Since the Rock Advertising decision of the UK Supreme Court in 2018, 'no oral modification' clauses have generally been strictly enforced. However, in Lim v Hong, the Singapore Court of Appeal has set a more flexible test for enforcement of such clauses. Where a party can prove that the parties agreed orally to modify the terms of their agreement, that modification may be enforceable despite a 'no oral modification' clause.
Background: 'No oral modification' clauses
'No oral modification' clauses are a common feature of commercial contracts, including construction contracts. Such clauses aim to invalidate modifications to a contract unless made in writing. Parties include them to provide certainty as to what their contract provides for. They are a mechanism to minimise the risk of personnel agreeing to contractual modifications by informal means.
Since 2018, the predominant approach to 'no oral modification' clauses has been that of the majority of the UK Supreme Court in Rock Advertising.1 This is a strict approach, and significantly restricts the ability (or risk) of parties orally agreeing to modify their agreement where that agreement contains a 'no oral modification' clause.
In Comfort Management,2 also in 2018, the Singapore Court of Appeal suggested a more lenient approach to 'no oral modification' clauses. As we discuss below, the Supreme Court in Lim v Hong has now affirmed a more permissive approach.
Charles Lim Teng Siang v Hong Choon Hau [2021] SGCA 43
Fact
Mr. Lim (on behalf of himself and his mother Mdm Tay ('Appellants')) entered into a Sale and Purchase Agreement ('SPA') with Mr. Hong and Mr. Tan ('Respondents'). Under the agreement, the Appellants were to sell 35 million shares to the Respondents for SGD 10.5 million.
The completion date for the transaction was 17 October 2014, and the SPA provided that time was of the essence. It also contained a 'no oral modification' clause, which 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.
The parties never performed their obligations of payment or transfer of shares under the SPA. More than three and a half years after the SPA's completion date, the Appellants commenced proceedings against the Respondents, claiming damages for breach of the SPA.
The Respondents alleged that Mr. Lim and Mr. Hong had agreed orally to rescind the SPA during a phone call before the completion date. The Appellants argued that no such phone call had taken place, and that the parties had not agreed to rescind the SPA.
The High Court found that Mr. Lim and Mr. Hong had validly rescinded the SPA by phone.3 The Appellants appealed. They argued that the phone call had never taken place and that, in the alternative, even if the parties had agreed to rescind the SPA by phone, the 'no oral modification' clause meant that oral rescission was not possible.
Issues considered
The principal questions considered by the Singapore Court of Appeal were:
- whether the 'no oral modification' clause applied to rescission; and
- if so, what the effect of the 'no oral modification' clause was on the purported oral rescission.
Decision
The Court ruled in favour of the Respondents, dismissing the appeal. It found that the SPA had been validly orally rescinded by the mutual agreement of Mr. Lim and Mr. Tan.
First, the Court looked at the question of whether the 'no oral modification' clause applied to a rescission. On a plain 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 rejected the Appellant's arguments that rescission could be likened to 'deletion' or 'replacement'.
Given this decision, the Court found that Mr. Lim and Mr. Tan had validly orally rescinded the SPA by mutual agreement over the phone. In reaching this conclusion, the Court highlighted the Appellants' 'complete inaction' on the enforcement of the SPA for more than three and a half years after the contract's completion date, particularly given that the SPA provided that time was of the essence.
Second, and even though the issue was moot, the Court took the opportunity to clarify the Singapore law on 'no oral modification' clauses.
The Court began by identifying schools of thought as to 'no oral modification' clauses. These were:
- First, the approach taken by the majority of the UK Supreme Court (delivered by Lord Sumption) 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.
- Second, the approach developed by Lord Briggs in Rock Advertising. This approach is the same as Lord Sumption's, except that parties may orally agree to depart from a 'no oral modification' clause. Such a departure must, though, be either express or by necessary implication.
- Third, the approach endorsed by the Singapore Supreme Court in obiter in Comfort Management. 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 affirmed its reasoning in Comfort Management, and decided that parties may validly orally agree to modify a contract despite a 'no oral modification' clause. In reaching this conclusion, the Court held that the strict approach taken by Lord Sumption was too focused on the parties' intentions at the time of contracting. Instead, the Supreme Court focused on the parties' autonomy as the 'master of their own contract', and held that if the parties decide to do away with or depart from a 'no oral modification' clause, then the Court should uphold their autonomy to do so.
The Court also highlighted the requirement for 'rather compelling' evidence before a Court would find and give effect to an oral variation, but held that it was not necessary for the parties to have actually expressly referenced the 'no oral modification' clause. It formulated 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.
Commercial Implications
The Lim v Hong decision has several significant implications for contracts governed by Singapore law.
First, it means that parties should be wary of the possibility of orally agreeing to modifications to their contracts. Company directors and other individuals capable of binding a company should ensure that any 'off-the-record' conversations regarding contractual provisions are prefaced by the express statement that any discussion is not binding unless committed to by writing by both parties, as required by the relevant 'no oral modification' clause.
In the context of construction and engineering contracts, even where a contract includes a 'no oral modification' clause, parties may decide that certain routine activities such as the communication of interim invoices may be agreed to informally.4 Having less-stringent requirements for such routine activities may have commercial benefits, including being more time efficient. Nevertheless, principals / employers should be wary of oral discussions around variations,5 changes to scope of work, and extensions of time, as in some circumstances such discussions may be binding.
Second, parties should ensure that conversations with other parties about contractual provisions are accompanied by detailed file notes and follow-up written correspondence. As the Court highlighted in Lim v Hong, the enforcement of 'no oral modification' clauses is for the most part an evidentiary question. A party might be able to demonstrate an oral modification to a contract that has a 'no oral modification' clause, but only if it can tender evidence that demonstrates that the oral modification actually occurred and was agreed to by the parties.
Finally, parties should keep in mind that it is best practice to ensure that any variation be made in writing. This allows parties to be certain as to the status of their contract, and avoids any inquiries that may be necessary to prove a valid oral modification.
1 Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] 4 All ER 21.
2 Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979.
3 Lim Teng Siang Charles v Hong Choon Hau [2020] SGHC 182.
4 See, for example, CIS General Insurance Limited v IBM United Kingdom Limited [2021] EWHC 347 (TCC), paragraph 310.
5 Construction and engineering contracts usually contain provisions relating to 'variations', which do not have the effect of varying the terms of the contract, but rather alter the scope of work. Construction contracts often require such variations to be made in writing. As is apparent from decision of the High Court of Singapore in Vim Engineering Pte Ltd v Deluge Fire Protection (SEA) Pte Ltd [2021] SGHC 63, whether variations that have been instructed orally are valid will often turn on the facts and scope of the relevant contractual provision. See Julian Bailey, Karim Mariey and Khadija El-Leithy, 'Oral Variations: "My Word Is My Bond"?' (White & Case, Client Alert, 7 April 2021) <https://www.whitecase.com/publications/alert/oral-variations-my-word-my-bond>.
Michael McArdle (White & Case, Associate, Melbourne) contributed to the development of this publication.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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