Without prejudice negotiations are not normally admissible in proceedings to which they relate. There are exceptions and Oceanbulk Shipping & Trading SA v TMT Asia Ltd  EWCA Civ 79 tests their boundaries. Allowing an appeal from a decision of Mr Justice Smith, the Court of Appeal of England and Wales has held that the exceptions do not extend to allowing evidence of without prejudice negotiations to establish background facts known to the parties as an aid to the construction of a settlement agreement reached in the course of those without prejudice negotiations.
The dispute was between two shipping companies over one party's alleged failure to comply with a settlement agreement relating to a monthly payment to the other under a series of freight forward swap agreements (FFAs). The FFAs provided for monthly cash settlements of the net amounts due between the parties. The Defendant, TMT, failed to make a monthly payment and after some discussion between the parties a settlement agreement was reached. The Claimant, Oceanbulk, complained subsequently that TMT had failed to comply with the settlement agreement. During proceedings, Oceanbulk applied to strike out part of TMT’s pleading that it was entitled to rely on evidence of without prejudice negotiations prior to the settlement agreement.
At first instance, Smith J found for TMT. He said that the distinction between identifying the terms of an agreement and interpreting them is a fine one. He also considered that there was authority to support TMT's position in Admiral Management Services Ltd v Para Protect Europe Ltd  1 WLR 2722. The judge also considered that since evidence of without prejudice exchanges is admissible if there is a plea of rectification, it would be illogical not to admit it for the purpose of construction. Additionally, he considered that a court which is deprived of evidence of the background against which an agreement is made would be less well equipped to discern the parties' intentions and less likely to construe the contract in accordance with them. The judge held that evidence about that representation could be given. His reasons were based on: (i) the fineness of the distinction between identifying the terms of an agreement and interpreting them, and (ii) the interests of justice.
COURT OF APPEAL DECISION
The main issue on appeal therefore was whether without prejudice discussions can be given in evidence in support of arguments about construction if they establish a fact that is part of the background to, or the matrix of, the contractual agreement. Lord Justice Longmore noted that as a matter of policy, it was the case that the without prejudice rule applied to exclude all negotiations aimed genuinely at settlement and that parties should not be discouraged by the knowledge that anything that is said in the course of such negotiations may be used to their prejudice in the course of the proceedings.
While the judge considered that the reasoning by which a court seeks to give effect to the parties' intentions could be classified either as an identification of an implied term or an exercise of construction, the courts did not often imply terms. Just because (in rare but obvious cases) that could happen, it did not, in Longmore LJ's view, mean one should be able to adduce evidence of what occurred in without prejudice negotiations.
TMT's strongest point was that the logic of the exception enabling parties to give evidence as to the terms of an agreement extended also to permissible relevant evidence of background if that was relevant to construction. Otherwise one could, in theory, have a term that would have one meaning if without prejudice material was excluded and another meaning if it was not excluded. In Longmore LJ's view, that danger was more forensic than real since very few disputes about interpretation were informed truly by evidence about preceding without prejudice oral discussions.
Longmore LJ concluded, in disagreement with the judge, that evidence of without prejudice communications was not admissible at trial in the current proceedings. The fact that such communications might reveal some background fact that could arguably be relevant to the construction of the settlement agreement did not suffice to fold the without prejudice umbrella.
Oceanbulk apparently intended to fall back at trial on the general rule that pre-contractual negotiations are not normally admissible for the purpose of determining the contractual meaning. But as Longmore LJ pointed out in his judgment, the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd  AC 1101 held that the general exclusionary rule does not prevent evidence of negotiations from being admitted to establish a fact that may be relevant as background known to the parties.