Introduction

The ability for parties to communicate “without prejudice” to try to settle disputes is an important principle in litigation in England and Wales. This gives a party comfort that a statement made without prejudice cannot later be used against it. There are however certain exceptions to this rule which are, perhaps inevitably, themselves often the subject of dispute.

Earlier this year we reported on a High Court decision analysing one exception to the without prejudice rule, the unambiguous impropriety exception (see our update "When is a statement made "without prejudice" not "without prejudice"?"). In a separate claim, Berkeley Square Holdings v Lancer Property Asset Management Ltd 1, the High Court has also provided useful guidance in relation to three other exceptions to the without prejudice rule: the misrepresentation, fraud or undue influence exception; the estoppel exception; and the controversial Muller2 exception.

Background

The Claimants were 24 BVI companies which have a combined English property portfolio of around £5 billion. From 18 November 2005 to 3 September 2015, Dr Mubarak Al Ahbabi ("Dr Al Ahbabi") was the Owner's Representative and held powers of attorney for the Claimants.

The Defendants were Lancer Property Asset Management Limited ("Lancer"), along with 4 of its directors and its holding company, Lancer Property Holdings Limited. Lancer was the Claimant's asset management company from 18 November 2005 until September 2016.

In 2005, the Claimants, through Dr Al Ahbabi, and Lancer entered into an Agreement in which Lancer was appointed to act as asset manager of the portfolio (the "2005 Agreement"). This 2005 Agreement was amended by a side letter signed in April 2006 (the "Side Letter") in which the Claimants, through Dr Al Ahbabi, agreed to an additional "capital performance bonus" to be payable to Lancer as well as additional fees in relation to rental income from the properties and revised fees for the asset and property management.

Part of these additional fees, about £26.48 million between 2005 and 2015, were paid over to a third party, Becker Services Limited ("Becker"). Dr Al Ahbabi is the beneficial owner of Becker.

In March 2011 the Claimants and Lancer executed a deed of variation (“2011 Variation”) which included ratifying payments made by Lancer to Becker and other third parties prior to the date of that variation.

In 2012, a dispute arose between the Claimants and Lancer relating to the payment of the capital performance bonus outlined in the Side Letter. The parties agreed to go to mediation on this dispute. Following this mediation, the parties entered into a Deed of Settlement and a linked Deed of Variation (“2012 Variation”) in which the Claimants agreed to pay Lancer £30 million, and the Side Letter was revoked and replaced with various new amendments to the 2005 Agreement.

Proceedings

On 4 September 2018, the Claimants issued proceedings. Their claim was that, in increasing the asset and property management fees in the Side Letter and paying these over to Becker, Lancer had "been complicit in a substantial fraud perpetrated on the Claimants by their own appointed representative, Dr Al Ahbabi, in dishonest breach of fiduciary duty."

They also claimed that by entering into the Deed of Settlement and Deed of Variation after the 2012 mediation, Dr Al Ahbabi had acted in further dishonest breach of his fiduciary duties and therefore, the Side Letter, Deed of Settlement and the Deed of Variation were all void.

In response to a Part 18 Request for Information, the Claimants stated that they had known that Lancer had made payments to Becker since March 2011 by virtue of the 2011 Variation – but not the amount, scale or purposes of those payments. The Claimants stated that it was only in May 2017 that they found out that Dr Al Ahbabi was the beneficial owner of Becker; that Lancer had paid around £32 million to Becker; and that Becker had provided no consultancy services to Lancer.

The Defendants contended that this was not true. They argued that the Claimants had known since 2012 that Becker was beneficially owned by Dr Al Ahbabi and that substantial sums had been paid to Becker. This was because that information was contained in the mediation position papers prepared in connection with the 2012 dispute, on the basis of which the Claimants had then entered into the 2012 Variation and Deed of Settlement. It was common ground between the parties that both sides’ position papers were without prejudice.

The Claimants had applied to strike out parts of the Defence and the Defendants had applied to amend their Defence. In determining these applications, the main question before the Court was whether the Defendants could rely on the contents of the mediation position papers, despite those papers being without prejudice.

