The Supreme Court recently issued a decision of seven judges in Oceanbulk Shipping & Trading SA v TMT Asia Limited and others [2010] dealing with the rule that statements made in ‘without prejudice’ negotiations are not admissible in evidence. This was in the context of whether TMT could rely on statements made during negotiations as an aid to interpretation of a settlement agreement.

The Dispute

 Oceanbulk entered into a number of forward freight agreements with TMT Asia and a number of other companies. TMT failed to pay an installment and sought additional time for payment. The parties then entered into without prejudice discussions, involving written exchanges and two lengthy meetings attended by the parties and their solicitors. This resulted in a written settlement agreement.

Both parties agreed that the terms of the settlement agreement were accurately recorded and neither party sought to have it rectified. However, there was a disagreement on the interpretation of one of the terms of the agreement. The Supreme Court had to rule on whether it was permissible, in interpreting the agreement, to refer to anything written or said in the course of the without prejudice negotiations.

The Decision

The Court considered the principles of interpretation of contracts as these have developed in recent years, most recently in the Chartbrook v Persimmon Homes case (2009). In that case it was said that, where the interpretation of language used in the contract is disputed, the Court has to consider what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood the words of the contract to mean. That would allow evidence as to the "factual matrix" to be led in order to assist in interpreting the agreement.

The Court saw no reason why the ordinary principles governing interpretation of an agreement should be any different, regardless of whether or not the negotiations which led to it were carried out on a without prejudice basis. The evidence required to be admitted to allow the court to come to a view on what were the parties' intentions.

Conclusions

It remains to be seen what effect the Oceanbulk decision will have in practice. It may make some people more wary during the negotiation stages. Despite the Court's view that if a party knows that facts which emerge during negotiations will be allowed into evidence to allow the agreement to be interpreted in accordance with parties' intentions, this judgment will act as an encouragement to settle.

Oceanbulk illustrates the importance of making sure that the settlement agreement is drafted in a clear and concise manner reflecting the key terms that have been agreed. Failure to do so may result in judicial examination of not only the settlement agreement itself, but also the settlement process that went before it, regardless of whether the information came from "without prejudice" discussions; a costly and time-consuming exercise that all involved in the dispute should be keen to avoid.