Now We're Talking: Revisiting the Canadian Approach to No Oral Modification Clauses.

• Author: Pike, Christoph

Introduction

1. The NOM Clause and its Application

2. The Treatment of NOM Clauses in Canadian Law

3. Developments Abroad

   1. The United Kingdom

   2. Australia

4. Reconsidering the Canadian Approach

   1. Freedom of Contract

   2. Understanding Intention

   3. Relationship with Exclusion Clauses

   4. Practical Concerns Conclusion

   Introduction

   Written contracts, particularly between commercial parties, often include a clause stating that any variation of the agreement must be made in writing. These clauses are commonly referred to as "no oral modification" (NOM) clauses. (1) Despite their ubiquity, the enforceability of such clauses has long been the subject of debate. (2) At the core of this debate is a disagreement over whether the law can support a decision by the parties to forfeit their rights to modify an agreement in whichever way they choose, even where such a concession may later bind them to terms that no longer reflect their most recent shared intention. Historically, courts across the common law world have opposed the enforcement of NOM clauses on their own terms, though some variations in treatment between jurisdictions have emerged. (3)

   A greater number of judges and academics have expressed their support for the enforcement of NOM clauses in recent years. (4) Most notably, the Supreme Court of the United Kingdom in Rock Advertising Limited v MWB Business Exchange Centres Limited allowed a NOM clause to be enforced on its own terms. (5) This decision caused a dramatic shift in the direction of English law and prompted considerable scholarly discussion in the wider common law world. (6) Only two years earlier in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd, the Court of Appeal of England and Wales held that NOM clauses are inconsistent with the principles of freedom of contract and therefore unenforceable in the face of a subsequent oral amendment. (7) This approach still has weight in Australia, where courts have consistently found NOM clauses ineffective against subsequent oral modifications.

   Courts in Canadian common law jurisdictions have not developed a unified approach to the enforceability of NOM clauses. Shelanu Inc v Print Three Franchising Corp, a 2003 decision of the Court of Appeal for Ontario, is often cited as the leading case on the enforceability of NOM clauses. (8) Yet Shelanu has not been interpreted consistently, and its articulation of a strong argument against effective NOM clauses in obiter dicta has not prevented their enforcement in subsequent decisions. It is therefore likely that the validity of NOM clauses will continue to be challenged, and considering recent developments in the United Kingdom, Canadian courts may look elsewhere in the common law world for a renewed approach.

   This paper aims to address the question of whether common law Canadian courts should give effect to NOM clauses, taking into consideration the approaches developed in British and Australian jurisprudence. I take the position that, where a NOM clause is present, a subsequent oral variation of the agreement that is clearly intended to modify its substance should nevertheless be enforceable, regardless of whether the parties had turned their minds to the existence of the NOM clause. (9) The clause should therefore not be enforceable on its own terms. However, unenforceability would not prevent the presence of the NOM clause from shaping the context in which the later amendment was formed. NOM clauses may therefore serve an evidentiary role as a signal of the parties' intentions, though the degree to which they influence a finding that a subsequent amendment has been made will vary based on factual circumstances. Further, NOM clauses should be treated as sui generis, rather than as a species of exclusion clause. This framework is consistent with established principles in Canadian contract law as well as the weight of persuasive authority from Australia and the Court of Appeal of England and Wales.

   To advance this position, I will first offer a comprehensive definition of the NOM clause. Second, I will provide an overview of the treatment of NOM clauses in Canadian jurisprudence. Third, I will review British and Australian jurisprudence addressing NOM clauses. Finally, I will discuss the key issues raised by the jurisprudence and propose an approach that is able to reliably give effect to the intention of the parties while remaining consistent with broader principles of Canadian contract law.

