In this article, our business dispute solicitors explain what a standstill agreement is, when they're used, and how they work. This will help you decide if it might be a good tactic for you to consider if you are involved in a dispute.
Contents:
- What is a standstill agreement?
- When are standstill agreements used?
- How does a standstill agreement work?
- What are the benefits of entering into a standstill agreement?
- What are the potential drawbacks of using a standstill agreement?
- What should a standstill agreement include?
- Is a standstill agreement legally binding?
- Can I extend a standstill agreement?
- What happens if a standstill agreement expires?
- What are the consequences of breaching a standstill agreement?
- Are there any legal requirements or formalities for a standstill agreement to be enforceable?
- Are there any alternatives to standstill agreements?
- Summary
What is a standstill agreement?
A standstill agreement is a voluntary arrangement reached between two parties involved in a dispute. Its purpose is to extend the time that the law says court proceedings have to be started or ‘commenced’ by. These timeframes are formally known as statutory limitation periods, and the type of dispute you’re involved in will determine what the law states as the limitation period.
As a business owner, the most common kinds of disputes that you’re likely to face are contractual claims. The limitation period for this type of claim is six years from the date of the cause of action (which is slightly different for each type of claim). If you are involved in a breach of contract dispute, it’s important to check that the contract doesn’t specify a shorter limitation period than the statutory six years.
When are standstill agreements used?
Standstill agreements are commonly used in civil and commercial litigation. They’re often used when the statutory limitation period for bringing the claim is on the horizon, in order to buy the parties more time to try and resolve the issues at hand without the costs, length of time and other risks associated with legal proceedings.
How does a standstill agreement work?
A standstill agreement suspendsor extends the statutory limitation period. The standstill agreement stops the clock on the statutory limitation period, which is why they’re often drawn up when the expiry of a limitation period is looming. Once a formal limitation period expires, it renders a potential claim as time-barred and acts as a complete defence for a defendant to that particular cause of action.
What are the benefits of entering into a standstill agreement?
Entering into a standstill agreement gives the parties to a dispute more breathing space to think about the merits of the claim (or defence if you’re a potential defendant) and to comply with any pre-action protocol requirements, which are steps that the court expects you and any other parties to follow before formally issuing proceedings. The main benefit to this is that there’s a reasonable chance that the conflict will be resolved by a different means; such as a settlement.
Another advantage of entering into a standstill agreement is that it doesn’t require a court order to be drawn up, which would in itself incur a fee.
What are the potential drawbacks of using a standstill agreement?
Whilst on the face of it standstill agreements sound like a straightforward solution to suspending or extending the time for the parties to explore the strengths and weaknesses of their cases there are potential drawbacks to consider.
The first thing to bear in mind is that the terms of the standstill agreement must be clearly drafted so that there’s no room for confusion. If any mistakes are made, then this can have disastrous consequences for the success of the claim or defence overall if it subsequently transpires that the standstill was not in place.
If you’re the claimant, agreeing to a standstill may give the appearance that you’re not serious about bringing the claim.
If there’s a potential third party involved in your dispute, this can add a layer of complexity because it requires their participation, which may involve some persuasion.
What should a standstill agreement include?
There are some crucial elements a well-drafted standstill agreement should include and the overall theme should be one of clarity when it comes to its contents. The below factors are the main ones to think about when drafting your standstill agreement:
- Who the parties to the agreement are: Whilst this sounds obvious and simple, it isn’t always straightforward depending on the nature of the dispute. For example, if one of the parties to the prospective claim is insolvent or at risk of insolvency, it might be the case that their liquidators need to be named in the agreement.
- The dispute and the scope of the standstill agreement: The agreement should clearly state what the subject of the potential claim is (i.e. the cause of action). In scenarios where this isn’t yet defined at the time of entering into the agreement, it’s important that the wording is broad enough to cover all possibilities.
- How much additional time is granted: This may sound simple and obvious, but precise times and dates should be set out in the agreement so that all parties know exactly when it expires – not being precise can cause a whole host of problems. The agreement should also state the final date by which you have to commence court proceedings if you’re the claimant, commonly called the longstop date.
- How to end the agreement: This should be documented in the agreement’s terms for clarity and so that everyone involved is aware of exactly when and how it’s due to end – whether that’s for the purposes of agreeing another extension or for court proceedings to be issued.
Is a standstill agreement legally binding?
Standstill agreements are a form of contract, which means that they are legally binding and are subject to the same general rules as other types of contract.
Can I extend a standstill agreement?
It’s often the case that a standstill agreement will need to be extended. If you find yourself in this position, it’s a good idea to request any extension plenty of time before the existing agreement is due to expire in case any negotiations are necessary and before doing so, check the agreement itself to make sure you comply with any formalities around possible extensions that might have been drafted in as a term. Any variations to the agreement will need to be recorded in writing once you and the other party or parties have decided how long any extension will be for.
What happens if a standstill agreement expires?
If your standstill agreement expires and you’re the claimant, you’ll have the same amount of time to issue your claim as you did at the start of the agreement if the agreement was to suspend the limitation period.
If the purpose of the agreement was to extend time, this means that you must issue proceedings upon the expiry of the standstill period. Ideally, the agreement would state the final date by which you’re expected to do this to avoid any misunderstandings.
What are the consequences of breaching a standstill agreement?
A breach of a standstill agreement may well result in the matter being brought before the court for a judge to decide on the consequences of the breach.
The outcome of past cases decided upon by the court illustrates that, even when there’s a standstill agreement in place, parties should always be prepared for litigation in case a situation of this nature arises – and in the event that a judge doesn’t agree that the breach is serious enough to ‘cancel out’ the fact that a claim has been issued at a time before the expiry of the standstill agreement.
Are there any legal requirements or formalities for a standstill agreement to be enforceable?
Because a standstill agreement is a legally binding contract, and as a result is subject to all of the usual rules in law around this, it’s vital to get the right support with drafting it – preferably from an experienced commercial lawyer.
Are there any alternatives to standstill agreements?
One of the main alternatives could be to go ahead and issue court proceedings before the statutory limitation period expires, then approach the other side to agree on an extension of time for service of the claim form, or to request a stay (the formal legal term for a pause in litigation proceedings) to adhere to the steps set out in the pre-action protocol that applies to your dispute.
Summary
Standstill agreements can be helpful when there is a possibility of legal proceedings and there is little time left before the deadline to file the claim. It is very important to talk to a business disputes lawyer to discuss if a standstill agreement is the right choice for your situation. If it is, the lawyer can help you create a clear agreement to reduce the risks of things going wrong. Mistakes and litigation can be expensive, so it is wise to get expert advice from an experienced business dispute lawyer.
