Knowledge Highlights 2 July 2021

In Charles Lim Teng Siang & Anor v Hong Choon Hau & Anor [2021] SGCA 43, the Singapore Court of Appeal found that a no-oral modification clause (“NOM clause”) in a sale and purchase agreement for the sale and purchase of shares (“SPA”) did not apply to an oral rescission of the SPA. In this case, the NOM clause prevented the “variation, supplement, deletion or replacement” of any term of the SPA unless made in writing and signed by or on behalf of all parties.

Notably, the Court of Appeal made observations on the legal effect of NOM clauses, diverging from the approaches taken by both the majority and minority in the UK Supreme Court decision of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24 (“Rock Advertising”), and instead affirming the approach endorsed in obiter in a previous Singapore Court of Appeal decision in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] SGCA 19 (“Comfort Management”), i.e. a NOM clause merely raises a rebuttable presumption that in the absence of an agreement in writing, there would be no variation.

Background

The appellants entered into an SPA to sell shares to the respondents. The date of completion for the sale and purchase of shares passed but the transaction was never completed. More than three and a half years later, the appellants brought an action to claim damages for breach of the SPA. The respondents argued that the SPA had been orally rescinded by mutual agreement in a telephone call, and alternatively argued that the appellants were estopped from enforcing the SPA. The appellants denied that there was a rescission via telephone call or that they were estopped from enforcing the SPA.

At trial, the High Court judge (“judge”) accepted the respondents’ version of events that the SPA had been orally rescinded by mutual agreement, but did not find it necessary to make any findings on estoppel.

Court of Appeal decision

On appeal, the appellants raised a new argument that even if there had been an oral rescission, this was invalidated by the NOM clause. The respondents on the other hand argued that the NOM clause did not apply to rescission as it only concerned the variation of terms, and in any event, the appellants were estopped from enforcing the SPA.

The Court of Appeal dismissed the appeal. On the particular wording of the NOM clause in this case, the court found that the NOM clause only prevented an oral “variation, supplement, deletion, or replacement” of any term in the SPA, and did not apply to rescission as “rescission” was to be treated separately from a modification of the SPA.

Legal effect of NOM clauses 

The Court of Appeal made several provisional observations in obiter on the following three schools of thought on the legal effect of NOM clauses, ultimately maintaining its preference for the approach endorsed in Comfort Management:

  • Lord Sumption’s majority grounds in Rock Advertising: A NOM clause will be given full effect such that any subsequent modification to the contract will be deemed to be invalid unless it complies with the formalities stipulated in the NOM clause (“Sumption approach”).

The Court of Appeal expressed reservations on this approach as it conflates a contracting party’s individual autonomy with the parties’ collective autonomy, leading to the erroneous conclusion that once parties have agreed to a certain set of rules, they cannot together agree to change those rules. While the Sumption approach seemed to be concerned with contractual certainty, the Court of Appeal opined that this should be resolved by evidential principles and not contractual principles. 

  • Lord Briggs’s minority grounds in Rock Advertising: The approach developed by Lord Briggs in Rock Advertising was similar to the Sumption approach, save that where parties orally agree to depart from a NOM clause, such agreement would be treated as valid (“Briggs approach”). Under this approach, an oral agreement to depart from a NOM clause can be express or by necessary implication, but should not be lightly inferred in a situation where parties merely agree to an oral variation without express reference to the NOM clause. A strict test would be applied before the court finds that parties had, by necessary implication, agreed to depart from the NOM clause.

The Court of Appeal opined that the Briggs approach suffered from one drawback, which was that situations where parties had expressly intended to, or by necessary implication, depart from the NOM clause will be very rare, with the result that a NOM clause will practically never be done away with. Further, the Court of Appeal explained that a necessary implication may only be inferred in circumstances where subsequent to the oral variation, the parties had to urgently perform their modified obligations such that they did not have the time to formalise the oral variation, but these circumstances would in most cases also give rise to an estoppel. The Briggs approach may thus not meaningfully add much to the requirements under the doctrine of estoppel, in practical terms.

Supporting the narrow test of what constitutes a “necessary implication”, Lord Briggs drew an analogy with the way the law treats negotiations “subject to contract” and observed that such negotiations will not be implied as being abandoned merely because parties reach full agreement, unless such implication is necessary. The Court of Appeal opined that this analogy did not advance the Briggs approach. Parties in negotiations involving a “subject to contract” clause expressly agree that there shall be no contract until and unless a formal contract is signed, whereas a NOM clause seeks to invalidate an oral agreement to vary even if such an agreement can be proved. The court went further to state that the treatment of “subject to contract” clauses by the law is in fact a recognition of the collective party autonomy principle.

  • Preference for Comfort Management approach: Ultimately, the Court of Appeal expressed its preference for the approach endorsed in Comfort Management, namely that parties could depart from a NOM clause via an oral agreement if parties had expressly or impliedly intended to depart from it, and that a NOM clause merely raises a rebuttable presumption that in the absence of an agreement in writing, there would be no variation.

The court preferred a wider test to imply such intention, i.e. whether at the point when parties agreed on the oral modification, 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. The court further observed that there must be compelling or cogent evidence before the court will find and give effect to an oral variation, due to the inherent improbability that parties would make an oral modification in the face of their express agreement to the contrary as prescribed in the NOM clause.

Judge’s finding of oral rescission upheld

On the facts, the Court of Appeal largely agreed with the judge that there was an oral rescission via a telephone call for the following reasons:

  • The completion date had passed without the SPA being completed, and for more than three and a half years thereafter, the appellants did not serve any notice to complete on the respondents. There was no satisfactory explanation for this inaction nor evidence supporting the appellants’ assertion that one of them had continually attempted to persuade the respondents to complete the transaction. 
  • Text exchanges showed that one of the appellants stopped pleading with respondents to complete the SPA immediately after the date of the alleged oral rescission.
  •  One of the respondents confronted one of the appellants on the date of the alleged oral rescission concerning certain announcements which made the respondents doubtful about the share transaction.

While the Court of Appeal found that the judge erred on two other factual findings that were made in favour of the respondents, the court did not consider that the more damaging findings made against the appellants’ case were displaced.

Appellants estopped from enforcing SPA

In any case, the court observed that even if the oral rescission was deemed invalid by operation of the NOM clause, the appellants would have been estopped from enforcing the SPA. The oral agreement to rescind the SPA constituted a clear and unequivocal representation by the appellants that they would not enforce the SPA, which was detrimentally relied upon by the respondents who decided not to complete the SPA.

Reference materials

The Court of Appeal judgment is available on the website of the Supreme Court of Singapore http://www.supremecourt.gov.sg/.

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