In Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2010] UKSC 44, the Supreme Court has recognised a new exception to the rule that communications made in a genuine attempt to reach a settlement are protected from being used as evidence by either party to proceedings.

The Appellants had appealed against a decision of the Court of Appeal which stated that evidence of without prejudice communications could not be given in a dispute about the true construction of one of the terms of a written settlement agreement between the parties. The key question was whether, by way of an exception to the without prejudice rule, one party could rely on facts communicated between the parties as part of without prejudice negotiations which would, were it not for the rule, be admissible as part of the “factual matrix or surrounding circumstances” in order to assist with the construction of the resulting agreement.

The Supreme Court allowed the appeal and answered this question in the affirmative. The usual principles governing the interpretation of a settlement agreement should not be amended simply because the negotiations which led to it were without prejudice. The language should be construed in the same way, and the central question should be the same: what would a reasonable person, having all the background knowledge which would have been available to the parties, have understood the parties to be using the language in the contract to mean? The relevant background knowledge may well include objective facts communicated in the course of negotiations, and the process of interpretation should be the same whether or not the negotiations were conducted without prejudice. In either case, the reason for admitting the evidence was to assist the court in making an objective assessment of the parties’ intentions.  

The court noted that if a party to negotiations knew that, in the event of a dispute about what the resulting settlement agreement meant, objective facts communicated during negotiations would be submitted to assist the court in interpreting the parties’ true intentions, settlement was likely to be encouraged.  

An important issue to arise from this case is that parties should ensure that any settlement agreement is drafted as clearly and tightly as possible, in order to avoid or at least minimise any future problems with interpretation.