Background

The without prejudice rule governs the admissibility of evidence in court proceedings. It is founded on the public policy consideration that parties should be encouraged to settle their differences, rather than litigate them to the finish. Broadly, the effect of the rule is that all communications (whether oral or written) which are genuinely aimed at settlement are inadmissible as evidence. This enables parties to speak freely when trying to establish the basis of a compromise, without fear that anything that they say may be used in court if the settlement discussions break down.

However, the rule is not absolute. A court can allow without prejudice material to be introduced in evidence when the justice of the case demands it. As a result, a number of limited exceptions to the rule have developed.

In Oceanbulk Shipping v TMT Asia the Supreme Court had to consider whether to create a further exception to the rule to allow facts communicated during without prejudice negotiations to be admitted as evidence at trial in relation to the construction of a settlement agreement.

Facts

Oceanbulk and TMT were in dispute over the interpretation of one of the terms of an agreement into which they entered in settlement of various forward freight contracts. The term in dispute was known as the ‘co-operation term’.

In support of its interpretation, TMT sought to rely on certain representations and communications that were allegedly made on Oceanbulk’s behalf in the discussions and exchanges leading up to the settlement agreement. It maintained that these representations and communications demonstrated that Oceanbulk had the same understanding of the meaning of the co-operation term as TMT. Two of the communications on which TMT sought to rely were made on a without prejudice basis.

The parties disputed whether the two communications were admissible in evidence in light of the without prejudice rule. Oceanbulk argued that TMT could not rely on the without prejudice communications. It submitted that to allow their admission in evidence would contradict the general principle that one party may not cross-examine another party on matters disclosed in without prejudice negotiations.

The question for the court was whether one of the exceptions to the without prejudice rule should be that:

facts identifi ed during without prejudice negotiations which lead 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.”

TMT submitted that unless this were the case, settlement agreements could not be construed in accordance with the wellrecognised principles of contractual interpretation.

The fi rst instance judge agreed with TMT, holding that the two without prejudice communications were admissible. The decision was overturned by a two-to-one majority in the Court of Appeal. TMT appealed to the Supreme Court.

Supreme Court decision

Giving the leading judgment (with which the other Law Lords agreed), Lord Clarke concluded that the interpretation exception should be a recognised exception to the without prejudice rule. In reaching this view, he stated that he could see no reason why the ordinary principles governing the interpretation of an agreement should not apply, even if the negotiations which led to the agreement were without prejudice.

Referring to Lord Hoffman’s judgment in Chartbrook v Persimmon, Lord Clarke declared that:

in every case in which the interpretation of the language used in the contract is 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 considered that “evidence of the factual matrix against which agreement is reached is admissible as an aid to interpretation, even where the evidence formed part of the negotiations”. Evidence of the parties’ negotiations formed part of the background knowledge and should be available to the court so that an objective assessment of the parties’ intentions when agreeing settlement terms could be made.

The case has been referred back to the trial judge to determine the construction of the co-operation term in light of the without prejudice communications on which TMT relied.

Comment

The effect of the decision is that in order to aid construction of an agreement, the court can - in principle - accept evidence of objective facts communicated in the course of without prejudice negotiations.

Clarke stressed that the court’s reason for recognising the interpretation exception as an exception to the without prejudice rule was that justice demands this. Accordingly, he was not seeking to underplay the importance of the rule, or to encourage the admission of evidence of pre-contractual negotiations beyond objective factual evidence. Nevertheless, the Supreme Court’s decision has introduced a further and potentially wide-reaching exception to the rule and raises questions about the extent to which parties will feel comfortable about speaking freely in without prejudice communications.