It is commonly thought that the words "without prejudice" mean exactly that - litigants can write or say what they like, safe in the knowledge that such information will never be put before a judge (and in effect used against them). Think again! In certain circumstances, a party's statements can be admitted as evidence. The UK Supreme Court has handed down a judgment on the hotly-debated exceptions to the well-known "without prejudice rule". In Oceanbulk Shipping & Trading SA v TMT Asia Limited & Others, the Supreme Court has confirmed that without prejudice negotiations can be opened up in order for the court to interpret the terms of a settlement. The decision is controversial as there are some that believe this a step too far and will discourage parties to settle. Not only is there a real difference of opinion among legal practitioners but the Supreme Court itself overturned the Court of Appeal and agreed with the High Court judge.

The without prejudice rule

In order for a communication, be it oral or written, to fall within the "without prejudice rule", it must be genuinely aimed at settlement. If it is, then it cannot be referred to in evidence in later legal proceedings. Statements made in "without prejudice" negotiations are privileged and cannot therefore be referred to in evidence. The rule is based on the public policy of encouraging litigants to settle their differences safe in the knowledge that anything said or written as part of the negotiations cannot be admitted as evidence. Consequently, a party is prevented from relying on admissions made in any unsuccessful negotiations and where legal proceedings continue after the negotiations. The without prejudice rule is also based on the express or implied agreement of the parties themselves that communications in the course of negotiations should not be admissible in evidence. A problem arises however, where the parties to the settlement agreement cannot agree on the meaning or interpretation of part of that agreement. In this scenario, it might be necessary to "open up" the without prejudice negotiations and examine what was written or said in order to assist the court in interpreting the agreement.

Exceptions to the without prejudice rule

The Oceanbulk appeal related to the scope of the exceptions to the without prejudice rule. The protection afforded by the rule has been eliminated in a number of limited circumstances where the justice of the case has required it. Prior to the Oceanbulk appeal, there were eight recognised exceptions to the without prejudice rule. For example, evidence of without prejudice negotiations is admissible if it shows that a settlement agreement should be set aside on the grounds of misrepresentation or fraud. This Supreme Court ruling is significant because it has recognised a ninth exception and added a tenth.

The facts

The dispute between the parties related to a series of forward freight agreements. TMT failed to make a payment instalment and sought time for payment. The parties entered into settlement negotiations which were expressed to be without prejudice. The negotiations were partly in writing but also included two lengthy meetings. The negotiations resulted in a written settlement agreement which the parties signed. It was common ground that all the terms of the settlement agreement were accurately recorded in the agreement. There was however a dispute as to the true construction of one of the essential clauses of the settlement agreement dealing with the parties' obligations in respect of the sum due.

The issue

TMT relied on four representations made or allegedly made by a representative of Oceanbulk, by email and at meetings. Interestingly, two of the representations were made openly (and therefore admissible in evidence) and two were made without prejudice. The issue for the court was whether TMT was entitled to rely on the two without prejudice representations (or alleged representations) as an aid to the interpretation of the agreement. Not unsurprisingly, Oceanbulk sought to exclude the representations because they were made in the course of without prejudice proceedings. The judge identified the issue as follows: "The question in this appeal is whether one of the exceptions to the rule should be that facts indentified during without prejudice negotiations which led to a settlement agreement of the dispute between the parties are admissible in evidence in order to ascertain the true construction of the agreement as part of its factual matrix or surrounding circumstances."

Analysis

The judge set out the eight well-established exceptions to the without prejudice rule. In addition he added a ninth exception, the "rectification exception". Rectification is where the court corrects a document, which because of a mistake, does not accurately reflect the parties' true agreement. This exception permits a party to without prejudice negotiations to rely upon anything said in the negotiations in order to show that a settlement agreement should be rectified.

Oceanbulk argued that none of the nine exceptions applied to this case. It also argued that the general principle that one party should not be permitted to cross-examine the other party on matters disclosed or discussed in without prejudice negotiations should be applied in its full rigour. On the other hand, TMT argued that facts which (a) were communicated between the parties in the course of without prejudice negotiations, (b) formed part of the factual matrix or surrounding circumstances and (c) would, but for the without prejudice rule, be admissible as an aid to construction of a settlement agreement which resulted from the negotiations should be admissible in evidence by way of exception to the rule. This was because the agreement could not otherwise be properly construed in accordance with the well-recognised principles of contractual interpretation. Further, there was no distinction in principle between "the interpretation exception" and, for example, the "rectification exception".

Decision

The Supreme Court agreed with TMT that the "interpretation exception" should be recognised as an exception to the without prejudice rule. Lord Clarke reviewed relevant case law. He commented that where the interpretation of the language used in the contract has been in issue, the question is what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract to mean. Lord Clarke's view was that he could see no reason why "the ordinary principles governing the interpretation of a settlement agreement should be any different regardless of whether the negotiations which led to it were without prejudice."

Lord Clarke was of the view that settlement was likely to be encouraged and not discouraged where a party to negotiations knows that in the event of a dispute as to what a settlement agreement means, objective facts will be disclosed in order to assist the court to interpret the agreement in accordance with the parties' true intentions. Lord Clarke also made a very practical point which was that the approach was the only way in which the modern principles of construction of contracts could properly be respected. He concluded by stating that he was persuaded the interpretation exception should be recognised because justice clearly demanded it, but he was also keen to stress that he did not seek to underplay the importance of the without prejudice rule. Neither did he seek to extend the exception beyond evidence which was admissible in order to explain the factual matrix or surrounding circumstances to the court which was required to interpret the agreement.

Comment

Parties need to be aware that where without prejudice negotiations result in a settlement agreement, it is in each party's interest to examine and analyse, in detail, (and objectively as well as subjectively) the words used in the agreement. This is aimed at avoiding any future dispute about the meaning or proper construction of the agreement. Failure to iron out any potential ambiguities or discrepancies as to the meaning of words or phrases used could result in the parties having to disclose written or oral without prejudice communications which they might prefer to remain private. Needless to say, the costs that would be incurred in satellite litigation dealing with any such issues should provide a further incentive for parties to fully understand the mechanics and obligations set out in a settlement agreement. Reaching an agreement in principle is not the end of the story!