"In a unanimous judgment, a panel of seven Supreme Court judges said that it was permissible to refer to any fact, written or spoken, in the course of without prejudice negotiations as an aid to the interpretation of the settlement agreement. This is yet another exception to the without prejudice rule - the "interpretation exception"."
"In a nutshell, the Supreme Court said the process of interpreting a contract should be the same, whether the negotiations were without prejudice or not."

With or without prejudice?

18 Feb 2013

The settlement of disputes through without prejudice negotiations, particularly at mediation, is a prominent feature of the post-Woolf litigation world, even in offshore jurisdictions such as Jersey. Parties are encouraged to put their cards on the table without fear that statements or offers made in the course of negotiations will be brought before the court. However, parties should know that there are several exceptions to the without prejudice rule, and the list has just got a little longer.

The UK Supreme Court creates a new exception to the without prejudice rule
The dispute in Oceanbulk Shipping v TMT [2010] UKSC 44 involved Forward Freight Agreements (or "FFAs") which are swap agreements used to hedge against market fluctuations. The freight markets were extraordinarily volatile in 2008. TMT bet the wrong way, leaving it owing Oceanbulk more than US$40m for the month of May 2008 alone, and with a potential further exposure of up to US$400m. The parties entered into without prejudice settlement negotiations, partly in correspondence but also at two lengthy meetings. Happily, a settlement was reached and its terms were recorded in a written agreement. 

Oceanbulk later claimed that TMT had breached a key term of the agreement. The parties had different views on what the term meant. In support of its interpretation, TMT sought to rely on representations made within a without prejudice email and at the without prejudice settlement meetings.

In a unanimous judgment, a panel of seven Supreme Court judges said that it was permissible to refer to any fact, written or spoken, in the course of without prejudice negotiations as an aid to the interpretation of the settlement agreement. This is yet another exception to the without prejudice rule - the "interpretation exception".

The without prejudice rule
The rule is based partly on public policy, and partly on the express or implied agreement of the parties.  The rule is reputed to have a wide and compelling effect. In general, the rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence.

Oral discussions may contain a mixture of admissions and half-admissions against a party's interest, more or less confident assertions of a party's case, offers, counter-offers and statements (which might be characterised as threats, or as thinking aloud) about future plans and possibilities. But, according to Robert Walker LJ in Unilever v Procter & Gamble [2002] 1 WLR 2436, to try to dissect out identifiable admissions and withhold protection from the rest would create huge practical difficulties and would be contrary to the underlying objective of giving protection to the parties to speak freely about all issues, both factual and legal, when seeking compromise and, for the purpose of establishing a basis of compromise, admitting certain facts.  Parties cannot speak freely at a without prejudice meeting if they must constantly monitor every sentence with lawyers sitting at their shoulders as minders.

The existing exceptions
The Supreme Court noted that because of the importance of the rule, its boundaries should not be lightly eroded, and exceptions should only be found where justice clearly demands it. So what are the existing exceptions?

  • When the issue is whether the without prejudice communications have resulted in a concluded compromise agreement, those communications are admissible.  See for example Incat v Luba Freeport [2010] JRC 083A where the Royal Court examined exchanges of without prejudice correspondence between the parties before concluding that there had not been a meeting of minds, and thus no agreement reached, between the parties.
  • To show an agreement apparently concluded between the parties should be set aside on the ground of misrepresentation, fraud or undue influence. In Jersey, these grounds would be examined in terms of an "erreur" vitiating a party's consent (Incat v Luba Freeport, above).
  • Even if there is no concluded compromise, a clear statement which is made by one party and on which the other party is intended to act and does in fact act may be admissible as giving rise to an estoppel.  
  • Evidence of negotiations in order to explain delay or apparent acquiescence. This is usually limited to the fact that such letters have been written and the dates at which they were written but, occasionally, full evidence is needed to give the court a fair picture of the rights and wrongs of the delay.
  • If the exclusion of the evidence would act as a cloak for perjury, blackmail or other "unambiguous impropriety". This only applies in the clearest cases of abuse of a privileged position.  
  • In cases where there is no public policy justification for the exclusionary rule, per Hoffman LJ (as he then was) in Muller v Linsley & Mortimor [1996] 1 PNLR 74 (a decision on discovery, not admissibility).
  • Where the parties use the words "without prejudice save as to costs" the correspondence may be admitted on questions of costs.
  • In matrimonial cases, there is a distinct privilege extending to communications received in confidence with a view to matrimonial conciliation. 
  • To show that a settlement agreement should be rectified. Although not in issue, the Supreme Court recognised this exception (apparently for the first time) following first instance authorities from Canada and New Zealand. It said it was scarcely distinguishable from the first exception, because no sensible line could be drawn between admitting such communications to determine whether they resulted in a concluded compromise agreement and admitting them in order to resolve the issue of what that agreement was. 
  • When the court is exercising a supervisory jurisdiction, for example when liquidators or trustees ask the court for directions, it needs to be fully informed about all relevant matters. Where the subject matter of the directions is the pursuit, defence or proposed compromise of claims, details of any without prejudice negotiations and settlement offers are likely to be highly material and can and should be put before the Court (see for example Re Transocean Equipment Manufacturing and Trading Ltd, Carman v The Cronos Group SA [2006] EWHC 1324 (Ch)). Such applications can be distinguished from adversarial proceedings between the parties, to which the other exceptions relate.

The new exception
Given its comments in relation to the rectification exception, it was a small step for the Supreme Court to find the existence of a new exception for facts communicated between the parties in the course of without prejudice negotiations that form part of the factual matrix of surrounding circumstances and which would, but for the without prejudice rule, be admissible as an aid to the construction of the settlement agreement (the "interpretation exception"). In a nutshell, the Supreme Court said the process of interpreting a contract should be the same, whether the negotiations were without prejudice or not. 

The effect of the new exception
Jersey generally follows English law principles in relation to without prejudice privilege (Balfour Beatty v Torr 2005 JLR N14) and many of the English law principles relating to the interpretation of contracts have also found expression in Jersey Law (In re Internine Trust 2005 JLR 236). So what is the effect of the new exception?

First, it is limited to cases where a concluded compromise has been reached. Matters raised in unsuccessful negotiations remain off limits (subject to the other exceptions).

Lord Clarke, giving the lead judgment, said that if parties know that, in the event of a dispute, objective facts which emerge in negotiations will be admitted to assist the court to interpret the agreement in accordance with the parties' true intentions, settlement is likely to be encouraged. This seems optimistic. Creating yet another exception to the rule undermines the simplicity of the rule and thus parties' confidence in putting all their cards on the table in the first place. 

Indeed, whether or not an ambiguity has arisen, the factual context must always be identified and considered before or during the process of construing a legal text (see for example, Philean Trust v Taylor 2003 JLR 61). So, in every case where the interpretation of the language used is in issue, the court will have to wade through the without prejudice material to distinguish between objective facts communicated from one party to the other during the pre-contractual negotiations (which are now admissible) and material which is, for example, merely evidence of the parties' subjective intentions (which remains generally inadmissible). Given the sorts of comments that may be made during such negotiations, this does not seem terribly attractive.

As parties to without prejudice negotiations can agree to vary the rule, by extending or limiting its reach, one practical solution may be for the parties to agree that any question as to the interpretation of the settlement agreement be referred, for example, to the mediator for determination in private.

To ensure continued confidence in the without prejudice rule, one hopes that the Supreme Court does not find any further exceptions up its sleeve.