In Sternberg Reed Solicitors v Harrison  EWHC 2065 His Honour Judge Hodge QC heard an appeal against an arbitration award on costs. The arbitrator had referred to inter-partes correspondence containing offers and counter offers of settlement in his costs award. Nearly all the communications had been expressly labelled without prejudice. HHJ Hodge QC concluded that the arbitrator had erred in admitting those communications on the issue of costs. He cited Computer Machinery Co Ltd v Descher  1WLR 1379 for the propositions that “communications expressly made on a ‘without prejudice’ basis are inadmissible, even for the purposes of costs arguments; and also that the court has no general discretion to disapply the ‘without prejudice’ rule” (at 30).
HHJ Hodge QC went on to consider the admissibility of the initial offer of settlement (contained in an email of 12 November 2015), which had not been marked without prejudice or open. HHJ Hodge QC held that the 12 November 2015 email was an attempt to settle a live dispute and it was therefore covered by the without prejudice doctrine pursuant to Chokoladefabriken Lindt & Sprungli AG v The Nestle Co Ltd  RPC 287. This is entirely uncontroversial. He reached the conclusion however, that the same 12 November 2015 email (unlike the correspondence expressly labelled without prejudice) was admissible on costs issues. HHJ Hodge QC stated that:
“49. Where correspondence is treated as being ‘without prejudice’, not because it is labelled as such, but simply because it is an attempt to compromise actual or impending litigation, there can be no public policy justification for preventing it being referred to on issues of costs as distinct from the issues in the substantive litigation; and I see no basis for implying any agreement that no reference should be made to such correspondence on issues of costs once issues in the substantive litigation have been determined.”
Is Sternberg right?
The Court of Appeal in Gresham Pension Trustees v Cammack  EWCA (Admin) 635 considered the status of a note of various inter-partes conversations about settlement. It held that these conversations were plainly covered by the without prejudice doctrine despite the fact that neither side had said the words ‘without prejudice’ (at 23). The note was therefore of the same nature as the 12 November 2015 email in Sternberg Reed Solicitors. However, the Court of Appeal concluded that:
“25. Negotiations which have taken place expressly on a “without prejudice save as to costs basis” are admissible on the question of costs as an exception to the general rule which precludes the admission of without prejudice communications … However, if the parties wish to exclude the general rule that would otherwise apply, they must say so.”
The note was held to be inadmissible on costs issues because the parties had not stated that their conversations regarding settlement were without prejudice save as to costs (at 24 - 7).
HHJ Hodge QC in Sternberg Reed Solicitors was not taken to the Court of Appeal’s decision in Gresham Pension Trustees. He dismissed the notion that the basis for excluding reference to without prejudice correspondence in costs proceedings is an implied agreement based on general usage and understanding that the party making the offer will not do so. He concluded that there could be no such implied agreement where the inter-partes communications had not expressly been marked without prejudice (and cited the earlier case of Bradford & Bingley PLC v Rashid  UKHL 37 (per Lord Brown at 63 - 4) in support). The Court of Appeal in Gresham Pension Trustees appears to have taken the opposite view of the basis for excluding reference to without prejudice correspondence in costs proceedings (see 25), but made no reference to Lord Brown’s judgment in the Bradford & Bingley PLC decision.
The case law is currently in a muddle. It would appear that Gresham Pension Trustees may have been wrongly decided, however counterintuitive that might seem to practising lawyers used to the operation of the without prejudice doctrine in cases where correspondence has been expressly labelled.
Why does it matter?
In Marcura Equities FZE & Ors v Nisomar Ventures & Ors  EWHC 523 (QB) Nicholas Vineall QC (sitting as a Deputy High Court Judge) commented that “[t]he distinction between WP and WPSATC is both real and important. The advantage of a purely WP meeting is that it can lead to the frankest possible discussion, without either party being worried that what they say might be used against it on costs” (at 34). It is obviously important that parties know exactly when settlement discussions or correspondence can and cannot be admitted into evidence on costs issues (and not just substantive issues). That certainty will only help to promote inter-partes discussion and the possibility of out of court settlements being reached.