A tolling contract is an agreement that contains the terms and conditions between two parties governing the waiving of the statute of limitations. Tolling’s definition or toll meaning is to suspend the running of the time period until some event specified under the law takes place. Statute of limitations prescribes the time within which civil suits may be filed against another party.
Various events or circumstances typically toll a statute, and it is tolled when one of the parties is legally incapacitated to perform an act, for instance, a child or a person who has a mental illness. It may also accrue when a person has some personal disability. Mere ignorance of the existence of a cause of action does not lead to a tolling agreement.
For example, A, a child is orphaned, and his estate is taken over by his relatives. Assuming the time limit for filing the suit is six years, and A is 12 and can only file a suit when he is 18. He may apply for tolling and get the six years which would take him to become major, waived off from the limitation period. This means that for six years, his right to file a suit would be in abeyance and would be revived on his attaining majority.
Parties Involved in a Tolling Contract
In Tolling agreement, generally, there are two parties involved:
- The party seeking the tolling service: Typically, the plaintiff or the person who is entitled to file the suit. Such a person would avail the tolling facility, as they would want to the abbey or suspend their right for a certain period of time.
- The party against whom the claim is sought to be enforced or the defendant.
Purpose of Tolling Contract
The purpose of a tolling contract is to enforce genuine claims which otherwise may get dismissed due to statute of limitations. It prevents the dismissal of cases on account of untimeliness of the plaintiff:
Typically, plaintiffs try to use tolling service in order to prevent the dismissal of their action on the grounds of expiry of the limitation period. Tolling puts the time period in abeyance until some specific event occurs.
For example, if a child has to file an action, he can request for tolling service until he attains majority. It also encourages the settling of disputes. During the interim period, when the rights are suspended, the two parties can sit together and peacefully reconcile their disputes. If the plaintiff has some legal disability and applies for tolling, then he/she can in the interim also settle the dispute amicably. It also enables the plaintiff to gain ground as a threat of eventual litigation may scare the defendant into negotiating a settlement.
Contents of a Tolling Agreement
A well-drafted Tolling agreement typically consists of:
- Parties to the Agreement: The plaintiff and defendant of a prospective suit must become the parties to a tolling agreement if tolling service is to be availed.
- Recitals explaining the dispute: The recitals to a tolling agreement should ideally explain the dispute with regard to which tolling is sought to be obtained.
- Tolling period: The time during which the tolling would be in effect is called the tolling period. A clear commencement and end date should be provided.
- Purpose of the tolling agreement: The tolling agreement should have a clear purpose. The rationale behind the tolling should be included in the contract.
- Waiver of a statute of limitations: Both parties should agree that they would not allege any time-based defenses for the dismissal of the action. The category under which the dispute falls, the applicable provision, and the limited time period should be stated.
- No litigation: During the tolling period, the parties should agree that neither of them would file cases against each other.
How to Draft a Tolling Agreement?
Following points must be considered while drafting a Tolling Agreement
- Details of Parties: The contract should include the names and details of both the parties. It should be clearly mentioned, which party is requesting for the tolling and who is the defendant in this case.
- Definitions: A tolling agreement can be complex in nature. Jargon may be used. Hence, definitions of basic terms such as ‘tolling period,’ `time-based defenses,’ etc. should be clearly laid down in the contract.
- Tolling period: Tolling period should be decided upon a mutual discussion. Typically, it would be the period that will lead to the end of the legal disability. It should not be too long a period of time. Both the parties should consent to this time period. For example, if a child who is 12 is requesting a tolling period on the ground of his minority, then the period cannot exceed six years, which is the minimum time in which his disability would end.
- Dispute Resolution: A tolling agreement, though appearing to be a simple agreement reflecting forbearance to sue, may assume trickier aspects. A party, despite obtaining a toll, may file a suit against the defendant. The defendant may try to abscond or dispose of his properties in the interim period. Hence, it is important that a robust dispute resolution clause is crafted as a part of the tolling agreement. A tolling agreement should ideally contain methods of dispute resolution, such as litigation or arbitration. It should also contain injunctive remedies in order to prevent the premature disposal of property.
- Reference to the dispute in question and the original contract if any should be made: A tolling agreement is entered into when a dispute exists between two parties. There may also be multiple disputes that can arise. Such disputes or the fact that they may arise should be referred to in the agreement. If the disputes arising out of another agreement, such agreement should also be referenced to, typically in the recital clause.
- The specific provision of the statute of limitations should also be mentioned: The limitation time, as provided under the law, should be mentioned in the contract.
- Termination: The tolling agreement, like all other agreements, should have an exit option, especially termination based on default. Events such as disposing of assets or trying to abscond should be classified as events of default, and premature termination of the agreement on account of such events should be permitted.
Following Negotiating Strategies to be kept in mind:
- Tolling period: Negotiations on this should aim at keeping the duration to a minimum.
- You should understand the consequences of tolling on your client and then only push for the same.
- The negotiating demands should be in line with the law.
- Typically, the tolling period should be only for the removal of legal disability.
Benefits and Drawbacks of a Tolling Agreement
Following are the Advantages of a tolling agreement:
- The settlement of disputes is encouraged. The interim tolling period leads to a settlement of disputes. The period during which the litigation stays in abeyance is a time when the parties can sit together and amicably resolve their disputes. It gives the parties time to think.
- It puts the plaintiff in a commanding or superior position as the threat of eventual litigation looms large on the defendant. Hence, this propels settlements even faster(1). Defendants may think that a certain present is better than an uncertain future and agree to settle,
- Parties often resort to tolling service in order to avoid litigation costs and the time taking litigation process.
- The buffer period provides more time to think to the parties as to how to settle the dispute.
- It also provides time to prepare for subsequent litigation (if any). During the interim period, the parties get additional time to prepare for a subsequent court battle.
Following are the Disadvantages of a tolling agreement:
- Uncertainty: The defendant stays uncertain till the tolling period expires as to litigation will happen or not. This may hamper his reputation and business.
- It unnecessarily delays the dispute and stretches it beyond time.
- It keeps the parties in a condition of uncertainty.
- It defeats the very purpose of statutes of limitations.
- It may be misused by non-serious plaintiffs.
- It can afford the defendant an opportunity to dispose of the assets or to abscond so as to avoid facing litigation.
What Happens in Case of Violation of a Tolling Agreement?
Typically, both the parties are prohibited under a tolling agreement to pursue litigation during the tolling period. As tolling is a statutory provision, a violation will lead to a breach of the law, and the relevant statute may be resorted to through litigation. Parties may also decide to amicably settle the disputes through arbitration, mediation, or other alternative methods of dispute resolution(2).
A tolling agreement is effectively used to ensure that no one is unfairly discriminated against on account of legal disability. It ensures that the limitation time period is kept in abeyance till the legal disability is cured. It is typically used in the United States as it is a statutory requirement therein.