11^th June 2018

“No Oral Modification” Clause

The “prohibition” against oral variation of contract via a No Oral Modification [“NOM”] clause raises several interesting questions:-

(a) If parties have the autonomy to mutually make a contract, then will they similarly have the autonomy to mutually vary it?

(b) What if original contract contains a NOM clause providing that the contract can only be varied in writing but subsequent to the contract, parties nevertheless agreed to vary it orally?

(c) Can the 2^nd (oral) agreement / contract said to have varied the original contract that contains a NOM clause?

(d) If the answer to (c) is negative, will it not be an affront to parties’ autonomy to make the 2^nd agreement / contract?

(e) If the answer to (c) is affirmative, will it not be an affront to parties’ autonomy to make the 1^st contract and expect it to be upheld?

NOM Enforceable

On 16.05.2018, the English Supreme Court in the case of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24 held that NOM clauses are enforceable. The NOM clause in this case is as follows:-

“This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

 [Emphasis added]

Lord Sumption reasoned that such NOM clause does not forbid parties to make oral variations, it merely invalidate such oral variations:-

“…What the parties to such a clause have agreed is not that oral variations are forbidden, but that they will be invalid. The mere fact of agreeing to an oral variation is not therefore a contravention of the clause. It is simply the situation to which the clause applies… The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open”

 [Emphasis added]

From the grounds of judgment, it appears that the Supreme Court’s decision is motivated by the need for commercial certainty. To this end, Lord Sumption provided 3 reasons for inclusion of such NOM clauses:-

– “The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment.”

– “Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms.”

– “Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.”

The decision was supported by Lord Briggs but on different grounds:-

“…For as long as either (or any) party to a contract containing a NOM clause wishes the NOM clause to remain in force, that party may so insist, and nothing less than a written variation of the substance will suffice to vary the rest of the contract (leaving aside estoppel). The NOM clause will remain in force until they both (or all) agree to do away with it. In particular it will deprive any oral terms for a variation of the substance of their obligations of any immediately binding force, unless and until they are reduced to writing, or the NOM clause is itself removed or suspended by agreement. That fully reflects the autonomy of parties to bind themselves as to their future conduct, while preserving their autonomy to agree to release themselves from that inhibition.”

 [Emphasis added]

In this regard, parties’ autonomy make the 1^st and 2^nd contract is both upheld and harmonised.

How it affects you?

Whilst Rock Advertising is an English decision, the Malaysian Courts will find such authorities persuasive.

In the Malaysian context, it is not uncommon for employers (or their site representative) to orally instruct the contractors to carry out urgent variation works, even where the contract contained a NOM clause. It is also not uncommon for the contractors to carry out the works relying on such oral instructions, presumably for the common good of expediting and / or not delaying the Project, notwithstanding the NOM clause.

If the NOM clause is strictly enforced, then what remedies are left to the contractor who expanded costs for such “oral variations”?

To this end, Lord Sumption stated that the safeguard against such potential injustice lies in estoppel and/or principles such as contractual good faith or abuse of rights:-

“The enforcement of No Oral Modification clauses carries with it the risk that a party may act on the contract as varied, for example by performing it, and then find itself unable to enforce it. It will be recalled that both the Vienna Convention and the UNIDROIT model code qualify the principle that effect is given to No Oral Modification clauses, by stating that a party may be precluded by his conduct from relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In some legal systems this result would follow from the concepts of contractual good faith or abuse of rights. In England, the safeguard against injustice lies in the various doctrines of estoppel.”

Apart from estoppel, Lord Briggs’s “more cautious recognition” of NOM clauses also provides an alternate safeguard. To this end, Lord Briggs held that a NOM clause may be “released” by “strictly necessary implication” depending on the circumstances of the case:-

“In my view this more cautious recognition of the effect of a NOM clause, namely that it continues to bind until the parties have expressly (or by strictly necessary implication) agreed to do away with it, would give the parties most of the commercial benefits of certainty and the avoidance of abusive litigation about alleged oral variation for which its proponents contend. It would certainly do so in the present case. It would probably leave only those cases where the subject matter of the variation was to be, and was, immediately implemented, where estoppel and release of the NOM clause by necessary implication are likely to go hand in hand…”

 [Emphasis added]

Conclusion

Contractors need to be mindful as to whether their contract contains a NOM clause.

If the Employer orally instructs for “urgent” variation works to be carried out notwithstanding the NOM clause, then the Contractor will need to ensure that such instructions are recorded in some form of communication to support a case of estoppel, if necessary.

The principles enunciated in this case are of general application and not only limited to the construction industry.

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