Without Prejudice

In his judgement Mr. Justice Roth restated the general rule set out by Lord Griffith in Rush & Tompkins Ltd v GLC3 that "[t]he "without prejudice" rule is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish."

However the without prejudice rule is not absolute and there are certain exceptions. These were summarised by Lord Justice Robert Walker in Unilever Plc v Proctor & Gamble Co4 (though he recognised the list was not exhaustive) and cited by Mr. Justice Roth in this case:

  • Where the issue in dispute is whether the without prejudice communications have resulted in a concluded compromise agreement;
  • Where the without prejudice communications show that a concluded agreement should be set aside on the ground of misrepresentation, fraud or undue influence;
  • Where there is a clear statement made by one party to negotiations and on which the other party is intended to act and does in fact act, giving rise to an estoppel;
  • Where not allowing the party to give evidence of the without prejudice communications would act as a cloak for perjury, blackmail or other unambiguous impropriety;5
  • Where the without prejudice communications explain delay or apparent acquiescence; and
  • Where an issue in dispute is the reasonableness of a settlement – the Muller exception.

In this case, the Defendants sought to rely on any one of three exceptions: the misrepresentation, fraud or undue influence exception; the estoppel exception; and/or the Muller exception.

The misrepresentation, fraud or undue influence exception

The Claimants submitted that this exception would only apply where the without prejudice rule is being used as a cloak to do something that is wrongful. They argued that it works to ensure that parties are not able to use the rule to engage in conduct which would otherwise be actionable. Therefore, it would not apply in this case as the Defendants are not using the exception to set aside an agreement but are instead attempting to uphold the 2012 Variation and linked Deed of Settlement.

The Defendants’ submission was that, since this exception can be used to allow a party to rely on without prejudice communication to show misrepresentation, fraud or undue influence was present, then it should also apply to show that there was no misrepresentation, fraud or undue influence.

The court agreed with the Defendants and held that this exception did apply, with Mr. Justice Roth stating "if you can use the antecedent negotiations to prove a misrepresentation and thereby rescind an agreement, it is illogical to say that you cannot use them to disprove a misrepresentation and thereby uphold an agreement."

In deciding this issue in favour of the Defendants, this would have been sufficient of itself to dispose of the applications before the Court. However Mr. Justice Roth thought it appropriate to address the other exceptions as they were fully argued before him.

The estoppel exception

This exception was identified in Hodgkinson & Corby Ltd v Wards Mobility Services Ltd6 in which it was stated that where a party reasonably relies on clear and unambiguous statements made in without prejudice communications, the party which made the statement is estopped from objecting to putting that statement into evidence.

Mr. Justice Roth held that the estoppel exception did not apply here because the Defendants were not seeking to put into evidence a representation (whether express or implied) made by the Claimants. The Defendants were instead seeking to put into evidence a representation made by one of the Defendants, Lancer. The estoppel on which the Defendants sought to rely was based on the subsequent silence of the Claimants after the mediation, which therefore fell outside the without prejudice rule.

Mr. Justice Roth did note that where the estoppel on which Defendants were seeking to rely was, as he had found, the silence of the Claimants in response to the Defendants’ position paper in the mediation, this would require the Defendants to give evidence of what Lancer said to the Claimants in the mediation – but he held this was a very different situation from the object of the estoppel exception. If relevant passages in Lancer’s mediation position paper were to be admitted into evidence it would have to be on a different ground.

In addition, Mr. Justice Roth did not accept the submission that the Claimants’ silence regarding Mr. Al Ahbabi's interest in Becker (and the amount of the payment) could be a statement on which the Defendants relied. This is because silence cannot be considered to be a clear and unambiguous statement, as required by Hodgkinson.

The Muller exception

This exception has proved to be controversial. The question in Muller was whether the claimants’ without prejudice communications from a separate dispute could be admitted in evidence in their claim against their former solicitors.

The Court of Appeal held that the claimants’ without prejudice communications could be admitted in evidence because the claimants had put in issue whether the settlement of the separate claim was reasonable mitigation of their loss, and the without prejudice communications formed part of that conduct. As Lord Justice Leggatt said, the claimants “cannot both assert the reasonableness of the settlement and claim [without prejudice] privilege for the documents through which it was reached. They are relevant because the [claimants] rely not only on the fact of settlement, but also on the reasonableness of it.