1. The NOM Clause and its Application

   Before beginning an analysis of the treatment of NOM clauses, it is important to outline a working definition of the term. The key feature of the NOM clause is that it establishes a formality requirement that precludes the parties from agreeing to any subsequent amendment that does not comply. (10) A NOM clause will typically resemble the following: "No variation of this Agreement shall be valid or effective unless made by one or more instruments in writing signed by the parties to this Agreement." (11) The parties may wish to set out formality requirements that are more or less rigorous than those found in the sample clause above. For instance, they may require that an amendment receive the signature of persons holding specified positions within their respective organizations, or may require a more detailed procedure for amendment. As will be discussed in Section IV.B of this paper, the nature of the formality requirements will provide some context in which the intention of the parties can be understood. Yet despite these potential variations, such clauses provide essentially the same function and therefore raise the same basic concerns. As such, it is necessary to consider them all through the same analytical framework.

   The NOM clause must be distinguished from the so-called "entire agreement" clause. The purpose of the entire agreement clause is to limit the agreement between the parties to what has been set down in writing, to the exclusion of any representations made prior to the execution of the contract. (12) As such, the clause will usually contain a phrase similar in effect to: "This contract contains the entire agreement between the parties." (13)

   Though they differ significantly in purpose, the NOM clause and the entire agreement clause bear some resemblance to one another and, due to this similarity, they have attracted comparisons and occasionally been given the same treatment by courts. (14) This tendency to see the clauses as categorically indistinguishable, or even closely analogous, is misguided. The key difference between the clauses lies in the fact that the NOM clause is employed to limit the parties' exercise of their future rights, while the entire agreement clause operates as a clarification of what has already been agreed. (15) The NOM clause is controversial because it purports to override the parties' later express intention, while the entire agreement clause is widely accepted because it represents the parties' current desire to override any previous understanding, thereby supporting the terms as they have been expressed in the contract in a manner akin to the parol evidence rule. (16) Due to these critical differences, it is not necessary to consider the treatment of entire agreement clauses in this paper, except where they must be distinguished from NOM clauses.

2. The Treatment of NOM Clauses in Canadian Law

   Shelanu is widely regarded as the leading Canadian decision addressing the treatment of NOM clauses. (17) The case concerned a dispute between Print Three Franchising Corporation (Print Three), a franchisor of print shops, and Shelanu Inc., a franchisee owned by Brian and Mary Deslauriers. The Deslauriers also owned a second corporation, BCD Print Inc. (BCD), which operated a separate Print Three franchise. Shelanu initially controlled two Print Three franchises, though due to declining revenues, Shelanu surrendered one of these by oral agreement with Print Three. This oral agreement was never questioned by either party despite the presence of a NOM clause in the corresponding, terminated franchise agreement. In the following years, BCD relocated its business and used the new location strictly as a production facility in support of Shelanu's remaining franchise operation. All agreements relating to these changes were made orally. Two years later, the parties reached an oral agreement to terminate the BCD franchise and effectively merge its production operation with the Shelanu franchise. However, Print Three subsequently disregarded this oral agreement and continued to treat Shelanu and BCD as separate franchises, thereby depriving the Deslauriers of certain sales-based royalty rebates that they would have received had the BCD franchise been surrendered. (18) In support of its position, Print Three relied on the NOM clause in the BCD franchise agreement, which stipulated that any "waiver, amendment, or change" of the terms had to be made in writing and signed by the parties. (19)

   Several contract and franchise law issues were raised at trial and on appeal, including whether the oral agreement to terminate the BCD franchise agreement was enforceable notwithstanding the NOM clause. The trial judge, Nordheimer J, held that the oral agreement was enforceable. (20) The Court of Appeal upheld Nordheimer J's decision to enforce the oral agreement.

   Justice Weiler, writing for the Court, reached this conclusion by first treating the NOM clause, along with an entire agreement clause also found in the franchise agreement, as exclusion clauses. However, she noted that these were unconventional exclusion clauses in that they did not concern the usual subject matter of such clauses, being the limitation of liability for damages related to breach of contract or a tort related to the contract. (21) She nevertheless maintained that the clauses at issue should be treated as exclusion clauses on the grounds that precedent supports the treatment of entire...