Singapore Court of Appeal declines to follow Rock Advertising: endorses more liberal approach to NOM clauses

A recent decision of a five-judge Court of Appeal in Singapore has considered the legal effect of no oral modification clauses (“NOM clauses”) under Singaporean law. In a break with the position in the UK (decided in the Rock Advertising case), the Court held that NOM clauses merely raise a rebuttable presumption that in the absence of an agreement in writing, there would be no variation. Under the strict approach adopted in Rock Advertising, NOM clauses are given full effect such that any subsequent modification to the contract will be invalid unless it complies with the formalities stipulated in the NOM clause. The Court also suggested that a more liberal approach to estoppel would apply than indicated in Rock Advertising were a NOM clause to result in the invalidity of an oral agreement. Given the prevalence of such clauses in commercial contracts, this divergence between the English and Singaporean laws may have a significant impact on parties’ choice of governing laws of their contracts.

Charles Lim Teng Siang v Hong Choon Hau

Mr Lim and others (the “Sellers”), entered into a sale and purchase agreement (“SPA”) with Mr Hong and Mr Tan (the “Buyers”), pursuant to which the Sellers were to sell 35 million shares in a public listed company to the Buyers for S$10.5million.

The SPA provided for a completion date of 17 October 2014 (“Completion Date”) and that time would be of the essence. It also contained an NOM clause which provided 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” (“SPA NOM Clause”).

Over 3 years had passed after the Completion Date before the Sellers’ solicitors issued a letter to the Buyers, demanding compliance with the SPA and threatening legal action. The Sellers subsequently commenced action in the High Court of Singapore, claiming damages for breach of the SPA due to the Buyer’s failure to complete.

The Buyers denied being in breach of the SPA and amongst other things, claimed that pursuant to an alleged telephone call between Mr Lim and Mr Hong on or about 31 October 2014, the SPA was rescinded by mutual agreement. The High Court accepted the Buyer’s evidence in this regard and rejected the Seller’s claim.

On appeal to the Court of Appeal of Singapore, the Sellers raised, among other things, a new argument that the alleged oral rescission, even if proved, was invalid because the requirements of the SPA NOM Clause had not been satisfied. The Buyers argued that the SPA NOM Clause did not apply to rescission and could not in any event invalidate an oral agreement contrary to its terms which had been adequately proved.

NOM clause not applicable to recission agreements

The Court held that based on its plain language, the SPA NOM Clause did not apply to the rescission of the SPA as it only expressly provided that a “variation, supplement, deletion and replacement” must be made in writing. The common denominator underlying these four forms of modifications is that the SPA will continue to remain valid and in force, which is in contrast to the effect of a rescission. The appellants’ arguments that a rescission amounted to “replacing” the SPA with an agreement to rescind, or that it “deleted” the clauses in the SPA which required performance of the share transaction, and that such deletion led to the rescission of the SPA, were rejected by the Court.

On the facts, the Court agreed with the High Court of Singapore that the parties had orally agreed to rescind the SPA via the telephone call on 31 October 2014.

The legal effect of NOM clauses

Even though it was not strictly necessary to do so, the Court also proceeded to discuss and clarify the legal effect of NOM clauses in general.

The Court examined the current schools of thought in this regard by reference to law from other jurisdictions:

• First, the strict approach taken by the majority of the UK Supreme Court in Rock Advertising (delivered by Lord Sumption). Under this approach, any subsequent modification to the contract must comply with the formalities stated in the NOM clause, otherwise it will be deemed invalid. As such, an NOM clause can only be removed by an agreement of the parties which complies with the formalities set out in the NOM clause.
• Second, the approach developed by Lord Briggs in Rock Advertising. Under this approach, the parties’ oral agreement specifically to depart from an NOM clause will be treated as valid. Such oral agreement may be express or by necessary implication. However, in situations where an oral variation is made without express reference to the NOM clause, a strict test should be applied before the court finds that parties had, by necessary implication, agreed to depart from the NOM clause.
• Third, the approach endorsed by the Singapore Court of Appeal in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd. Under this approach, an NOM clause merely raises a rebuttable presumption that in the absence of an agreement in writing, there would be no variation. Incidentally, this approach was adopted from the English Court of Appeal’s decision in Rock Advertising which was later reversed by the UK Supreme Court on appeal.

The Court confirmed the third approach, siding with the Court of Appeal in Rock Advertising and disagreeing with the two Supreme Court approaches. Underlying this difference is the emphasis the respective courts placed on parties’ intentions at the time of entering into a contract. Lord Sumption’s view in Rock Advertising was to the effect that once parties had agreed to regulate their legal relations, then they are bound by those regulations. Each party’s autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows.

On the other hand, the Court took the view that fixing parties’ intention at the time the contract was entered into overlooks the fact that parties to a contract had the autonomy to change the terms of the contract. In the Court’s opinion, Lord Sumption’s view conflated the parties’ individual autonomy (which should necessarily be bound by the terms of the contract) with the parties’ collective autonomy. Collectively, the parties to a contract should be able to jointly agree to vary any aspect of their own agreement and the court should uphold their autonomy to do so.

