“No Oral Modification” Clause: A Tussle Over Interpreting Party Autonomy

[Divyansh Pareek and Divyansh Bhardwaj are 4th and 3rd year students of National Law University Odisha respectively]

The Singapore Court of Appeal in Charles Lim Teng Siang v Hong Choon Hau (“Teng Siang”) has instigated a debate on the significance and extent of party autonomy in the contract. The court held that parties in a contract consisting a “no oral modification” clause (“NOM Clause”) can waive the said clause impliedly after incorporating a mutual oral agreement.

The NOM Clause is a procedural clause which, if incorporated in a contract, restricts the parties to the contract from amending the terms of the contract orally or impliedly. The same has been recognized by various common law cases and international conventions such as UNIDROIT (2016) and UN Convention on Contracts for the International Sale of Goods (1980). The UK Supreme Court established in Rock Advertising Limited v MWB Business Exchange Centres Limited (“Rock Advertising”) that the NOM Clause incorporated in the contract must be enforced and should be ordinarily honoured. The incorporation of such a clause is held not to be against common law principles and does not form a collateral contract.

The clause has been adopted as a constant practice in commercial contracts in a number of common law jurisdictions, including the USthe UKIndia and Singapore. The NOM Clause holds a significant value in commercial contracts and provides advantages. Among other things, it prevents attempts to undermine written agreements by informal means, aids in avoiding many disputes as oral modifications provide for a large scope of misunderstanding, and it makes it easier for organisations to regulate their internal policing regarding who shall be the authority in taking decisions regarding the variations and other situations.

This post firstly deals with the conflict that has arisen due to different stances taken by the Singapore Court of Appeal in its recent judgement. Further, the post attempts to analyse different schools of thought and their effects on the contemporary world.

The Conflict

The controversy arose when the Apex Court of Singapore in Teng Siang provided a completely different approach towards disposal of the NOM Clause as against the school of thought discussed in Rock Advertising. In Rock Advertising, Lord Sumption in the majority opinion had established that the NOM Clause in a contract shall be interpreted strictly and parties to the contract cannot waive the NOM Clause impliedly by making an oral modification to the terms of the contract. Any amendment arising out of the contract, as well as where parties seek to remove the NOM Clause from the contract, shall strictly be in a written form. In effect, the majority held that the parties can exercise their party autonomy to the extent they have allowed themselves in the contract.

Whereas Lord Briggs, while concurring with Lord Sumption to some extent, provided another school of thought. In the minority opinion, he concurred that parties through an oral modification cannot implicitly waive the NOM Clause. However, he opined that parties can waive the NOM clause orally by acknowledging the same in the oral amendment.

While in Teng Siang, Justice Chong adopted a more liberal approach that the parties to a contract consisting of the NOM Clause can impliedly waive the said clause by mutually amending their contract through an oral modification. The Court held that the parties can mutually remove the NOM Clause without even referring to the said clause in the first place through simple oral communication.

The question is not that whether parties have an autonomy to amend the NOM Clause, but the dispute lies in how the clause shall be amended, i.e., how the autonomy shall come into play. The conflict is of relevance to arbitral tribunals and courts, as common law countries have to follow one of these approaches. The post now focuses on analysing all the approaches and suggesting the approach that could be adopted while deciding a dispute.

Critical Analysis

There are three controversial schools of thought of interpreting the extent of party autonomy with regards to the waiver of the NOM Clause. To find a suitable approach, it is necessary to examine and analyse the approaches and their consequences.

The concurring opinion by Lord Briggs in Rock Advertising enables the parties to the contract to waive the NOM Clause orally by just referring to it during the oral communication and agreeing to remove the same in a written manner. The Briggs approach is based on the reasoning that if both sides agree not to bind the NOM Clause upon themselves, there will be no reason why their previous agreement should stand in the way. This approach was rightly denied in Teng Siang. The simple reason is that the parties to the contract would rarely amend the clause orally if they were aware of the existence of the NOM Clause as they would have anticipated such amendment to be invalid. The views of Lord Briggs do not hold ground as, if the parties are aware of the NOM Clause, they would simply remove the clause through a written modification. The only reason they are mutually agreeing to an oral modification is the fact that they have overlooked the presence of the NOM Clause in their contract.

In Teng Siang, the Singapore Court acknowledged this situation and held that the parties that make the contract can unmake it through a consensus. The Court believed that when parties themselves have forgotten about the presence of the NOM Clause and made an oral modification, they have indeed dispensed with the requirement of mandatory written modification. Therefore, the Court held that the parties can do away with the NOM requirement orally through mutual consent, denying the reasoning given in the Rock Advertising.

The approach adopted in Teng Siang raises various questions regarding the power of the parties to go against the contract signifying their autonomy. In the landmark case of L’ Estrange v F. Graucob Ltd., it was established that if the parties have signed a document containing contractual terms, they would be bound by each term incorporated in it. Further, there is a clear standing that the parties cannot use the defence that they were not aware of the contractual termin the case of non-performance. Party autonomy exists according to the terms of the contract which can be altered by the consent of all the parties to the contract. Since the inclusion of the NOM Clause is itself a special case that provides for the procedure for such an amendment, therefore, the parties can only amend the NOM Clause in writing.

Further, amending the NOM Clause is a material alteration. The rule of material alteration states that any material alteration cannot come into effect without the unequivocal consent of all the parties involved in the contract. The court in Teng Siang held that the parties overlooking the NOM Clause amending the contract orally would impliedly waive the NOM Clause. This verdict does not hold ground under the rules of material alteration. Assuming the parties were unaware of the existence of the NOM Clause, they cannot waive the NOM Clause by amending the terms of the contract orally. To implicitly dispense with some clause, the parties in the first place should know that such clause exists in the contract and their action would amend such clause. Where even one party is not aware of the presence of the NOM Clause, the oral amendment done by all the parties, including those who are aware of said clause, would not be sufficient to dispense with the said clause impliedly. Therefore, in the absence of unequivocal consent of all the parties, the NOM Clause cannot be said to be waived.

Thus, the approach taken by Justice Chong and Lord Briggs seems to be flawed by the reason of the above-mentioned logic and principles. Another approach is the interpretation of party autonomy by Lord Sumption in the Rock Advertising. According to him, party autonomy is exercised to the extent the contract is finally concluded, and thereafter, can be exercised within the rights given under the contract. Therefore, once the parties have included the NOM Clause, they can only amend such clause in writing as the parties have to exercise their autonomy within the scope of the contract. Such a principle justifies the extent of party autonomy and restricts them from disrespecting their autonomy. While adopting this approach, the courts would not in any manner be encroaching on the parties’ autonomy. 

The approach by the Apex Court of Singapore is not practical as parties to the contract can bring on a minor change which was concluded on oral terms to make the NOM Clause insignificant in a later stage where a dispute arises. It also minimizes the importance of the NOM Clause as, by the first oral amendment,, the clause would cease to be a part of the contract and assumptively in many cases, without the knowledge of the parties. Furthermore, the interpretation in Teng Siang negates the influence of the NOM Clause as, according to it, the parties can amend the contract orally or in writing with or without the existence of the NOM Clause which would just make the clause redundant.  

Conclusion

Going by the reasons given above, the extent of party autonomy should not be interpreted liberally as it would only maximise the disputes between the parties resulting in more court interventions. Following the approach taken in Teng Siang, the courts would only disregard the intentions behind incorporating such a clause in the contract. On the contrary, the approach adopted in Rock Advertising respects the boundaries imposed by the clause, to which the parties have consented. 

– Divyansh Pareek & Divyansh Bhardwaj

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