Standstill agreements: lessons in drafting from (1) Exsus Travel Limited (2) Coronation Limited v (1) Baker Tilly (2) Baker Tilly Audit LLP [2016] EWHC 2818 (Ch)

Standstill agreements are frequently negotiated and entered into under some time pressure, often as a result of a claimant client having sought advice at the eleventh hour. Notwithstanding such pressures, the recent decision of the High Court in (1) Exsus Travel Limited (2) Coronation Limited v (1) Baker Tilly (2) Baker Tilly Audit LLP [2016] EWHC 2818 (Ch) highlights the importance of clear drafting in standstill agreements.

In this case, the Claimants (E and C) had intimated claims in contract and/or negligence against the Defendants (BT), in relation to their audits of E and C’s accounts for the financial year ending 31 December 2005. E and C entered into a Standstill Agreement entered with BT on 30 November 2011. Recital (B) (which was the relevant clause) 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 Standstill Agreement made no reference to the possibility of termination within the 12 month period referred to in Recital (B), but Clause 3 provided that the Standstill Period could be terminated at any time by any of the Parties giving not less than 28 days’ notice in writing.

Following entry into the Standstill Agreement (in November 2011), E and C’s solicitors requested a number of amendments to be made:

• in March 2013 they asked for the Standstill Agreement to be amended to include claims in respect the year ending 31 December 2006; and
• in June 2014 they asked for the Standstill Agreement to be amended to include claims in respect of the year ending 31 December 2007 (in both cases we assume the audits were signed-off midway through the following year).

BT’s solicitors agreed to those amendments. In May 2015, E and C’s solicitors wrote to BT’s solicitors asking for the Standstill Agreement be amended to include claims in respect of the years ending 31 December 2008 and for the agreement to be terminated by 30 September 2015 in respect of all of the claims covered. In response, BT’s solicitors noted (amongst other things) that the Standstill Periods had already expired in respect of earlier accounting periods (i.e. for the years ending 31 December 2005 and 2006). E and C did not agree that those Standstill Periods had expired and the question was brought before the Court to decide.

The critical clause in the Standstill Agreement was Recital (B). E and C argued that the Recital defined a minimum 12 month period which continued until it was brought to an end by service of a notice under clause 3. It was conceded on behalf of E and C that the drafting was not clear but submitted that the true meaning and effect of Recital (B) could be ascertained through consideration of the underlying factual matrix and the obvious point that E and C would need longer than 12 months from the date of the Standstill Agreement to bring the claims against BT (owing to other related litigation that needed to be determined first and which had necessitated the Standstill Agreement). E and C submitted that it must therefore have been the parties’ intention that the 12 month period was a minimum, which was to continue thereafter subject to termination on 28 days’ notice.

In response, BT submitted that the ordinary and natural meaning of the words (particularly the use of the disjunctive word “or”) made it clear that the Standstill Agreement lasted for 12 months only unless extended by agreement; and that, under Clause 3, either of the parties could terminate the Standstill Period “at any time” including within the 12 month period. BT did not agree that it was necessary to have regard to the relevant factual matrix and asserted that the composite construction argued by E and C was not consistent with the plain meaning of the words used in Recital (B).

Noting that recitals can and should be taken into account when interpreting an agreement, Edward Murray (sitting as a Deputy Judge of the Chancery Division) agreed with BT and held that the Standstill Period applied in relation to each set of claims for a period of 12 months only, unless terminated by earlier notice under clause 3. He did not consider the underlying factual matrix to be relevant because there was “no need to depart from the natural meaning of the words used”. The effect of the Standstill Agreement was that the limitation period had expired in relation to the 2005 and 2006 claims and those claims were time-barred unless an estoppel by convention had arisen.

On the latter point, the Deputy High Court Judge did not find that an estoppel had arisen because there was no evidence that BT shared E and C’s assumption that the Standstill Period was for a minimum of 12 months. Significantly, the judge commented that, had there been evidence that BT’s solicitors had “crossed the line” by remaining silent in the face of E and C’s assumption as to the meaning of the agreement (thereby assuming some element of responsibility for that false construction), the result might have been different. In other words, had BT’s error been “manifest” it would have been unconscionable for BT’s solicitors to take advantage of it. The judgment does not define what constitutes a “manifest” error in this context. BT’s solicitors must have recognised that at least some error had been made by E and C’s solicitors but it is clear from the fact-pattern of this case that a manifest error capable of setting up an estoppel must be one which is explicitly apparent to, and at least tacitly encouraged by, the other party (perhaps unsurprisingly in view of the court’s view of the plain meaning of the relevant contractual provision).