While the Court recognised there are several legitimate commercial reasons why parties may choose to included NOM clauses in their contract, those reasons do not provide a legitimate basis to prevent parties from varying a contract orally where such an oral variation can be proved. The Court distinguished between proving the fact that an oral variation had taken place (and the evidential difficulties that come with it) and recognising an oral variation at all in cases where there are NOM clauses.

Nevertheless, the Court emphasised that compelling and cogent evidence is required before the court will find and give effect to an oral variation in order to rebut the presumption that there is no oral variation. This does not modify the standard of proof, but rather “serves to reflect the inherent difficulty in proving such an oral variation in the face of their express agreement to the contrary as prescribed in the NOM clause.” However, this perceived evidential difficulty in proving the oral variation should not be confused or conflated with the question of the legal effect of a NOM clause.

Once the burden of proof in relation to the oral variation is discharged, the NOM clause will cease to have legal effect because such is the collective decision of both parties to the contract. The test, according to the Court, should be 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.

Although, strictly speaking, the Court’s decision on these points is obiter, and therefore not binding, the fact that the decision was made by a panel of five judges of Singapore’s highest court means that it is very likely to be followed in future cases.

NOM clauses and estoppel

For completeness, the Court also observed that even were NOM clauses to have the strict effect found by the UK Supreme Court, the doctrine of equitable estoppel would nevertheless be likely to apply in most cases where an oral agreement had been proved. This was because in most cases such an agreement is likely to be provided by the parties’ subsequent conduct in performing the contract as orally varied. Accordingly, “in most circumstances where an oral variation (which would in itself constitute a clear and unequivocal representation) is proved, the parties should be able to establish detrimental reliance on the oral variation (the act of performing the obligations of the oral variation), and thereby satisfy the doctrine of equitable estoppel.”

This finding contrasts with a stricter approach to such estoppels indicated by Lord Sumption in Rock Advertising and subsequently applied by the English courts. This approach requires more than mere reliance on an oral promise; some statement or conduct is needed which unequivocally represents that the oral variation was valid notwithstanding its non-compliance with the NOM clause.

Consequences and wider application

NOM clauses are prevalent in commercial contracts, included to ensure commercial and legal certainty, and to prevent such situations of having to prove oral modifications. In these circumstances, a party to a contract governed by Singapore law seeking to rely on an NOM clause should ensure that any oral discussions that may have the effect of, and/or be relied upon as, modifying the terms of the underlying contract be properly clarified as not being binding unless documented in accordance with the formalities set out in the NOM clause.

In circumstances where parties are seeking to rely on such oral discussions, the safest approach is still to comply with the NOM clause, but if that is not practical then proper notes and records should be taken. As stated by the Court of Appeal, compelling and cogent evidence is required in order to make a finding that there has been an oral agreement to modify the terms of the contract.

Further, clear policies and guidelines should be established in respect of the day-to-day management and execution of the contract so that daily discussions or off the record conversations do not have the unintended effect of modifying the terms of the contract. Where there has been some form of discussion or communication that has the effect of modifying the terms of the contract, a party that has allowed the other party to rely on this discussion or communication to its detriment could also be estopped from relying on the NOM clause.

The Court’s decision may also have relevance to the continued development of English law in relation to NOM clauses. While the UK Supreme Court’s decision in Rock Advertising has authoritatively determined the English position in relation to the legal effect of such clauses, the position in relation to estoppel was addressed only in qualified obiter comments. The Court’s suggestion in the present case that a more liberal approach might apply than indicated by Lord Sumption could therefore prove relevant in future English law cases.

As NOM clauses appear in many international model forms, the decision of the Court is of wide relevance across a variety of sectors. For example:

• The AIPN Model Form Operating Agreement (2012) requires an amendment to be a “written amendment” and “signed”.
• Clause 74.5 of the BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Oil Products (2015) also require modifications to be “evidenced in writing”.
• The NEC suite of contracts requires amendments to be “in writing and signed by the parties”.

On a practical front, it should also be remembered that an email, in some jurisdictions, may be ‘in writing’ for the purposes of a NOM clause. For example, in C&S Associates UK Ltd v Enterprise Insurance Company plc, the English Commercial Court decided that:

• An exchange of emails was “in writing” for the purposes of a NOM clause.
• An email with a signature block was able to satisfy the requirement for an agreement to be “signed”.

Finally, the wider implication of this divergence between English and Singaporean law (as well as the laws of other jurisdictions) on parties’ choice of governing law should not be understated, particularly on multinationals and international parties conducting business globally. When considering alternatives in governing laws, parties should have a proper appreciation of the legal effect of NOM clauses.

References:

Charles Lim Teng Siang v Hong Choon Hau [2021] SGCA 43

Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] 4 All ER 21

Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979

C&S Associates UK Ltd v Enterprise Insurance Company plc [2015] EWHC 3757 (Comm)