‘No oral modification’ (NOM) clauses are commonly found in commercial contracts and, if enforceable, carry significant force. Yet the legal position in New Zealand relating to such clauses is far from established. A recent decision of the Singapore Court of Appeal, Charles Lim Teng Siang v Hong Choon Hau,¹ has reignited the debate.

What are NOM clauses?

NOM clauses aim to restrict the contracting parties from varying a contract unless certain conditions are met. They generally state that all variations to the contract “must be agreed, set out in writing and signed on behalf of both parties before they take effect”.

In Charles Lim Teng Siang the agreement contained a NOM clause which stated:

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 contract related to the sale of 35 million shares. The parties never performed their obligations under the contract. Three and half years passed from the date of completion and the vendors commenced proceedings against the purchasers claiming damages for breach of contract. The purchasers alleged that the parties had orally agreed to rescind the agreement over the phone before the completion date. This was denied by the vendors.

What is the current position in New Zealand?

There seems to be only a handful of reasoned decisions on this subject in New Zealand ² and even fewer decisions from the higher courts. The issue has arisen in two cases before the Court of Appeal³ however in neither case did the Court substantively address the legal issue of whether NOM clauses should be enforceable and no consideration was given to the significant body of English cases addressing the issue.

The Supreme Court was less equivocal in Savvy Vineyards v Kakara Estate Ltd.⁴ Faced with a NOM clause, the Court held that “In any event, we do not accept that such a clause deprives the parties to a contract of the ability to vary it otherwise than in writing, albeit that it may be of distinct evidential significance ⁵. However, that was the full extent of the discussion, so the Court hardly grabbed the bull by the horns.⁶

The approach in New Zealand appears to reflect that of English Court of Appeal case in Globe Motors Inc and ors v TRW Lucas Varity Electric Steering Ltd⁷ that a contract can be varied orally, and the enforceability of that variation rested on the intentions of the parties, given all the available surrounding evidence. If the parties’ subsequent intention was to vary the contract despite a NOM clause, then the courts would not stand in the way of the parties’ autonomy.

However, since that decision, the Supreme Court of the United Kingdom (UKSC) decided to settle the position in England and Wales in relation to NOM clauses in Rock Advertising Ltd v MWB Business Exchange Centres Ltd.⁸ The UKSC decided that contractual certainty should be given primacy and determined that NOM clauses were enforceable. The decision has attracted a lot of attention.

What are the arguments against NZ’s current position?

These are found in Rock Advertising Ltd. Ultimately, the majority’s main conclusion was that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”. The Court found there were “legitimate commercial reasons” for parties to agree to NOM clauses:

1. NOM clauses prevent attempts to undermine written agreements by informal means.
2. Oral variations can gives rise to misunderstandings and parties acting at cross-purposes. NOM clauses avoid disputes about the actual intention of the oral variation and the exact terms of that variation.
3. A measure of formality in recording variations allows for easier internal compliance within corporations.⁹

On the issue of the parties’ contractual autonomy, the Court found that “party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows”.

How did the Singapore Court of Appeal respond?

In Charles Lim Teng Siang the Singapore Court of Appeal addressed the arguments in Rock Advertising Ltd head on. It adopted the more orthodox position that “…in the absence of statutory provisions mandating formalities for contracts, the court should give effect to party autonomy as the paramount consideration, and uphold the parties’ oral agreement to depart from a NOM clause, express or implied, if the same can be proved.”¹⁰

But what of other formalities imposed on contracting parties, such as the requirement for certain contracts to be in writing, or for agreements that need to be in a prescribed form (such as contracts for the sale of land)? The Singaporean Court distinguished these restrictions on the basis that “statutory provisions which impose mandatory formalities for contracts are enacted by the legislature to achieve certain policy goals at the expense of party autonomy.¹¹

The principle that policy aims are a matter for the legislature and not the courts is in its twilight – there is no such thing as a policy neutral legal principle, whether it is developed by the courts or imposed by the legislature. The Singapore Court’s elevation of party autonomy as the paramount consideration is itself a philosophical position, developed at a time when laissez-faire philosophy reigned supreme in the British Empire.

Our view: it’s time to re-think New Zealand’s position

In this context, the elevation of contractual autonomy comes at the expense of commercial certainty. There may be a distinction, from 10,000 feet, between the legal effect of a NOM clause and the evidential difficulties that arise in proving the oral variation. But that ignores the reality on the ground -  due to the increasing complexity of the commercial world and the enormous amount of written material involved, modern commercial litigation is very time consuming and expensive. Determination of evidential issues, such as what was said on a phone call, occurs at the end of a long, costly process, by which point cynical defendants may have achieved a strategic advantage. In this context, it is not surprising that commercial actors wish to minimise the risk of litigation. In our view, such aims outweigh the very limited (tangible) benefit of allowing parties to orally vary a contract in the face of a NOM clause.

But what about situations like in Charles Lim Teng Siang? Would it not be an injustice to enforce an NOM clause where the parties had agreed, over the phone before completion date, to rescind the contract? The situation was further colored by the fact that three and a half years then passed before the vendor sued for breach of contract. As mentioned in Rock Advertising Ltd, the safeguard against injustices in such cases lies with the doctrine of estoppel. This doctrine is not so broad to destroy the advantage of a NOM clause, but at the same time it offers protection in situations where the parties have clearly acted upon the oral variation as if it were valid.

1. [2021] SGCA 43.↩
2. Conqueror International Limited v Mach’s Gladiator Ltd [2018] NZHC 265 at [44].↩
3. Stevens v ASB Bank Ltd [2012] NZCA 611 and Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218.↩
4. [2015] 1 NZLR 281.↩
5. [At 112].↩
6. Although the issue received better attention in Beneficial Finance Ltd v Brown [2017] NZHC 964.↩
7. [2016] EWCA Civ 396.↩
8. [2018] UKSC 24.↩
9. At [12].↩
10. At [49].↩
11. At [49].↩