Lord Justice Hoffman outlined his view (with which the other members of the Court of Appeal agreed) that the exceptions to the without prejudice rule

will be found on analysis to be cases in which the relevance of the [without prejudice] communication lies not in the truth of any fact which it asserts or admits, but simply in the fact that it was made. Thus, when the issue is whether without prejudice letters have resulted in an agreed settlement, the correspondence is admissible because the relevance of the letters has nothing to do with the truth of any facts which the writers may have expressly or impliedly admitted.7

However, this rationale for the Muller exception has been criticised. In Unilever Lord Justice Robert Walker stated "I respectfully doubt whether the large residue of communications which remain protected can all be described as admissions." Similarly, the House of Lords in Ofulue v Bossert8questioned this basis for the Muller exception.

Having reviewed the authorities, Mr. Justice Roth found he had to determine the ambit of the Muller exception given that, in his view, “much of the reasoning of all three judges who decided [Muller] cannot stand”.9

The application of the Muller exception was summarised in EMW Law LLP v Halborg.10 This case concerned whether the defendant, Mr. Halborg, had made all reasonable efforts to recover EMW's costs in a settlement between himself and a third party. Having considered the judicial criticism of Muller, Mr. Justice Newey (as he then was) approached the task on the basis that there was an exception to the without prejudice rule “which encompasses the facts of the Muller case” because “justice clearly demands” such an exception should apply.

He identified various arguments in support of the Muller exception, of which Mr. Justice Roth cited two. Firstly, as EMW was suggesting that the defendant acted unreasonably in negotiations, "It is hard to see how EMW's claim would be justiciable without the disclosure of [the without prejudice] Documents". Secondly, the Muller exception "means that communications otherwise protected by the without prejudice rule may become disclosable and admissible because the other party to negotiations unilaterally chooses, for reasons of his own, to put forward a case about the negotiations in litigation with a third party".

The issue of justiciability was advanced by Mr. Justice Fancourt in the 2019 decision of Briggs v Clay,11 whose analysis of the Muller exception Mr. Justice Roth adopted. In summary, he held the Muller exception may apply “where an issue is raised that is only justiciable upon proof of without prejudice negotiations … A claimant or defendant cannot at one and the same time raise an issue to be tried and rely on without prejudice privilege to prevent the court from seeing the evidence that is needed to decide it.” 12

Mr. Justice Roth’s interpretation of this was that the Muller exception applies where the without prejudice material in question “is so central to an issue which the party resisting disclosure has introduced that there is a serious risk that there will not be a fair trial if that evidence is excluded.”13

Applying that analysis to the facts of this case, Mr. Justice Roth found that a fundamental issue at trial would be whether the Defendants had acted dishonestly, and therefore whether the Claimants were indeed unaware of Mr. Al Ahbabi's interest in Becker. The Claimants’ lack of knowledge was a potentially critical issue raised by the way the Claimants had advanced their case. In Mr. Justice Roth’s view, this issue would not be fairly justiciable if the Defendants could not put in evidence what Lancer had told the Claimants in its mediation position papers. The Muller exception therefore applied to Lancer’s without prejudice mediation position papers, such that these could be put in evidence.

Comment

This case provides helpful guidance as to how three of the exceptions to the without prejudice rule can be applied. In what appears to be the first reported case of the misrepresentation, fraud or undue influence exception, Mr. Justice Roth has not only confirmed its existence but has also extended its scope. It has allowed this exception to be used not only as a sword to reveal wrongdoing but also as a shield to demonstrate its absence.

In relation to the estoppel exception, this case has confirmed that the exception does not apply where a party is seeking to rely on its own statement. It has also discussed, in obiter, whether silence will be considered sufficiently clear and unambiguous. In the current case, it was not.

Finally, Mr. Justice Roth has given guidance as to when the controversial Muller exception will apply. In agreeing with the redefinition of the exception expressed in EMW and refined in Briggs, this case has reinforced the availability of the exception whilst also more closely defining its application.