The practice of placing the magic words “without prejudice and subject to contract” on every exchange during commercial negotiations can be thought a “belt and braces” or “no harm, no foul” approach, but experience and a recent High Court decision make it clear that such labelling might not grant the anticipated protection.

In Avonwick Holdings Ltd v Webinvest Ltd, [2014] EWHC 3322 (Ch), claimant Avonwick made a pretrial application for an order that certain correspondence between the parties, their accountants and their solicitors should be admissible as evidence, notwithstanding that most of it had been headed "without prejudice and subject to contract". The application was opposed by the defendants. The claimant’s solicitors had started the use of “without prejudice and subject to contract” on draft heads of agreement proposing terms for the restructuring of the defendants’ liabilities and obligations under a loan agreement and guarantee. The same phrase was then copied over into the covering email sent by the claimant’s accountants, and was then repeated by both parties in subsequent correspondence back and forth between them.

In order to consider why this issue made a difference in Avonwick, it might be well to revisit the accepted meaning and effect under English law of the term “without prejudice”.

Placing the legend “without prejudice” at the top of a communication indicates that it concerns settlement negotiations and that the marked document should not be used for any other purpose or in any other context without the writer’s consent. While use or nonuse of the phrase by a lawyer will often carry some weight with the court when it determines the admissibility of proffered correspondence or other documents, it is not conclusive. Nevertheless, in general terms, the "without prejudice" rule can be used to exclude from evidence a document that is part of a genuine negotiation or attempt to resolve a dispute. That is, there needs to be both a genuine dispute to be resolved and a genuine attempt to resolve it. If there is no dispute about a liability, but only a negotiation as to how and when it should be discharged, the negotiations, and documents produced in the course of them, are usually not covered by the “without prejudice” exception to the admissibility of relevant evidence. That was the situation in Bradford & Bingley plc v Rashid [2006] 1 WLR 2066 and here again in Avonwick. This may seem a subtle difference, but then the law and lawsuits often turn on such subtleties.

Did it make a difference in this case?

In Avonwick, the Court found that the term “without prejudice” had been used incorrectly since, upon examination of the evidence, Mr Justice Richards concluded there was no genuine dispute between the parties on liability. Rather, the discussions at that time were about terms and timing for the satisfaction of an admitted liability through a restructuring of the defendants’ debt. “Subject to contract” never really came into it. Therefore, the incorrect or mistaken marking of various documents as “without prejudice” did not require the further agreement of the parties for use or preclude the admission of the correspondence in evidence at the trial. As the court succinctly remarked: “the only conclusion, itself not an impossible one, is that the solicitor made a mistake.”

Does this provide a lesson?

It is clear from Avonwick that whether or how a lawyer or the parties mark commercial correspondence or documents does not always grant the status sought, since a court will decide whether the presence or absence of a privilege legend is appropriate or effective. Advisors and clients need to be careful to avoid creating and disseminating documentation which may not have attached to it the status of privilege they expect even when labelled as such by the legal team. In Avonwick, it was perhaps ironic that the party whose solicitors and accountants started the trail of mismarked documents then had to litigate to overcome the presumption that followed from the marking. It is therefore wise to know what the “without prejudice” phrase really means, how it should properly be used, and as well when not to use it.