Written amendments

THIS COLUMN HAS previously explored issues concerning contracts and how contracts are formed. One column examined the terminology that is used in English and Chinese to describe contracts and agreements (see China Business Law Journal volume 2 issue 2: ‘Contract’ or ‘agreement’ – which is correct?). A subsequent column analyzed the terms that are used when parties enter into a contract or agreement (see China Business Law Journal volume 2 issue 3: Execute or sign: which is correct?).

In addition, this column has explained the different terminology that is used to describe the act of changing the terms of a contract (see China Business Law Journal volume 3 issue 6: Amend or modify?). This column explores the circumstances in which an amendment to a contract is required to be in writing. In particular, it considers the effectiveness of a clause in a contract that requires any amendments to be in writing. Such a clause is referred to in English as a ‘no oral modification’ (or NOM) clause. The column compares the position under common law with the position under Chinese law.

Required to be in writing. First of all, it is important to bear in mind that in both common law jurisdictions and China, the law requires certain contracts to be in writing.

In England, the requirement for certain contracts to be in writing first appeared in a statute called the Statute of Frauds, which was enacted in 1677. As its names suggests, the purpose of this statute was to protect parties from fraudulent conduct. It achieved this by requiring certain contracts to be in writing. Originally, the requirement just applied to contracts for the sale of land; subsequently, it was extended to include guarantees.

For similar reasons, the PRC Contract Law requires the following contracts to be in writing: (1) loan agreements, except where the loan is between natural persons who have agreed otherwise (article 197);
(2) lease agreements where the lease term is six months or longer (article 215); (3) financial lease agreements (article 238); (4) construction contracts (article 270); and (5) contracts that are required to be in writing by a relevant law or administrative regulation (examples include guarantees, mortgages and pledges under the PRC Security Law).

If the law requires a contract to be in writing, any amendments to the contract must also be in writing.

Other contracts. As all lawyers are aware, with the exception of contracts that are required to be in writing as outlined above, the parties to a contract may enter into an oral contract where the terms are not recorded in writing. So long as there is evidence to prove the terms of the contract, a party to an oral contract can assert its rights under the contract in a court of law and take proceedings to enforce the terms against the other party.

Written contracts often contain a clause – known as a ‘NOM’ clause as mentioned above – that requires any amendments to the contract to be in writing. An important question is whether it is possible for the parties to disregard such a clause and to amend the agreement orally. Logic would suggest that if a contract contains a NOM clause, an amendment will only be valid if it is in writing except where the parties have agreed to an oral amendment and one or more of the parties have relied substantively on the oral amendment.

This logic is reflected in the Vienna Convention on Contracts for the International Sale of Goods (1980), which has been ratified by 89 states including China (but not the United Kingdom). Article 29(2) of the Convention provides as follows:

A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.

A similar provision appears in UNIDROIT Principles of International Commercial Contracts, which reflect concepts that are found in many legal systems. Article 2.1.18 of the UNIDROIT Principles provides as follows:

A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct.

Readers may be interested to know the question posed above – namely, whether it is possible for the parties to disregard a NOM clause and to amend the agreement orally – is uncertain in many common law jurisdictions. As discussed below, the question was only recently settled as a matter of English law. In addition, the PRC Contract Law does not contain any express provision in this regard, although it is likely that the position under PRC law would be the same as the position under the Vienna Convention and the UNIDROIT Principles.

English law. The question was recently considered by the Supreme Court of the United Kingdom in the case of Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant) [2018] UKSC 24. This case concerned a commercial transaction under which a company called Rock Advertising entered into a licence with a company called MWB to use office space in London. Clause 7.6 of the licence agreement provided 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.

One of the questions that the Supreme Court had to answer was whether an oral agreement to amend the licence had legal effect, despite the terms of Clause 7.6. Previously, the courts in England and other jurisdictions (including Australia and Canada) had decided that a NOM clause was ineffective. This was because, in the absence of a formal requirement for a contract to be in writing, it was always possible for the parties to agree over an oral amendment and to disregard the NOM clause, either expressly or impliedly. In other words, it was conceptually impossible for the parties to a contract to limit the manner in which they could amend their relationship in the future. It was believed that such a limitation would be inconsistent with the concept of party autonomy, under which the parties should have autonomy to enter into future contracts, including contracts that amend their existing contractual relationship.

In a significant departure from previous thinking, the Supreme Court decided that a NOM clause is effective and that it does not frustrate or contravene any policy of the law. The Supreme Court acknowledged that a NOM clause has the following advantages: (1) it prevents written agreements from being undermined; (2) it avoids disputes about whether an amendment was intended and also about the terms of the amendment; and (3) it makes it easier for corporations to ensure that amendments are agreed only by persons who have the relevant authority.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.