Contributors
The recent decision in (1) Exsus Travel Limited (2) Coronation Limited v (1) Baker Tilly (2) Baker Tilly Audit LLP [2016] EWHC 2818 (Ch) provides a salutary tale for solicitors regarding clear drafting when seeking to negotiate standstill agreements.
Standstill agreements are a frequent tool employed in disputes when, for myriad different reasons, the claimant and defendant wish to buy themselves more time in order to avoid the (increasing) expense and hassle that comes with the issuing of Court proceedings. However, despite their importance, they are often poorly drafted which may well be because they are usually sought and agreed only a short time before expiry of the limitation period. This has led to many a piece of satellite litigation as careless mistakes can lead to a claimant losing the opportunity to pursue their case and then turning their ire, and freshly-instructed solicitors, on those previously retained.
Facts
This is one such case that has recently been heard in the High Court. Both claimants had brought claims in negligence against the defendant auditors relating to their audit of accounts for the financial year ending 31 December 2005. The parties agreed to enter into a standstill agreement and one was signed on 31 November 2011 (the Standstill Agreement). Recital B of the standstill agreement provided that:
“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 2004 Claim and 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 2004 Claim is irrelevant for the purpose of this decision and was discounted. The balance of the Standstill Agreement was silent on how the defined Standstill Period would come to an end save for a standard notice provision which meant the Standstill Period could be terminated in writing with at least 28 days' notice.
The claim moved on and the claimants' solicitor made various requests, all agreed, to broaden the scope of the Standstill Agreement to include the 2006 (agreed on 26 March 2013) and 2007 (agreed on 4 July 2014) financial years. However the claimants never expressly agreed an extension to the Standstill Period.
In May 2015 the claimants made a final request for the Standstill Agreement to encompass the audit carried out for the 2008 financial year and threatened to terminate the Standstill Agreement shortly thereafter. The defendants responded by giving 28 days' notice to terminate the Standstill Period but also pointing out that this notice was served without prejudice to the fact that the Standstill Period had already expired.
The claimants sought to argue that Recital B provided that 12 months was actually the minimum time the Standstill Period would be extant. Thereafter it would simply continue until brought to an end under the notice provision detailed in the body of the Standstill Agreement. The claimant sought to support this interpretation of the wording in Recital B by looking at the surrounding factual matrix and inviting the Court to find this was the parties' intention when they entered into the Standstill Agreement.
The defendants countered by simply stating that the natural and ordinary meaning of the wording agreed did not support the claimant's interpretation and that it was not necessary to consider the surrounding factual matrix.
The Decision
The Judge held that:
- It was irrelevant that the Standstill Period was defined in a recital rather than in an operative provision. Contracts should be interpreted as a whole and there was no clash here between Recital B and an operative provision as the rest of the Standstill Agreement was silent on the Standstill Period
- The 12 month Standstill Period and the provision in the body of the Agreement regarding the notice period were alternative methods for bringing the Standstill Period to an end, rather than both being part of the same, and only, mechanism that could bring the Standstill Period to an end
- The wording used was clear enough such that he did not need to consider the surrounding factual matrix.
It was therefore the case that the Standstill Period in respect of the 2005 and 2006 years had expired. The Judge also considered the claimants' alternative argument that the defendants were estopped by convention from relying on the claimant's solicitor's mistake as they had in fact held the same interpretation of the Standstill Agreement and had been dealing with the claimants' solicitor based on that interpretation.
Estoppel by convention was considered by the Judge as operating in circumstances where parties to a transaction proceed on a shared underlying assumption and that one or both parties would have to "cross the line" by expressly communicating this assumption to the other party either by words or conduct.
In this case the Judge found that there was no such shared assumption and therefore no estoppel by convention. The defendants' solicitor's silence in the face of the claimant's solicitor's mistaken interpretation was not sufficient to "cross the line" and the defendants' solicitor was not obliged to point out the claimants' solicitor's error.
Comment
It is obviously good practice that clear drafting is employed not only in standstill agreements, but in general. In respect of standstill agreements it is always important to ensure that sufficient protection is afforded to your client when entering into it, to keep the agreement under constant review and to diarise in respect of extensions in good time. An effective mechanism for extending or terminating the standstill agreement is arguably one of the main operating parts of the contract, so particular care should be taken over that aspect. Limitation periods are not complicated to understand in most situations but if mistakes are made the consequences can be severe for the client, the solicitor and eventually, quite possibly, their professional indemnity insurers.
As for the estoppel arguments, this decision also reinforces the fact that in an adversarial process one legal representative is not obliged to be the nursemaid of the other, indeed doing so could lead to a conflict between that representative and their client.
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