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Lacking "the essential oxygen of common sense". Disclosing the contents of "without prejudice" communications

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Negotiations for settlement of a dispute are often carried out on a "without prejudice" basis.  The "without prejudice" rule has been stated "to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence".  The purpose of the without prejudice rule is to allow parties to discuss matters freely in order to promote settlements, knowing that the material will not be made available to the Court in litigation.  What is the scope of the without prejudice rule? The Court of Appeal has examined the without prejudice rule in two recent cases and found the extent of protection it offers to be robust, indeed too robust for the liking of one of the Court of Appeal Judges. 

In Oceanbulk Shipping & Trading SA v TMT Asia Limited [2010] EWCA Civ 79 the Court of Appeal had to decide whether evidence of without prejudice communications and discussions can be given if there is dispute about interpretation of a written settlement agreement. 

Oceanbulk and TMT effectively bet on the freight market going up or down.  Depending on how one clause in the agreement was interpreted, TMT would owe Oceanbulk money or the reverse.  TMT wanted to rely on representations and statements made by Oceanbulk which TMT accepted were made on a "without prejudice" basis to support its interpretation of the agreement. 

Lord Justice Longmore ran through the history of the without prejudice rule, noting the potential conflict between two different policy objectives: firstly, the ability to negotiate without prejudice promoting settlements and secondly, the desirability of having all the relevant material available to the Court in order for the Court to make a just decision.  The Court of Appeal acknowledged that this appeal was not about whether the representations and statements made by Oceanbulk would make a difference to the outcome of the case but a pure point of law as a matter of principle as to whether TMT could rely on them given they were without prejudice. 

The Court of Appeal identified in the previous decisions some of the principal exceptions to the without prejudice rule:

1. Where without prejudice communications have resulted in a concluded compromise agreement, those communications are admissible. The distinction between this and what TMT was asking for is referred to below.

2. Evidence of the negotiations is also admissible to show that an agreement apparently concluded between the parties during the negotiations should be set aside on the ground of misrepresentation, fraud or undue influence. This did not apply in this case.

3. Even if there is no concluded compromise, a clear statement which is made by one party to negotiations on which the other is intended to act and does act may be admissible as giving rise to an estoppel (to prevent the party which has made the statement intended to be relied on from taking unfair advantage). TMT did not allege an estoppel.

Another limited exception in the case of freezing injunctions is discussed in more detail below.

Lord Justice Longmore and Lord Justice Stanley Burnton decided that the without prejudice rule trumped the desirability of the Court having all relevant material before it.  Lord Justice Longmore thought it was possible to distinguish between ascertaining the true terms of a contract (where without prejudice material would be available) and considering background facts referred to in without prejudice communications to ascertain the contract's meaning (which would not).  They did not think it was a fine distinction. The without prejudice material was not admissible.

In a minority opinion, Lord Justice Ward was scathing.  It would, he said, "strike [his] mother as "barmy"". "If a party can use the antecedent negotiations to prove the agreement, to rescind it, or to rectify it, why on earth can you not use the negotiations to establish the truth of what the concluded contract means?"  "It goes to prove what every good old fashioned County Court Judge knows: the higher you go, the less the essential oxygen of common sense is available to you".

In Linsen International Limited and others v Humpuss Sea Transport PTE Limited [2010] EWHC 303 (Com) the High Court had to decide whether a worldwide freezing order obtained by the Claimants against the Defendant should be discharged because of the Claimants' failure to inform the Court about certain without prejudice communications.  The Claimants had obtained the freezing order on the basis that there was a significant risk of the Defendant dissipating its assets and avoiding the claim.  By their nature, applications for freezing injunctions are usually made without the defendant present and because of this the applicant has a particular duty in law to the make full and frank disclosure.  The applicant must draw the Court's attention to all relevant material including points adverse or potentially adverse to his case. This was a hearing at which the Defendant was present to argue its case reviewing the question of whether the order should continue. The Defendant complained that what should have been, but was not, disclosed was the fact and content of without prejudice discussions which took place two days before the freezing injunction was made.  The Claimants argued that they were neither bound nor entitled to refer to the without prejudice meeting or its contents.

The Court of Appeal said that in the context of a freezing injunction:

1. Those who make without notice applications must make full and frank disclosure to the Court of material matters.

2. The parties are entitled and bound not to disclose or refer to without prejudice communications.

3. Where there is a collision between principles 1 and 2 the Court will make a judgment as to whether the public policy in favour of confidence is overridden by the possibility of the Court being misled.

In this case, the Court observed that no agreement was reached at the without prejudice meeting, nor was any offer capable of acceptance made.  The Defendant had made a deliberate choice for the meeting not to be open, no doubt with the intention that its content should not be put before a Court.  Further, neither the fact nor the content of the meeting cast any real light on whether there was a risk that the Defendant would remove its assets from the effective grasp of the Claimants.  The Court refused to discharge the freezing order which would continue.

In Oceanbulk I can understand Lord Justice Ward's frustration that injustice may be done as a result of an overly robust and arguably artificial application of without prejudice protection.  However, as the majority opinion quoted from another Judgment, "parties and their representatives who are trying to settle a dispute should be able to negotiate openly, without having to worry that what they say might be used against them subsequently, whether in their current dispute or in some different situation".

What both Oceanbulk and Linsen show is that one needs to be careful in choosing to communicate certain things without prejudice and not openly.  Making communications "without prejudice" clearly provides substantial protection against that material being used in Court, but successful dispute resolution also depends on making sure that one is not restrained from making reference to material one may want the Court to see.

It is therefore important to consider when engaging in without prejudice communications how they may be used, particularly when there is a risk of a party seeking an injunction.

If you would like to discuss the best use of without prejudice protection, how to negotiate settlement of a dispute, obtaining or defending an injunction or any other commercial dispute resolution issues, please contact John Mackle who is a senior associate solicitor in the Litigation Department at Clarion on 0113 336 3336 or at j.mackle@clarionsolicitors.com.

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