Why it’s time to pay attention to ‘no oral modification’ clauses

A ‘no oral modification’ or ‘no oral variation’ clause requires that parties may only modify a contract in writing and often requires any written modification be signed by all parties. In other words, the contract cannot be verbally modified. For example, a contract might say, “no amendment to the agreement will be effective unless it is in writing and signed by all parties”. These types of clauses typically feature at the back of contracts and often receive scant attention. However, they carry significant force and can influence whether a variation to the terms of a contract is valid and enforceable.

What is the purpose of a ‘no oral modification’ clause?

There are numerous commercial reasons why ‘no oral modification’ clauses (NOM clauses) are included in contracts. Fundamentally, the clauses create certainty and formality. They uphold the intention of the parties at the time of execution and protect the original terms of a written contract by minimising the risk of subsequent informal or accidental amendment. For example, they seek to avoid situations where a principal and contractor’s employees informally or accidentally agree to modify a contract without the consent of the parties’ respective boards – the intention of an employee may not reflect the intention of the company even though the employee has ostensible authority to bind the company.

Practically, NOM clauses assist in preventing disputes regarding the status of a contract’s terms. If there is a blanket prohibition on oral amendments, then this can add discipline to contracts and prevent protracted disputes about what the terms of the contract are or may be over time.

The clauses also facilitate a smoother transition when there is a change in project personnel (a common occurrence in the construction industry). Verbal amendments can make a contract difficult to administer.

Are ‘no oral modification’ clauses enforceable?

Three approaches can be taken to interpreting NOM clauses:

  • NOM clauses are fully enforceable or in other words, “fully effective” meaning parties can only modify the contract in writing (this approach was taken in earlier New Zealand decisions and in the recent United Kingdom decision, Rock Advertising[1]);
  • NOM clauses are unenforceable or “not effective” (this approach has not been taken by New Zealand or United Kingdom courts); or
  • a middle ground where NOM clauses are enforceable but a verbal amendment may still be valid, depending on the intention of the parties (this is the current position in New Zealand).

Initially, New Zealand courts took the strict (first) approach to NOM clauses, holding that the existence of a NOM clause precludes an otherwise enforceable oral variation of a contract.[2] In Stevens v ASB Bank Ltd [2012] NZCA 611, the court said, “we see no justification for going behind these plainly worded provisions, which are intended to prevent the uncertainty and dispute that so often arises where written agreements are said to have been varied orally”.

However, more recent New Zealand decisions have shifted away from the strict approach and have adopted the United Kingdom’s approach where there is a middle ground between the courts upholding NOM clauses as enforceable, but recognising that they can be varied orally by strong compelling evidence that the parties intend to displace the clause (third approach).[3] This approach was taken in Conqueror International Limited v Mach’s Gladiator Limited [2018] NZHC 265, where the appellant claimed that a Sale and Purchase Agreement for the sale of a commercial door business was orally varied by the parties, meaning $480,000, which would otherwise have been due to be paid by the appellant to the respondent, was instead to be retained by the appellant. The High Court held that there was no enforceable oral variation due to both a lack of evidence to establish an oral variation, but also the existence of a NOM clause. Even if the appellant could establish that there was an oral variation, that oral variation was in no way reduced to writing and was therefore not in compliance with the terms of the Agreement. The clear intention of the parties was expressed in the NOM clause and strong compelling evidence was required to displace it.[4]

Ultimately, enforceability of a variation rests on the intention of the parties in light of all available evidence. The question the courts will ask is whether the parties subsequently intended to bind themselves by an oral variation and displace their initial intention expressed in the NOM clause.[5]

Overall, the approach taken by the New Zealand courts strikes a balance between giving effect to agreed terms and upholding the right for parties to freely contract. The starting point is that if a contract contains a NOM clause, the courts will uphold the clause. However, the courts recognise the importance of freedom of contract and will not prevent parties from exercising their right to contract again. This allows NOM clauses to operate as intended by protecting parties from spurious and unfounded claims. NOM clauses effectively raise the evidential burden of a party proving that there has been a valid oral variation.

 A different approach going forward?

Interestingly, the UK has recently strayed from its position in Globe Motors and has strictly upheld the requirement for an agreement to be in writing, even where there has been an otherwise valid variation (returning to the first approach). In Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, the UKSC held that a NOM clause was enforceable and a licence could not be varied orally because it had not met the written requirements of the NOM clause. This was on the basis that there are legitimate commercial reasons for enforcing NOM clauses that contract law does not normally override. This overturned the UKCA’s decision which followed Globe Motors and enforced the oral variation and differs from the position taken by New Zealand courts.

The UKSC’s decision in Rock Advertising has not been discussed by a New Zealand court so it remains to be seen whether the decision will have any impact on the approach of New Zealand courts going forward. In Formax Finance Ltd v Fundstar Finance Ltd [2020] NZHC 208, the plaintiff argued that New Zealand courts should adopt the position in Rock Advertising, but it was not necessary for the court to consider the argument.

Practical considerations – how to comply with NOM clauses

The New Zealand courts’ endorsement of NOM clauses emphasises the importance of parties knowing their contract. Parties should look to whether their contract contains a NOM clause and if so, what its requirements are. If a contract contains a NOM clause, it is important that parties comply with its requirements and record their variations in writing and, for best practice, may even want to have the variation signed by both parties (even if this is not a requirement of the NOM clause). Parties should ensure that they have a clear internal approval process for processing contract modifications. If there has been a verbal modification by the other side, parties should carefully consider their subsequent conduct as courts will look to this when considering whether parties intended to vary the obligations that they had originally intended at the time of contract execution.

While NOM clauses can be said to “ignore reality”, as amendment is often required urgently in the commercial world, the clauses can be useful tools to include in commercial contracts to create certainty and provide a control on unintended amendments.

Footnotes

[1]Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24.

[2] In Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 (CA), the court held that there had not been a valid oral variation of the date of redelivery of an aircraft under a lease agreement, as the lease contained a NOM clause. Similarly, in Stevens v ASB Bank Ltd [2012] NZCA 611, the court held that there had not been a valid oral variation of a loan agreement due to the absence of written documentation that converted an oral proposal into a binding agreement.

[3] This approach was taken in Globe Motors Inc and ors v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396.

[4] A similar approach was taken in both Beneficial Finance Limited v Brown [2017] NZHC 964 and Beneficial Finance Limited v Brown & Anor [2019] NZHC 505, where the court considered that the developing English approach was likely to be applied in New Zealand.

[5]Beneficial Finance Limited v Brown [2017] NZHC 964.

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