In Pihiga Pty Ltd v Roche  FCA 240 (Pihiga) and Lewis v Nortex Pty Ltd (Lewis) the Federal Court confirmed that the common law “without prejudice” privilege rule will not protect all communications in the course of mediation.
This update outlines the courts’ reasoning and discusses the exceptions to the common law “without prejudice” privilege rule (“without prejudice” rule).
The “Without Prejudice” Rule
The “without prejudice” rule was developed to encourage parties to resolve disputes outside of court.
It is available for any communication made in the course of genuine negotiations which aim to settle an existing or contemplated dispute between the parties.
However, it is limited to oral or written admissions made in good faith to settle disputes and where no settlement is reached. Such admissions are not admissible in subsequent court proceedings relating to the same subject matter without the parties consent. If settlement is reached, then the evidence of statements made is admissible in court in order to enforce the agreements.
The “without prejudice” rule exists in both common law and under the Evidence Act 1995 (Cth) (Evidence Act).
This rule is not absolute and numerous exceptions apply to allow disclosure of documents or admissions.
A dispute arose between various companies and individuals in the ADC/EDC Group (Group) concerning refinancing and the appointment of directors.
The parties agreed to participate in a mediation to attempt to resolve the issues.
The mediation agreement provided that all negotiations would be confidential and without prejudice. Agreement was reached to resolve the dispute.
A settlement deed (Deed) was entered into by the parties following the mediation.
The Deed provided, amongst other items, that one of the parties would sell their shares in the holding company to another of the parties for an agreed price.
Court action was taken by some of the signatories to the Deed.
Declarations were sought that the Deed was void, should be set aside, or rescinded, on the basis that false representations about the value of real estate assets and the financial position of the Group, had been made, which induced the entrance into the Deed and purchase of shares at a specific price.
Further, it was alleged that by making these representations, the representors had engaged in misleading or deceptive conduct.
The allegations were denied and defended on the basis that if any such representations were made, it was either a genuinely held opinion or an opinion that was based on reasonable grounds.
Injunctions were sought, on the grounds of ‘without prejudice’ privilege, to prevent the introduction into evidence or reliance on:
- any documents brought into or discussed during the course of the mediation ; and/or
- any oral exchanges made during the mediation.
Counterargument was also brought to tender mediation documents as evidence with argument about whether the Evidence Act provisions would reclude this occurring.
The Court rejected the argument that an injunction should be granted on the basis of the “without prejudice” privilege rule saying the foundation of this rule is what is in the public interest together with any express or implied agreement between parties to keep information confidential.
Clauses in a mediation agreement providing that negotiations are to be confidential and without prejudice give no greater protection than the common law.
The Court said it would be contrary to public policy to allow a private agreement to oust statute or established common law principles.
If “without prejudice” privilege is lost because of exceptions at common law, it cannot be maintained under a mediation agreement.
Exceptions to the “without prejudice” rule were developed to avoid unfair and improper conduct in trade and commerce. Misleading and deceptive conduct being one of those exceptions.
The Court did not exclude the evidence under the Evidence Act as the Deed is not a document created in furtherance of settlement; it is the product of the settlement and would not be used in a manner prejudicial to the parties.
The decision in Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd  NSWSC 1245 demonstrates where fraud may remove a claim to “without prejudice” privilege.
This case concerned the admissibility of an affidavit prepared in connection with a formal mediation. The applicants argued the last six lines of an affidavit were not privileged by reason of section 131 of the Evidence Act as it was drafted in furtherance of commission of a fraud.
The allegedly fraudulent conduct was the production by the applicant of a stock record showing a substantially higher figure of stock on the shelves than recorded in the books of the company.
The applicant sought to argue that the current stock level discrepancies was likely the result of the respondent continuing to sell “reserve” stock for cash since the applicant left the company.
When challenged as to the stock level discrepancies, the respondent asserted that the stock report relied on to show the discrepancy by way of comparison is not established. The respondent also hinted the applicant had the opportunity to observe stock levels for the relevant period and may also have caused its disappearance. The affidavit sought to be admitted contains the respondents’ responses to these challenges.
The Court held that the respondents’ production of a substantially lower stock level and responses to the applicants challenges about this figure are steps towards concealment of a fraud.
On this basis, the Court was satisfied the affidavit material was not covered by the “without prejudice” rule by virtue of the Evidence Act exception for fraud.
How does this apply to you?
Without Prejudice privilege does extend to mediation and other settlement communications, even if they are not called “without prejudice” communications.
Many parties however often mistakenly believe all admissions made in attempts to resolve a dispute are covered by “without prejudice” privilege. This is not the case due to the exceptions that exist.
Exceptions which remove the protection of “without prejudice” privilege and result in disclosure include:
- a settlement deed or terms of a settlement for enforcement purposes or otherwise;
- false or misleading representations made in reaching settlement;
- exclusion of the evidence would acts as a cover for perjury, blackmail or other impropriety;
- a proceeding where the same subject matter is not concerned but the admissions are relevant to the matters in dispute in the other proceeding;
- where a party acts fraudulently in the mediation process;
- the evidence will act as an explanation for undue delay or apparent acquiescence; or
- an offer is made “without prejudice except as to costs”.
It is recommended either:
- legal advice be sought before disclosing any information or making any admissions; or
- parties participating ask themselves the question before they say or hand something over: “would I be happy for a judge to see/hear this if this does not settle”.