Many contacts contain a clause, often called either a No Verbal Variations or No Oral Modifications (NOM) clause, intended to prevent future “nod and handshake” waivers of the terms of that contract, even when willingly entered into by both parties.

The intention behind such clauses is to protect both parties from future disagreements based upon verbal alterations for which there is no written evidence.  Although entered into in good faith, such modifications do not leave much of an evidentiary trail, which can cause significant legal problems in the future.  Parties may disagree on what was said, understood or agreed.

NOM clauses are not legally binding under Australian law. However, it is not necessarily a good idea to remove such clauses, nor should you rely on them when a verbal variation has taken place.

Different international jurisdictions have recently taken different approaches to the applicability of such clauses.  Let’s look at the contrasting situation in the UK, USA, and Australia.

NOM Clauses in the UK and USA

These clauses date back over a century, but there have been a number of attempts to demonstrate that they cannot be legally binding, citing principles of autonomy.

A recent case tried in the UK’s Supreme Court referenced the 1919 New York Court of Appeals decision in the case of Beatty v. Guggenheim Exploration Co. in which judge Cardozo stated “Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other.”

However, the UK’s Supreme Court Judge Lord Sumption found that in the UK, the meaning of such clauses is clear.  He identified three reasons for their inclusion:

  • They prevent the undermining of written contracts by informal means and the potential for dishonesty in the discussion of what parties agreed to.
  • Oral agreements can be misinterpreted in a way that may only become evident much later, where there may be nothing tangible to shore up the intended meaning.
  • NOM clauses make it easier to control who, within a company, has the ability to alter contractual terms.

In the recent UK case (Rock Advertising Limited v. MWB Business Exchange Centres Limited [2018]) it was concluded that such clauses would continue to be legally binding and that they were fundamental to such contracts being enforceable.

The only possible wriggle room in such UK / US determinations is the principle of estoppel, by which a party who has acted in accordance with a contract made verbally can be held to those terms, should they subsequently behave as if they did not so agree.

In such cases, the party’s actions are taken as evidence of their asserting to a condition, which they cannot in good faith later renounce.  However, this principle did not apply to the Rock Advertising case.

Australian Position

Australian law has set a different precedent.  The Federal Court recently had occasion to consider this contentious issue, with reference to Rapsey, in the matter of Australian Mortgage Finance Limited (Administrator Appointed) [2021] FCA 189 (‘AMFL’).

Following AMFL going into administration, its directors asserted that, contrary to their written consultancy agreements, which contained NOM clauses, they had agreed to be remunerated via their own companies’ consultancy agreements, in the form of equity, rather than cash.

To determine whether they were so entitled would require these directors to be identified as creditors of AMFL and able to vote on remuneration proposals at a second creditors meeting.  The administrator, Mr Chad Rapsey, had received competing remuneration proposals from the directors and from established creditors.

Mr Rapsey cited the NOM clause and contended that there had been no legally binding variation to the written agreements.  However, the court disagreed.  The administrator also contended that no variation to the contract was supported by any consideration (mutual benefit).

Again, the Court took a different view, stating that the company would benefit from not having to draw on its cash reserves, while the directors would potentially benefit by increasing their shareholding.

However, Justice Nicholas found that the directors would be entitled to equity according to the subsequent variation.  Of course, given that AMFL was in receivership, such shares were valueless and therefore did not convey voting rights to the directors as creditors.  It was determined that Mr Rapsey had no legal basis to allow them to vote at the creditors’ meeting.

Although it did not benefit the AMFL directors materially, this case has further ratified the principle, under Australian law, that such oral variations can have validity, and that NOM clauses are not fit for their explicit purpose.

Ironically, NOM clauses, where used in Australian contracts, can be cited as evidence that a variation has later been made.  They express the strength of conviction that both parties hold regarding the intention of the contract at a given point in time. Such clauses place a “line in the sand”, against which a future variation can be contrasted.

Let Common Sense Prevail

As a matter of good practice, parties making a variation to legally binding contracts should still notarise such alterations in writing.  There are several self-evident reasons for this:

  • CLARITY – oral conversations and agreements can be misunderstood.  Written and signed agreements are harder to misrepresent.
  • COMMUNICABILITY – a record is created which both parties can refer to when sharing the variation or refreshing their memories of what was agreed.
  • EVIDENCE – should there be subsequent disagreement, there is written documentation of the contractual alterations agreed by both parties.

The limitation of this approach may be purely practical.  When situations require a quick decision, it is not always possible to quickly mobilise legal teams to notarise a contract variation or temporary waiver.  However, this waiver should be recorded and identified as retroactively assented to by both parties as soon as possible to the occurrence of the variation.

As previously mentioned, the inclusion of a No Verbal Variations clause may give rise to issues of estoppel, when a different course of action has been taken from that described in the contract, without any agreed variation.

Blaine Hattie is a commercial lawyer at Sutton Laurence King Lawyers.

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