No Oral Modification (NOM) Clause Does Not Exclude Oral Rescission
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In Charles Lim Teng Siang and another v Hong Choon Hau and another [2021] SGCA 43, the Singapore Court of Appeal held that the NOM clause in question did not apply to an oral recission, and explained the legal effects of a NOM clause.
Key Takeaways
This case highlights:- The scope of a NOM clause specifically excluding oral modifications by variation, supplement, deletion, and replacement will not extend to oral recission of the agreement.
- Parties could depart from a NOM clause via an oral agreement if they had expressly or impliedly intended to depart from it.
- In addition, the doctrine of equitable estoppel is recognised an exception to a NOM clause. A party may therefore be estopped from enforcing a NOM clause if the other party had acted in reliance on the oral modification to his detriment.
Relevant Background Facts
The parties entered into a Sale and Purchase Agreement (the “SPA”) for the Appellants to sell shares to the Respondents. More than 3.5 years after the completion date of the SPA, the Appellants issued a letter to the Respondents demanding compliance with the SPA. The Appellants followed up with proceedings against the Respondents claiming damages for breach of the SPA, and alleging that the Respondents had wrongfully failed to complete the sale.At the Singapore High Court (“HC”), the Respondents successfully argued that the SPA had been orally rescinded by mutual agreement via a telephone call. The HC, however, did not make any findings on the Respondents’ alternative plea that the Appellants were estopped from enforcing the SPA. On appeal to the Singapore Court of Appeal (“CA”), the Appellants raised a new argument that the alleged oral recission was invalid pursuant to a clause in the SPA which prevented “variation, supplement, deletion or replacement” of or from the SPA and any of its terms, unless made in writing and signed by both parties (the “NOM Clause”). In response, the Respondents argued that the NOM Clause did not apply to the recission of the SPA, as it was only concerned with variation of terms.
On appeal to the Singapore Court of Appeal (“CA”), the Appellants raised a new argument that the alleged oral recission was invalid pursuant to a clause in the SPA which prevented “variation, supplement, deletion or replacement” of or from the SPA and any of its terms, unless made in writing and signed by both parties (the “NOM Clause”). In response, the Respondents argued that the NOM Clause did not apply to the recission of the SPA, as it was only concerned with variation of terms.
The Court of Appeal’s Decision
The CA held that the NOM Clause did not apply to the recission of the SPA based on the clear and plain language of the clause, and found that there was indeed an oral recission on the facts. Further, the CA opined that in any event, the Appellants would have been estopped from enforcing the SPA.The NOM Clause did not apply to an oral recission
As a matter of contractual interpretation, the CA held that the plain language of the NOM Clause made it clear that it did not apply to recission.
Recission clearly did not fall within the meaning of any of the four expressly stipulated forms of modifications in the NOM Clause (i.e. variation, supplement, deletion, and replacement). The CA further explained that these four forms of modifications shared an underlying “common denominator” in that the SPA would continue to remain valid and in force, unlike the case for recission.
Further, the CA noted that where parties intend for a NOM clause to exclude oral recission, this should be explicitly provided for by specifically adding the word “recission” in the NOM clause.
Parties could depart from a NOM clause via an oral agreement which can be express or by necessary implication
The CA acknowledged the legitimate commercial reasons for including a NOM clause in a contract which included ensuring commercial certainty by preventing informal modifications of written agreements. However, those reasons did not prevent parties from orally varying a contract where such oral variation could be proved.
In analysing the legal effect of a NOM clause, the CA elected to take an approach which upholds the parties’ collective power and autonomy to vary any aspect of their own agreements, so long as they jointly agree to do so. The court therefore recognised that parties could rightfully depart from a NOM clause via an oral agreement, which can be express or by necessary implication.
In this regard, the CA preferred a wider test for “necessary implication” which did not strictly require the parties to have specifically addressed their minds to dispense with the NOM clause when agreeing to an oral variation. The CA proposed that the test 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”.
In any event, the Appellants would be estopped from enforcing the SPA
The CA also found that the Appellants were estopped from enforcing the SPA.
As the doctrine of equitable estoppel is generally recognised as an exception to a NOM clause, even if the oral recission was deemed invalid by operation of the NOM Clause, estoppel would apply to prevent the Appellants from enforcing the SPA. The oral agreement for recission itself would have constituted a clear and unequivocal representation by the Appellants that they would not enforce the SPA, which the Respondents would have relied on to their detriment.
In this case, the detriment would have been that the publicly listed price of the shares in question had substantially plummeted from that as of the completion date of the SPA. Therefore, it would have been inequitable for the Appellants to enforce the SPA.
Comments
The judgment gives effect to party autonomy as the paramount consideration (where illegality or public policy concerns are not involved), which echoes what has been said in an earlier decision by the CA in Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals [2021] 1 SLR 631 (“Denka”). In Denka, the CA stated that the principle of party autonomy cannot be unduly undermined and refused to extend the application of the rule against contractual penalties to situations outside of a breach of contract.At the same time, the coterminous doctrine of sanctity of contract should also be borne in mind. By the CA’s words in Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] 3 SLR 857 at [30]: “It is axiomatic that the courts should – as far as it is possible – endeavour to uphold the validity of contracts and ensure that they are performed according to their terms. Put simply, sanctity of contract is the norm. This is only to be expected, lest the idea of freedom of contract degenerate into an instrument of abuse which would (in turn) engender unpredictability and chaos not only in the transactional context but in the wider society as well.”
In striking a balance between the two fundamental doctrines in the law of contract, the CA in this instance was of the view that sanctity of contract and commercial certainty did not “offer a legitimate basis” to restrict parties from orally varying a contract despite the existence of a NOM clause.
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This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please contact our lawyers if you have any specific queries.
