The significance for asset managers of the Supreme Court’s decision that No Oral Modification clauses are valid and binding

The Supreme Court recently gave judgment in the case of Rock Advertising v MWB Business Exchange Centres Ltd [2018] UKSC 24. Whilst the subject matter of this case concerned a dispute relating to a licence to occupy office premises, the Supreme Court’s decision to uphold the validity of a “No Oral Modification” (NOM) clause has implications for all organisations operating in the UK, including asset managers.

A NOM clause is typically a very simple clause which requires any variations to a contract to be set out in writing (and is often accompanied by a signature requirement). In Rock Advertising, the NOM clause under scrutiny was phrased as follows:

“All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

In Rock Advertising, a dispute arose when the licensee, in arrears on licence fees, proposed on a telephone call a new payment schedule, which it alleged the licensor to have accepted orally. This was denied by the licensor, who subsequently terminated the licence and claimed for the arrears.

The majority judgment in the case was handed down by Lord Sumption (with only Lord Briggs dissenting), whose primary reasons for upholding the clause were as follows:

• these types of clauses serve legitimate commercial purposes, including: (i) to prevent attempts to undermine written agreements by informal means; (ii) to prevent uncertainty as to what has been agreed between the parties (as oral discussions can easily give rise to misunderstandings); and (iii) to make it easier for corporations to control who in the organisation can agree to contractual variations
  
  
• the argument that it is conceptually impossible for parties to agree not to vary a contract orally because any such agreement would automatically be destroyed by doing so should not prevent English law recognising: (i) a general rule allowing a contract to be made informally; and (ii) a specific rule to the contrary - of the kind NOMs impose
  
  
• where parties to a contract containing a NOM clause agree to a subsequent oral variation, the natural inference in such cases is not that the parties intended to abandon the NOM clause, but instead that they overlooked the clause which should accordingly apply as intended, and
  
  
• where the parties clearly intend to make an oral variation in knowing circumvention of a NOM clause, the doctrine of estoppel can act in certain circumstances to prevent instances of subsequent unjust reliance.

The decision of the Supreme Court is positive for asset managers in some respects as, provided a NOM clause is included, it secures certainty in contractual relationships and limits the risk of inadvertent variations. This is particularly pertinent in light of the complexities inherent in the vast array of contractual relationships that asset managers have and the consequent potential for misunderstanding that results from these complexities.

However, there are also downsides to the Supreme Court’s decision for asset managers, in particular where urgency dictates a swift amendment to contractual terms. This might, for example, occur in circumstances where amendments are required to investment restrictions to reflect market events or unforeseen changes in law/regulation (such as a restriction on short selling). In these circumstances, should a NOM clause be included in the mandate, it will be more difficult to quickly agree the necessary contractual changes.

Asset managers should also consider the potential impact on their trading arrangements. Most trading agreements would typically include a NOM clause as standard in any event (eg Section 9(b) of the 2002 ISDA Master Agreement), but asset managers should be aware of the risk of potential claims for contractual breach in the event of any oral amendments which have an impact on transactions which do not perform well for the counterparty.

There remains some protection for an asset manager caught out by a NOM clause. It might be possible for an asset manager to rely on estoppel in circumstances where it relies on an oral variation (for example, a variation to the effect that certain types of securities are now within the scope of the mandate), invests in these types of security, and then finds itself subject to a claim from the client for breach of contract. However, while the defence of estoppel is still viable, the effect of the decision in Rock Advertising is that, if a NOM clause is included in the mandate, it is prudent to confirm any variation in writing, as the estoppel defence will only be available in certain circumstances.

In addition, it is our experience that it is relatively rare for asset managers to amend contracts orally, with the acceptance by conduct approach more commonly being used. However, in light of the decision in Rock Advertising, it remains to be seen whether the established body of case law permitting variation by conduct will be revisited by the Courts in the future, especially in circumstances where the contract includes a NOM clause.