Informal amendments: the risks may be more than NOM-inal

In the current volatile markets, we have observed a trend of asset managers seeking to amend contracts to reflect the changing circumstances. This includes amendments to investment restrictions to reflect market events and unforeseen changes in law/regulation (such as the recent short selling restrictions) and more generally, amendments to terms of business in place with service providers.

In the interests of time and with authorised signatories working from different locations, asset managers may seek to agree amendments orally. Similarly, when dealing with a counterparty, asset managers may seek to deploy acceptance mechanisms that provide for acceptance by conduct. These mechanisms may save time and alleviate operational and administrative burdens. However, caution must be taken when deploying them and thought should be given to any risks involved.

Where an asset manager is seeking to make changes to a contract that it has in place it should consider any amendment clause contained in the contract and its requirements. An amendment clause may take the form of a “No Oral Modification” (NOM) clause. 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). Most trading agreements typically include a NOM clause as standard (eg, see Section 9(b) of the 2002 ISDA Master Agreement).

If a NOM clause is present and variations are agreed orally but not in writing, or by some other means that does not comply with the NOM clause (including by conduct), there is a significant risk that the variation may be deemed ineffective at a later time.

In 2018, the Supreme Court considered NOM clauses and determined that, 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 intended¹ .

As a result, where amendments have not been carried out in accordance with the relevant amendment clause, asset managers may face future difficulties in enforcing the amended terms against their counterparty. In those circumstances it will be open for the counterparty to argue that the amendments were not effective, such that the prior version of the terms continue to apply. This creates contractual uncertainty, where often the very aim of the amendment exercise is to achieve certainty.

This illustrates the importance of taking care and checking to ensure that the correct procedures are followed when amending contracts. This is equally applicable to other often overlooked contractual requirements, such as notice requirements.

¹ Rock Advertising v MWB Business Exchange Centres Ltd [2018] UKSC 24. If you are interested in further information about the Supreme Court’s decision, please see our article here.