Parties often enter into standstill agreements when approaching the expiry of a limitation period. This case shows the difference between suspending time and extending time for the purposes of limitation in a standstill agreement. As a matter of interpretation the court held that the standstill agreement had suspended time which meant that the remainder of the limitation period continued to run after expiry of the standstill agreement. Although the court did not deprive the claimants of the ability to bring a claim, the case serves as a reminder of the importance of considering limitation issues and of proceeding with care when negotiating standstill agreements: (1) Stuart Howard Russell (2) Naomi Patricia Russell v (1) Peter Stone (trading as PSP Consultants) (2) PSP Consultants Limited (3) PSP Consultants (a firm) [2017] EWHC 1555 (TCC).
The defendants provided quantity surveying and project management services for the claimants’ construction project. The project was beset by difficulties, for which the claimants blamed the defendants. The parties entered into three standstill agreements, with the third expiring on 30 November 2016. On 1 December 2016, the claimants issued proceedings against the defendants. The defendants argued that the claims were time-barred.
A reminder about standstill agreements
A claim must be issued within the relevant limitation period. The statutory limitation period for contractual claims is six years, with time running from the date on which the cause of action accrued. If the limitation period has expired, the claim will be time-barred and the defendant will have a complete defence to the claim.
Parties to a dispute may choose to enter into a standstill agreement where they are approaching the expiry of the limitation period, but the claimant is not yet ready to issue its claim (because, for example, the parties are in negotiations which, if successful, would prevent a claim from needing to be issued at all).
A standstill agreement can preserve the claimant’s position regarding limitation by either suspending or extending time. If the standstill agreement has the effect of suspending time, on expiry of the standstill period the claimant will have the same amount of time left in which to issue its claim as it did as at the date of the agreement. If the standstill agreement merely extends time, the claimant must issue proceedings on expiry of the standstill period.
Suspend or extend?
The court had to determine when the relevant causes of action accrued and whether the standstill agreements operated to suspend or extend the limitation period.
The standstill agreements contained recitals which stated that the purpose of the agreements was to extend the period in which proceedings could be issued by the claimants. In contrast, the operative provisions of the standstill agreements referred to time being “suspended” and to the “suspension of time”. The claimants referred to the operative provisions and argued that the standstill agreements had the effect of suspending time for the purposes of the limitation period, whilst the defendants pointed to the recitals (and certain other factors), arguing that the standstill agreements were only intended to extend time.
On the claimants’ case, if they had a period of, say, one month remaining out of the six year limitation period when they entered into the standstill agreements, they still had a period of one month when the third standstill agreement came to an end. On the defendants’ case, the time for commencing proceedings expired when the third standstill agreement came to an end (ie on 30 November 2016). If the claimants were correct, they had issued their claims in time but, if the defendants were correct, the claimants were out of time and the claims were time-barred.
Recitals v operative provisions
The court considered the proper approach to the construction of recitals and their interaction with operative terms against the background of recent developments in the law on contractual interpretation. In principle, if the recitals and the operative provisions of an agreement are clear but they are inconsistent with each other, the operative provisions must be preferred (Re Moon (1886) 17 Q.B.D. 275). However, the courts are now placing greater emphasis on factual background and the recitals are increasingly being considered in order to assist with contractual interpretation.
Decision: suspension, not extension of limitation period
The court held that:
− Each standstill agreement prevented the parties from issuing proceedings during the currency of that agreement. Therefore, the claimants could not legitimately commence proceedings before 30 November 2016 without breaching the terms of the third standstill agreement.
− The operative provisions repeatedly referred to the suspension of time: the only mention of the extension of time was in the recitals. There was no inconsistency between the description in the recitals of the claimants’ desire to have longer to issue the proceedings (i.e. to extend the time for doing so) and the mechanism of achieving that aim (i.e. to suspend time). If there had been an inconsistency, the operative provisions would take precedence over the recitals.
− The fact that the solicitors had based the third standstill agreement on a template which was premised on the principle of suspending time supported the claimants’ position (despite serial departures from the original).
− When the claimants entered into the third standstill agreement, they still had over three weeks to issue proceedings. If the defendants’ position was correct and the claimants were out of time on expiry of the third standstill agreement, by entering into the agreement the claimants were running the risk of losing their right to bring the claims at all. The purpose of the standstill agreement was to preserve rights not to risk their loss.
Accordingly, the standstill agreements operated to suspend time for the purposes of limitation and the claimants had issued their claims in time.
Comment
Potential claimants should carefully consider their options when approaching the expiry of a limitation period. Coulson J observed that standstill agreements are becoming increasingly common and remarked that he had been left with “the overwhelming feeling that they are potentially just another self-inflicted complication”. He suggested that, if limitation is an issue and more time is needed to work on the claim, claimants should instead consider commencing proceedings within the limitation period and then seeking a stay.
However, if a standstill agreement is considered the most appropriate option, efforts should be made to ensure that the parties expressly agree on the intended effect of the standstill (ie whether it acts to suspend or extend time for the purposes of limitation), and that the wording of the standstill agreement clearly and consistently reflects that intention.
More generally, this decision also serves as a reminder that, despite an increased emphasis in recent cases on the consideration of factual background to help with contractual interpretation, where clearly worded operative provisions address an issue, parties cannot rely on recitals to overturn their true meaning.
