It is right that parties should be able to negotiate freely to avoid or resolve a dispute without fear that their position at any final hearing will be compromised. That position is changed when a party wants to show the judge or arbitrator that they had made an offer to their opponent earlier in the proceedings that was equal to or better than the final award made, so that they can soften the blow of any costs order that might be made against them. That principle, that correspondence marked only ‘without prejudice’ is not admissible to the court on questions of costs but correspondence bearing the words ‘without prejudice save as to costs’ is, is well established.
In the heat of negotiations, however, the parties can forget the niceties of marking correspondence with either of those headings. That has not stopped the court from determining that correspondence is, however impliedly, without prejudice where it is clearly for the purpose of trying to resolve a dispute. Can that impliedly privileged correspondence be referred to on the question of costs though? The recent High Court decision in Sternberg Reed Solicitors -v- Harrison  EWHC 2065 (Ch) gives us an insight.
The claimant, Sternberg Reed Solicitors, obtained permission to appeal against a costs award made in an arbitration between the firm and one of its former partners, in relation to the calculation of his outgoing entitlements on retirement under the partnership agreement. The arbitrator had held that, when determining questions of costs, he had a discretion to take into account without prejudice correspondence between the parties, even though it was not marked as ‘without prejudice save as to costs’. This included both an initial offer of settlement, contained in an email from 12 November 2015, that was not marked as ‘without prejudice’ at all, and subsequent correspondence that was marked in that way.
It was the claimant’s position that the arbitrator had erred in law by wrongly holding that he had a discretion to take into account the contents of the without prejudice correspondence. It was submitted by the claimant that the offer contained in the email of 12 November 2015 was covered by the without prejudice rule, because it was an offer to settle a live dispute, and the arbitrator had misdirected himself that there had been no outright winner.
The appeal was dismissed. The claimant argued that it was ‘plain from the context of the communications’, that it was the parties’ intention that the communications, including the initial offer contained in the November email, were to be treated as properly ‘without prejudice’.
The court, however, disagreed, and found that where communications are explicitly stated to be ‘without prejudice’, they are clearly not admissible and should not have been considered by the arbitrator. Where, however, communications are not so marked but were still an attempt to compromise a live dispute, HHJ Hodge QC found that there could be no reason why the law should impute to parties who do not expressly mark their communications ‘without prejudice’ an intention that the communications should be treated as impliedly ‘without prejudice’ for all purposes. In particular, there was no basis for implying any agreement that no reference should be made to such communications on the issues of costs once the substantive issued had been determined.
Clarity is the key. If communications are aimed at resolving a live dispute, be clear whether they should be treated as ‘without prejudice’ and inadmissible to court/tribunal/arbitrator at all, or whether they should be ‘without prejudice save as to costs’ and able to be deployed in any subsequent dispute as to the amount of costs payable between the parties. It may also be worthwhile seeking clarification from any opposing party who appears to be corresponding on a without prejudice basis without marking correspondence appropriately to avoid being drawn into arguments about implied privilege in respect of unmarked chains of correspondence.