The English Court of Appeal decision in Framlington Group Ltd v Barnetson [2007] makes it clear that, in order to exclude evidence of pre-litigation disputes under the without-prejudice rule (the Rule), one needs to look at the proximity between the issues at the heart of the settlement negotiations and the subject matter of the actual or threatened litigation. This is more important than the length of time by which the pre-litigation dispute precedes the threat or start of litigation. Before Framlington, there was uncertainty about when the rule would apply before the issue of proceedings.

Purpose of the Rule

The without-prejudice rule stems from the public policy of encouraging litigants to settle their disputes at an early stage, thereby shortening (or even avoiding) litigation and saving costs.

To promote this policy, the Rule helps litigants to negotiate a settlement by ensuring that pre-settlement communications, whether oral or written, are specifically excluded from disclosure during discovery. This protects the parties from embarrassment, as the details of any settlement or any admission remain known only to the parties involved, free from the scrutiny of the courts. Such communications must be made in a genuine attempt to settle the dispute and not merely as an assertion of the parties’ rights.

The communications must also be made at a time when a dispute actually exists between the parties. However, up until now, there has been considerable uncertainty about whether the Rule covers communications made during a dispute but before the start (or threat) of legal action. Just how close in point of time and subject matter to the litigation do such communications have to be in order to gain the protection of the without-prejudice principle? This was the thorny issue that the English Court of Appeal had to tackle in Framlington.

The Framlington case

In Framlington, pre-litigation negotiations were held to resolve a dispute between the employer (the defendant) and the employee (the claimant). The negotiations failed and the employee was subsequently dismissed. He then started a legal action, claiming damages for breach of contract and wrongful dismissal.

During the proceedings, the employer applied to the court for the deletion of certain passages in the former employee’s witness statement, claiming that they referred to negotiations that were protected by the Rule. The passages involved several exchanges between the parties that occurred shortly before the former employee’s dismissal, including negotiations regarding the employee’s share participation entitlement and a letter in which he threatened legal proceedings against the employer if the dispute over his entitlement was not resolved.

Dismissing the employer’s application, the High Court judge ruled that, since the exchanges took place before the start of litigation or potential litigation, the Rule did not apply. The pre-litigation negotiations related to reaching agreement on the terms of the employment contract, and the negotiations themselves were to prevent a dispute from occurring. They had not been undertaken to settle or compromise an existing dispute.

The employer appealed to the Court of Appeal. Lord Justice Auld (speaking on behalf of the court) overturned the first instance decision. The Court of Appeal decided in favour of the employer because the relevant exchanges and communications amounted to disputes over the terms of the employee’s contractual entitlement, where both parties were clearly aware of the possibility of litigation if the negotiations fell through. The negotiations were not simply discussions about the variation of the contractual terms, where the employee was not under any risk of dismissal. If that had been the position, the Rule would not have applied.

When considering whether evidence of prelitigation disputes is excluded under the Rule, the Court of Appeal said that it is the proximity of the subject matter of the dispute that is important, and not how long before the threat, or start, of litigation that the parties conducted the negotiations.

In judging the proximity of the subject matter of the dispute, there are two key questions: 

  • Could the pre-litigation negotiations result in the parties not going to court over the issues that are being negotiated? 
  • Do the parties contemplate taking legal action if the negotiations fail to produce a settlement?

A positive response to these questions would strongly indicate the proximity of the dispute’s subject matter to the litigation. Consequently, the Rule would exclude such communications from being given in evidence.

Framlington has reiterated the public policy consideration of the without-prejudice principle that a dispute may be covered by the Rule even though litigation has not yet begun.

However, the Court of Appeal has been careful not to extend the scope of the Rule further than is necessary, as it has to weigh the public policy interest underlying the Rule against wrongly preventing a litigant from putting their case at its best. Where the line is drawn will largely depend on the nature of the particular case in hand.

Hong Kong legal position

Under Order 41, rule 6 of the Rules of the High Court, the court may strike out from an affidavit any content containing matter that is scandalous, irrelevant or otherwise oppressive. The Hong Kong Court of Appeal case of Rich Idea International Investment Co Ltd v Law Man Chak (t/a Jade Creations Production Co) [1995] ruled that this has given the court “complete discretion” as to whether or not it strikes out from an affirmation references to communications made without prejudice, and therefore inadmissible in evidence.

The grounds for striking out a witness statement containing without-prejudice material can be found in the case of Re Jinro (HK) International Ltd [2002], a Hong Kong Court of First Instance decision involving winding-up proceedings. For a party to claim without-prejudice privilege, the communications must have been made (1) in a bona fide attempt to settle the dispute, and (2) with the intention that, if the negotiations fail, such communications will not be disclosed without the consent of the parties.

To establish the first limb of the test, the party claiming the privilege must show that: 

  • at the time the communications were made, there was an existing dispute between the parties; 
  • legal proceedings regarding the dispute had started or were contemplated; and 
  • the communications were made in a genuine attempt to settle the dispute. It is insufficient that the communications were simply concerned with the dispute.

The case also says that where the exclusion of evidence under the without-prejudice rule would act as a “cloak for perjury or other unambiguous impropriety”, the court will allow evidence to be given which would otherwise be protected by privilege. The court will only exercise this exception in the clearest cases, as it does not want to impair the public policy underlying the rule of encouraging litigants to settle their disputes wherever possible, rather than litigate them to the finish.

The test laid out in Re Jinro for claiming without-prejudice privilege has been followed in the subsequent cases of Ip Wah v Cheung Chun Chiu [2006] and Standard Chartered Bank (Hong Kong) Ltd v Ma Lit Kin, Cary [2006], both cases of the Court of First Instance.

Reconciling the two cases

In Framlington, the issue of whether evidence of pre-litigation communications may be excluded depends on the proximity of the subject matter of the dispute. The subject matter will be sufficiently proximate if the pre-litigation negotiations could spare the parties having to go to court over the dispute in question, and if the parties are contemplating litigation in the event that the negotiations fail.

Although there is no mention of the word “proximity” in Re Jinro, the test for claiming the benefit of the without-prejudice rule is very similar to that in Framlington. At the outset, both cases require the existence of some form of dispute, and the need for the negotiations to be made in furtherance of the settlement of that dispute. In addition, both cases mention the foreseeability of litigation should the negotiations collapse.

Furthermore, although Re Jinro does not deal directly with pre-litigation disputes, the decision expresses strong support (on public policy grounds) for preserving the without-prejudice rule, and makes it plain that the rule can only be overridden in the most obvious cases where an abuse of the rule can be shown. It also says that pre-litigation disputes come within the ambit of the without-prejudice rule, and that (providing the test in the case is satisfied) the related communications will therefore not have to be disclosed in evidence in Hong Kong.

To some extent, the Hong Kong courts have adopted a more liberal approach than their English counterparts, as they would only disallow a without-prejudice claim if the exclusion of evidence acted as a “cloak for perjury or other unambiguous impropriety”. In Framlington, the English Court of Appeal stated that there is a need to balance the public policy interest underlying the without-prejudice rule against preventing one of the litigants from putting their best arguments forward.