Practical Law

The Supreme Court’s decision in Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors, in which Berwin Leighton Paisner acted for Oceanbulk, was handed down on 27 October 2010. In a landmark ruling the Supreme Court revisited those instances where without prejudice negotiations may lose their privileged status. The court introduced a new exception to the without prejudice rule, the “interpretation exception”, overturning the previous decision of the Court of Appeal.

What is the without prejudice rule?

A general perception prevails that a party can mark a communication “without prejudice” and then say what it likes. The communication will never see the light of day in a court of law. Not so!

To fall within the without prejudice rule, the communication must be genuinely aimed at settlement, whether oral or in writing. If it is a genuine attempt at settlement, the communication will be protected from being presented in evidence and cannot be used by an opponent.

What is the rationale for this?

The underlying rationale behind the without prejudice rule is that the parties are more willing to speak frankly and openly in settlement negotiations if nothing they say can be relied upon in later proceedings. In theory, this encourages parties to settle their differences rather than litigate.

Exceptions to the rule

Because of the importance of the without prejudice rule, the courts have emphasised that it should be broadly applied unless justice clearly demands otherwise. There are, nonetheless, exceptions to the rule, which allow statements made in without prejudice negotiations to be admitted in evidence. It is these exceptions that create the potential pitfalls for commercial parties.

In Oceanbulk v TMT, the Supreme Court endorsed eight exceptions to the rule identified in Unilever v Procter & Gamble; recognised a ninth (the “rectification exception”) and added a tenth (the “interpretation exception”). (The exceptions are listed in full at the foot of this post). This new exception applies where the without prejudice negotiations form part of the “factual matrix or surrounding circumstances” and would otherwise be admissible as an aid to construction of the terms of a concluded settlement.

Controversy

This case has polarised views as to whether or not the exceptions to the without prejudice rule should be extended in this way.

On the one hand, given that the courts already allow without prejudice negotiations to be adduced in evidence for the purposes of considering a claim in rectification, one might argue that such negotiations should also be available as an aid to interpreting the terms of a settlement.

On the other hand, as Oceanbulk argued (with the strong support of the majority of the Court of Appeal), it is critical to maintain parties’ confidence in the robust nature of the without prejudice rule. It serves a vital purpose: to encourage dialogue between parties to a dispute, with a view to reaching settlement. Any erosion to the scope of the without prejudice rule risks undermining this objective.

The Supreme Court recognised this issue. Lord Clarke made it clear that the court’s decision should not underplay the importance of the without prejudice rule, or extend the exception beyond evidence that was admissible solely in order “to explain the factual matrix or surrounding circumstances to the court whose responsibility it is to construe the agreement in accordance with the principles identified in ICS and Chartbrook“.

Practical implications

This decision means that parties are now more likely to exercise a degree of caution in what they say in without prejudice discussions. They will be less prepared to make concessions, or to say anything they consider might be perceived as prejudicial if subsequently disclosed. This may well impede the effectiveness of without prejudice discussions, with the consequence that reaching a settlement is less likely.

This case also demonstrates the importance of ensuring that the terms of a settlement are drafted as clearly as possible, to avoid difficulties in interpretation. As with any contract, ambiguity can result in further dispute, which can in turn lead to additional cost and disruption. Such ambiguity may ultimately lead to judicial examination of the settlement negotiation process, whether or not that process was undertaken on a without prejudice basis.

Exceptions to the without prejudice rule

1. When the issue is whether without prejudice communications have resulted in a concluded settlement, then the communications are admissible in evidence.
2. Evidence of the negotiations is also admissible if it shows that a settlement agreement should be set aside on the grounds of misrepresentation, fraud or undue influence.
3. Even where there is no concluded agreement, a clear statement made by one party, upon which the other party has acted, may be admissible as giving rise to an estoppel.
4. If the exclusion of the without prejudice evidence would act as a cloak for perjury, blackmail or other unambiguous impropriety, it is admissible.
5. Evidence of the fact of negotiations (but not the detail) may be given to explain delay in pursuing an action.
6. Exceptionally, where a claimant sued his former solicitors, evidence may be given as to whether the claimant had acted reasonably to mitigate his loss in his conduct and conclusion of negotiations for the compromise of proceedings.
7. Evidence may be admitted by agreement of the parties. For example, a communication marked “without prejudice save as to costs” can be presented in evidence after the conclusion of a hearing to determine which party should pay the costs.
8. In matrimonial cases, communications received in confidence with a view to matrimonial conciliation can be admitted.
9. A party to without prejudice negotiations can rely upon anything said in the course of those negotiations in order to show that a settlement agreement should be rectified (the “rectification exception”).
10. Facts communicated, which form part of the factual matrix and would (but for the without prejudice rule) be admissible as an aid to the construction of a settlement agreement that resulted from the negotiations, will be admissible by way of an exception to the rule because the agreement cannot otherwise be properly interpreted (the “interpretation exception” added by Oceanbulk v TMT).