The High Court has held that defendants were not precluded from relying on the terms of a Standstill Agreement because the claimants had mistakenly believed the standstill period had not expired. The mistake had not been caused by anything said or done by the defendants and there had been no duty on the defendants’ solicitors to correct the mistake.

Background

In November 2011 the claimant companies entered into a Standstill Agreement with the defendants relating to potential claims arising out of audits for the 2004 and 2005 years of account. The Agreement contained a Recital B which defined the standstill period as follows:

“The purpose of the Agreement is to suspend the running of the applicable limitation periods 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 Agreement was subsequently amended by correspondence between the parties’ solicitors. In March 2013 it was agreed to extend its application to potential claims relating to audits of the 2006 year of account, and in July 2014 to potential claims relating to audits for the 2007 year. In June 2015 the defendants’ solicitors wrote to the claimants’ solicitors terminating the standstill period without prejudice to their position that the standstill periods in respect of the 2005 and 2006 Claims had already expired.

The claimants argued that the standstill periods in respect of the 2005 and 2006 Claims had not expired. The proper construction of Recital B was that the first part of the definition defined a minimum 12 month period, which continued until brought to an end by the termination of the standstill period in accordance with the Agreement’s terms. As the clause was not clearly drafted, the claimants said, it was necessary to look at the factual matrix to determine its meaning. On the claimants’ case, the factual matrix showed that the parties’ intention must have been that the 12 month period was a minimum period only.

Decision

In considering the construction of Recital B the court made a number of points.

  • It was irrelevant that the definition of the standstill period was made in a recital rather than an operative provision of the Standstill Agreement. A recital cannot control an operative provision but that question only arises where there is inconsistency between a recital and an operative provision.
  • The use of “or” between the two parts of the definition of ‘standstill period’ (“a period of 12 months from the date of this Agreement or any later date agreed in writing by the parties” and “until this Agreement is terminated in accordance with its terms”) made it clear that they were alternatives.
  • There was no need to refer to the factual matrix to construe the recital where the words used were clear.

The judge found that the standstill period, which ran separately for each set of claims, therefore ran for a period of 12 months only, unless terminated earlier in accordance with the terms of the Agreement. As a result, by the time the Agreement was amended in 2013 to include the 2007 audits, the 12 month standstill periods in respect of the 2005 and 2006 audits had long since expired and the claimants were out of time to bring a claim in respect of those audits.

As the 2005 and 2006 Claims were on their face time-barred, the court considered the claimants’ alternative argument that the defendants were estopped from relying on the claimants’ mistaken interpretation of the Agreement. Briefly, estoppel by convention operates to prevent one party from going back on an assumption where the parties to a transaction have conducted the dealings between them on the basis of that underlying assumption. The judge had no difficulty in rejecting the claimants’ argument.

  • The essence of estoppel by convention is that there is a shared or common assumption, whereas in this case there was no evidence that the defendants’ solicitors shared the claimants’ mistaken interpretation of the Standstill Agreement.
  • Silence, inactivity or a failure by the other party to take a point will not usually be enough to succeed in an argument of estoppel by convention, unless that party is shown to have “crossed the line” sufficient to manifest assent to the assumption. Agreeing to the extension of the Standstill Agreement to include the 2006 Claims was not “crossing the line”.
  • The defendants’ solicitors’ conduct had been consistent with their (correct) interpretation of the Agreement, the claimants’ mistake had not been obvious and it was not a case of solicitors taking unfair advantage of an opponent’s manifest error. There was therefore no basis for imposing a duty to speak out on the solicitors.

Comment

Clear language in a Standstill Agreement is always going to be important. The professional solicitor needs to be careful to choose language that either protects his client’s position indefinitely, or if that is not possible, to make sure a robust system is in place to warn and remind clients of the date that an agreement comes to an end so an extension can be negotiated in good time.

The decision is also welcome news for those acting for professionals. Where a claimant is legally represented and those lawyers make a mistake in their understanding of how a Standstill Agreement works, the duty to point out such an error is extremely limited. It can't be correct that the defendants’ lawyers are obliged to do the claimant lawyers’ job for it.