The pros and cons of standstill agreements

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Disputes over the meaning of particular standstill agreements have reached the courts in two cases this summer – Russell v Stone and Muduroglu v Stephenson Harward . We look at the common pitfalls parties should be aware of when dealing with standstill agreements.

Standstill agreements to extend or suspend a limitation period have become a regular feature of civil litigation.  They enable the parties to focus on the pre-action protocol requirements without worrying about limitation.  They can also save the cost of the court issue fee if the dispute settles pre-action.  So where’s the problem? Two recent cases – Russell v Stone and Muduroglu v Stephenson Harwood - illustrate the downside of standstill agreements.  We examine the benefits and the pitfalls.

The broader picture

Before pre-action protocols were introduced, a claimant could reach the end of the relevant limitation period and issue a claim form without having worked out any of the detail of the claim.  Now they can be penalised in costs for failing to engage with the protocol process. The result can be a long drawn out pre-action period of information sharing and negotiation during which the limitation period may run out.

The standstill agreement buys time for both sides.  Less helpfully, it also means that the parties (more usually their lawyers) have to negotiate and agree a contract at a time when they are gathering evidence and getting to grips with the substance of the dispute. Where there is more than one defendant, the claimant will want to agree identical standstill agreements with them all.  Even if all defendants are prepared to play ball, which they may not be, claimants often end up with multiple agreements and subsequent variations if time runs out again.

The courts have frequently urged claimants to issue proceedings in these circumstances and then request a stay to follow the protocol.  A stay acts to suspend time but, unlike a standstill agreement, it requires a court order. The Technology and Construction Court (TCC) Guide recommends this course.  As Coulson J commented in Russell v Stone, this is a much safer option than the muddle that results from the self-inflicted complication of standstill agreements that don’t work.

Concluding an agreement

A standstill agreement is a contract and subject to the same rules as other contracts. Although the recent cases concern disputes about the terms of the particular standstill agreements, problems can also arise at the point of contract formation. The agreement can be oral but usually the parties agree not to be bound until the agreement is in writing, often by using the phrase “subject to contract”.  

If the claimant doesn’t ask for an agreement until shortly before expiry of the limitation period, time can be a problem.  Even where the terms are finalised, any formal requirements the parties have agreed such as signing, dating and returning the agreement may not be completed by the critical date.

The terms of the agreement

The claimant usually offers the first draft.  This may be based on its lawyers’ own precedent or a template provided by a service such as Practical Law, as happened in Russell v Stone. The problem with any template comes when the parties amend it. 

In Russell the parties didn’t understand the structure and intention of the Practical Law template. The template suspends time for the purpose of limitation so that the parties are in the same position as they were when they entered into the agreement at the end of the standstill period. If they had one month to go until the limitation period expired, they will still have one month to go at the end of the standstill period.

The parties in Russell confused the issue by agreeing variations referring to extending the limitation period. They also added a clause that the parties would not issue or serve proceedings during the period of the agreement.  This conflicted with the structure of the template.

Interpreting the agreement

Where the terms of the agreement are unclear, the courts will apply the rules of interpretation recently clarified by the Supreme Court in Wood v Capita Insurance Service Ltd. The defendant argued that the agreement extended the limitation period so that proceedings issued one day after the standstill period were out of time. 

The effect of this construction was that claimant would have to breach the clause prohibiting them from issuing proceedings any earlier to avoid being time-barred.  This was obviously a nonsense – the court will not interpret a contract in a way that requires one party to breach its terms in order to make the agreement work.  Coulson J held that the agreement suspended time so that the claimant still had time to issue proceedings after the end of the standstill period.

Estoppel arguments

Where the parties disagree about the meaning or effectiveness of their standstill agreement, and the defendant’s case is correct, the claimant may argue that the defendant is estopped from relying on their contractual rights.  This can happen where there is a shared assumption about the meaning of the agreement (known as an estoppel by convention) or where the defendant has taken unfair advantage of the claimant’s obvious error.

In Exsus Travel Ltd v Baker Tilly the claimant’s solicitor misunderstood how the standstill period worked.  The court rejected the argument that an estoppel by convention arose - there was no evidence that the defendant’s solicitor shared the mistaken assumption or was aware of the mistake. 

Where the defendant is aware of a mistake, the court may refuse to allow it to benefit from its unconscionable behaviour.  This will be the case where the defendant’s solicitor or insurer deliberately encourages the claimant to believe, wrongly, that they have agreed a standstill with the correct defendant (see The Stolt Loyalty).

Breach of the agreement

In Muduroglu v Stephenson Harwood the claimant issued proceedings without giving notice as required by the standstill agreement. The defendant argued that this was a repudiatory breach of the agreement, with the consequence that the claimant couldn’t rely upon the agreement to suspend time for limitation purposes.  The court decided that the breach did not go to the root of the contract.  The notice provision was not a condition precedent and any breach of it did not therefore disentitle the claimant from benefiting from the limitation suspension.

In this case the language of the contract did not point towards a strict interpretation of the notice provision – a defendant could insist on specific wording to that effect if it wished.  It was also relevant that the defendant had already had a substantial benefit from the standstill at the date of the breach. There was no indication that the defendant would have settled the claim during the notice period.

Problems where parties refuse to agree a standstill

These recent cases give the impression that entering into a standstill agreement is fraught with difficulty but agreements are reached every day that fulfil both parties’ needs.  Other problems can arise where the parties do not reach an agreement.

Two scenarios can lead to an abuse of process in this context. The first, illustrated by Lewis v Ward Hadaway, was prompted by a cash flow problem in the face of increased court issue fees.  The defendants refused to enter into a standstill agreement so the claimants had to issue to protect time before they had obtained disbursement funding to pay the court issue fees.  The claimants’ solicitors paid the fees themselves.  In order to reduce the court fees, they put lower figures in the statements of value on the claims forms than those the claimants intended to claim. They then amended the claim forms and paid the higher issue fees before serving the claim forms.  This was held to be an abuse of process.

The second scenario involves claims against third parties.  Defendants need to be careful before entering into standstill agreements with claimants without proper information about the claim where they may have a claim against a third party that cannot be brought under the Civil Liability (Contribution) Act 1978.  They can find themselves in an impossible position if they are unable to persuade the third party to enter into a back-to-back standstill agreement, as occurred in Nomura International Plc v Granada Group Ltd. It is an abuse to deprive a defendant of a limitation defence by issuing proceedings where you cannot properly formulate the claim and have no intention of pressing ahead with the action.

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