In Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44, the Supreme Court of the United Kingdom has reversed a decision of the Court of Appeal of England and Wales and added a further exception to the general inadmissability of without privilege communications—the “interpretation exception”—which brings without prejudice negotiations in line with the approach to pre-contract negotiations.

A dispute arose between two shipping companies over one party’s alleged failure to comply with a settlement agreement in respect of a debt owed under freight forward swap agreements (FFAs). After a market-shift, TMT owed Oceanbulk approximately US$70 million under these FFAs. Following “without prejudice” negotiations, the parties entered into a written settlement agreement. One clause of the settlement agreement required co-operation to close out their FFA contracts in a certain way. There was a dispute as to the interpretation of this clause. TMT alleged that the clause related to only certain types of deals and that representations made by Oceanbulk in the course of the settlement negotiations demonstrated that TMT’s interpretation was correct. The upshot of the way the FFAs were closed-out was that Oceanbulk now owed TMT US$86 million. TMT argued that without prejudice negotiations were admissible in evidence to confirm their interpretation. Smith J found for TMT at first instance and allowed admission. The Court of Appeal allowed Oceanbulk’s appeal and ruled the evidence inadmissible.

The question in the Supreme Court case was: should one of the exceptions to the rule be that facts identified during the without prejudice negotiations, which lead to a settlement agreement of the dispute between the parties, be admissible in evidence to ascertain the true construction of the agreement as a part of its factual matrix or surrounding circumstances. Lord Clarke referred to the list of existing exceptions. 

  • Where the issue is whether without prejudice communications have resulted in a concluded compromise agreement.
  • To show that a settlement agreement should be set aside on the ground of misrepresentation, fraud or undue influence. 
  • To establish an estoppel based on clear statement notwithstanding a failure to conclude settlement negotiations. 
  • If the exclusion of the evidence would aid perjury, blackmail or “unambiguous impropriety”.
  • To explain delay or apparent acquiescence (in limited circumstances). 
  • In relation to whether the claimant acted reasonably to mitigate loss in his conduct and conclusion of negotiations for the compromise of proceedings. 
  • The “without prejudice except as to costs” exception. 
  • In matrimonial cases, confidential communications seeking matrimonial conciliation.

Lord Clarke held that a further exception should exist: a party to without prejudice negotiations can rely upon anything said in the course of them in order to show that a settlement agreement should be rectified. Lord Clark noted that judges have to distinguish frequently between material that forms part of the pre-contractual negotiations, which is part of the factual matrix and therefore admissible to aid interpretation and material that forms part of a pre-contractual negotiation, which is not part of the factual matrix and is thus inadmissible. Settlement agreements should be treated the same as other contracts in this regard. Lord Clarke stressed that he was not seeking to erode the without prejudice rule or to extend the exception beyond evidence which is admissible in order to explain a factual matrix or surrounding circumstances to the Court.