proving verbal contract variations. 

As such, it is not surprising that parties to commercial contracts wish to minimise any scope for disputes.  

However, do the aims of avoiding costly litigation over oral modifications outweigh the potential benefit of allowing parties to verbally vary a contract?

What about situations like those in the Charles Lim Teng Siang case? Would it not be an unfair to enforce a ‘no oral modification’ clause where the parties had agreed, before the completion date, to rescind the contract?

At present, the Rock Advertising decision remains authority in England and Wales and as such parties should keep in mind that it is always best practice, in the interests of certainty, to ensure that any contractual variations be made in writing.

 

Posted on: 22/12/2021

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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