In March 2010 I blogged on the Court of Appeal’s decision in Oceanbulk Shipping & Trading SA v TMP Asia Limited  EWCA Civ 79 about the status of “without prejudice” negotiations. The Supreme Court has now reversed the Court of Appeal’s decision and created a new exception to the “without prejudice” rule. The Supreme Court decision is significant for anyone who negotiates “without prejudice” or is involved in agreeing important contracts. Practical lessons from the Judgment are listed at the foot of this blog.
The background to the decision lies in the principles of interpreting contracts and how those principles potentially clash with the “without prejudice” rule. Historically, the Courts looked only at the words of a contract to interpret its meaning. Parties were taken to have intended to use the words in the contract and the Courts ignored the factual background. However, over time, the Courts decided that ignoring the factual background could lead to nonsensical and unjust results and so the modern approach to interpreting contracts involves interpreting the "natural meaning" of words in light of the “factual matrix or surrounding circumstances”. This gives Judges a considerable amount of flexibility in deciding how to interpret contracts where there is a plausible argument about what the words mean which may result in fairer decisions in individual cases, but can make the outcome of arguments about interpretation of contracts difficult for lawyers to predict.
One exception to these principles of interpretation was the “without prejudice” rule. Negotiations for settlement of a dispute are often carried out on a “without prejudice” basis. The purpose of the “without prejudice” rule is to allow parties to discuss matters freely in order to promote settlement, knowing that the material will not be made available to the Court or be used against a party in the litigation. The Court of Appeal decided that the policy objective of the “without prejudice” rule (allowing parties to discuss matters freely in order to promote settlement) trumped any potential injustice caused by some material being unavailable to the Court to assist in a dispute about the meaning of any agreement subsequently reached. In a scathing dissenting judgment described in my previous blog, Lord Justice Ward disagreed with his fellow Court of Appeal Judges.
The case went to the Supreme Court which gave its Judgment on 27 October 2010. The Supreme Court Judge overruled the Court of Appeal, agreeing with Lord Justice Ward, and created a new exception to the “without prejudice” rule. Now evidence of facts, communicated in the course of “without prejudice” negotiations and which are part of the “factual matrix or surrounding circumstances”, is in principle admissible when determining the true construction of a settlement agreement which resulted from those negotiations, despite being “without prejudice”.
According to the Supreme Court, if a party to negotiations knows that in the event of a dispute about what a settlement contract means, objective facts which emerge during negotiations will be admitted in order to assist the Court to interpret the agreement in accordance with the parties’ true intentions, settlement is likely to be encouraged not discouraged.
I have my doubts. The underlying rationale of the “without prejudice” rule is that the parties will be more likely to speak frankly if nothing they say can subsequently be relied upon and that as a result they would be more likely to settle their dispute. The parties in Oceanbulk were engaged in wide-ranging discussions lasting several hours. That can be quite common in “without prejudice” discussions in a major dispute. The various Judges in Oceanbulk had completely different opinions about whether or not the fact which one of the parties wanted to rely on (a technical point about “sleeving” of contracts) was irrelevant to the eventual outcome of the case or crucial to it. It may be very difficult for parties to identify all facts which are going to be important prior to “without prejudice” discussions, to check them and be confident that they will not be relied upon in a later dispute about the interpretation of a contract. It may be also difficult to confine cross-examination at trial to the “factual matrix or surrounding circumstances” of a contract communicated at a long “without prejudice” meeting which may not have been minuted, especially given how broad the “factual matrix or surrounding circumstances” can be.
Whilst some argue that the effect of the Supreme Court decision is narrow because it is limited to “interpretation” cases, it may nonetheless make it harder for parties to speak freely in “without prejudice” negotiations. Thus in “without prejudice” negotiations, the aim is no longer just to persuade the other party on the terms favourable to you but to ensure that no facts are allegedly communicated which will give rise to interpretation arguments later, a point which it is almost impossible to foresee.
Practical lessons from the Judgment include the following:
1. Contracts need to be drafted clearly and carefully to avoid a post mortem of the detailed background that led up to them.
2. It is important to consider carefully what to communicate openly, “without prejudice save as to costs” and “without prejudice” respectively. It should not be automatically assumed that “without prejudice” is best. A party may want to rely upon what has been communicated either openly or when the question of who pays the legal costs of the dispute comes to be decided (“without prejudice save as to costs”).
3. It is more important than ever to prepare carefully for “without prejudice” meetings, to consider having your lawyers present to advise you and to take regular private breaks to check on things said in the previous session which could be relied upon by the other party and to consider whether there is anything which needs to be corrected or qualified. Keep detailed notes and consider confirming the key points discussed in writing.
4. Communications which are “without prejudice” should sometimes also be “subject to contract” (meaning that a contract is not normally made until a formal legal document is subsequently agreed and signed off by the parties).
5. If certain facts need to be checked or are uncertain and should not be relied on, make that clear. Conversely if facts are material to the contract, seek open, written confirmation of them. Make clear to your own lawyers who are drafting or agreeing the contract terms what background assumptions you are making in agreeing to the contract.
6. The “without prejudice” and “interpretation” rules” are mechanisms by which the Courts seek to prevent perceived injustice. If the Courts think a party is taking unfair advantage of a situation, they will often find a legal mechanism to find against that party, whether by preferring one witness’ evidence to another, preferring one interpretation over another or by finding an exception to a rule.
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