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Standstill agreements: Draft in haste, repent at leisure

Agreement and Magnifying Glass Print publication

15/12/2016

Parties enter into standstill agreements to suspend the usual limitation period for bringing a claim. As the limitation deadline approaches, the need to enter into a standstill agreement can become increasingly urgent because, failing that, the claimant must issue court proceedings or it will lose its opportunity to bring a claim. These pressured circumstances can often lead to precipitous agreements, which lack detail and thorough consideration.

Last year Walker Morris achieved a victory before the Court of Appeal in a case which highlighted the importance of getting the drafting of your standstill agreement right [1].  The issue has now hit the legal headlines again, in the case of Exsus Travel & Anor v Baker Tilly [2].

The Facts

The parties entered into a standstill agreement in 2011 in relation to potential claims arising from the defendant’s audits of the claimants’ accounts for the financial year ending 31 December 2005 (the “Standstill Agreement“).

A series of amendments to the Standstill Agreement were agreed by an exchange of correspondence between the parties’ solicitors. These amendments extended the application of the Standstill Agreement to potential claims arising out of the defendant’s audits of the claimants’ accounts for the additional financial years of 2006 and 2007.

In 2015, the claimants proposed a further amendment to extend the Standstill Agreement’s application to accounting periods ending in 2008. The defendant responded by giving 28 days’ notice to terminate the Standstill Agreement altogether and argued, in the alternative, that the standstill period had already expired in respect of the earlier accounting periods ending 31 December 2005 and 2006. The claimants disagreed.

Conflicting Interpretations

The disagreement arose from two conflicting interpretations of the relevant part of the Standstill Agreement, Recital B, which provided:

The purpose of the Agreement is to suspend the running of the applicable limitation period both in contract and in tort in respect of the […] 2005 Claims for a period of 12 months from the date of this Agreement or any later date agreed in writing by the Parties or until this Agreement is terminated in accordance with its terms (the Standstill Period“).”

The crucial issue was that, whilst agreed amendments had extended the scope of the Standstill Agreement to cover additional potential claims, the parties had never actually expressly agreed an extension to the Standstill Period. The question for the High Court was therefore the correct interpretation of Recital B; namely, whether the applicable limitation periods had already expired.

The claimants argued that Recital B defined a standstill period of a minimum of 12 months, which otherwise continues until it is brought to an end by the giving of a notice in accordance with terms in the body of the Agreement. Although they admitted the drafting was not clear, the claimants argued that the correct interpretation could be ascertained by reference to the factual matrix and by considering the parties’ intentions at the time the Standstill Agreement was completed.

The defendants, however, submitted that the court should give the words their ordinary and natural meaning [3]. They argued that the use of the word “or” made it clear that the Standstill Period would expire after 12 months or until termination by notice. Judge Murray accepted this construction, noting that the ordinary and natural meaning of the clause was clear and so there was no need to depart from that to look to the factual matrix/parties’ intentions.  As such, the Standstill Period for each potential claim had expired at the end of 12 months.

Estoppel by convention: claimant’s alternative attempt

As an aside, the claimants alternatively argued that an ‘estoppel by convention’ had arisen which prevented the defendant from asserting that the Standstill Period had expired.

Walker Morris has reported recently on a number of cases which demonstrate that legally binding contracts can sometimes come into existence, or existing contracts can be varied, as a result of the parties’ conduct [4].  Similarly, an estoppel by convention may arise where parties act on an assumption that is either shared by both or is made by one and acquiesced by the other, to preclude one party from denying the assumed circumstances where that would be unjust.

Here, the claimants submitted that the defendant’s silence in the face of the claimants’ mistaken assumption that the Standstill Period was still running amounted to acquiescence in that assumption. However, noting that mere silence is not enough to found an estoppel by convention, the High Court held that there was no evidence to suggest that the defendants ever shared the claimants’ assumption and that the defendant was not estopped from alleging that the limitation period had expired.

WM Comment

The Exsus Travel case is a good example of the correct approach to contractual interpretation and the importance of clear drafting.  The protection of a claimant’s ability to pursue a claim is paramount, but entering into or amending/extending standstill agreements hurriedly in light of a looming limitation deadline can be fraught with risk.  Parties and practitioners alike should note the following practical advice.

  • As with any commercial contract, the starting point when it comes to interpretation is the ordinary natural meaning of the words themselves.
  • Whilst consideration of commercial common sense, the factual matrix and the parties’ intentions at the time a contract was entered into can, in the right circumstances, be taken into account, those factors should not undermine the clear meaning of a contractual provision.
  • It is therefore important to ensure that any standstill agreement is accurately and clearly drafted to truly reflect the understanding and intention of the parties.
  • Key aspects of a standstill agreement which it is essential to get right include the definition and scope of potential claims covered; the definition of the standstill period itself; and any mechanisms for amendment, extension and termination of the standstill period or of the agreement overall.
  • When interpreting a standstill agreement or any other contract, the contract should be read as a whole.
  • It was irrelevant to the interpretation exercise here that the Standstill Period was defined in a recital rather than in an operative provision in the body of the contract. The principle that a recital cannot control an operative provision will only be relevant if there is an inconsistency between the two.
  • A standstill merely defers, it does not remove, the limitation deadline. Once a standstill agreement has been completed and the immediate time-pressure is lifted, parties’ attention generally turns to further investigation of the potential claim or negotiation of a settlement. It is vital, however, that standstill deadlines are not missed later down the line. Parties and their solicitors should diarise standstill deadlines properly and should leave enough time to either agree and document any further extension, or else to issue proceedings.
  • Finally, the convention by estoppel aspect of this case is an effective reminder that one party is not the other’s keeper and so there is no obligation to draw a party’s attention to its mistake.

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[1] See our earlier briefing for more information
[2] [2016] EWHC 2818 (Ch)
[3] The defendant’s argument was in line with leading authority on contractual interpretation, Arnold v Britton [2015] UKSC 36.  See our briefing for information and advice.
[4] https://www.walkermorris.co.uk/publications/disputes-matter-may-2015/contract-by-conduct-a-cautionary-tale/; https://www.walkermorris.co.uk/publications/disputes-matter-summer-2016/beware-letters-inadvertent-commitment/; https://www.walkermorris.co.uk/publications/disputes-matter-summer-2016/anti-variation-clauses-court-appeal-confirmation/

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