'Without prejudice', 'without prejudice save as to costs' and 'subject to contract' are three legal terms that are frequently seen in correspondence or thrown about in discussions. However, they are often used in the wrong context and can confuse recipients who do not know what they really mean.

Here we shed some light on the meaning of each term and set out some tips on when they can be applied appropriately.

Without Prejudice

"Without prejudice" communications are intended to encourage settlement negotiations between parties to assist them in avoiding Court. The wording literally means that the communication has been made without prejudice to the writer / speaker's position.

"Without prejudice" may be used by parties who are discussing or corresponding about an existing dispute, whether or not Court proceedings have already been issued. However, it must be noted that a communication can only be "without prejudice" where the following conditions are satisfied:

  1. There must be an existing dispute between the parties; and
  2. The communication must contain a genuine attempt to settle the dispute.  

If communications are expressed to be "without prejudice", provided that they are a genuine attempt to settle, they cannot later be relied upon in Court proceedings if the attempt to settle fails.

Any negotiations forming part of a genuine attempt to settle can be "without prejudice". If they are part of a chain of discussions, this will be implied. To be certain, it is much better to label correspondence accordingly, or to clarify at the outset that any meeting or discussion is on a "without prejudice" basis. Although failure to use the label will not waive the privilege, it is better to put the matter beyond dispute.

Equally, both conditions 1 and 2 must be satisfied. Simply using the words "without prejudice" will have no effect if there is no genuine dispute or no genuine attempt to settle. If the conditions are not met, then the communication will be open and can be disclosed, regardless of the label.

Genuinely "without prejudice" communications are privileged from disclosure and cannot be shown to the Court unless the parties agree to waive the privilege. Nor can they be shown to a third party unless both parties consent to this. One party may not waive the privilege by themselves.

The purpose of the "without prejudice" rule is to encourage parties to reach settlement and thus to try and avoid Court action. It exists to enable parties to speak freely without being afraid that their position would be weakened by concessions aimed at settlement if the matter ultimately ended up before a judge. It can be extremely effective in bringing matters to a mutually satisfactory conclusion.

Without Prejudice Save As To Costs

The "without prejudice save as to costs" rule extends the basic "without prejudice" rule. It maintains the same privilege but, should the matter go to Court, the parties can disclose communications when the Court comes to decide the issue of costs.

This means that the communications remain privileged until after the matter has been settled or decided by the judge. Therefore the parties can negotiate freely without fear that any admissions will be used against them in Court until the judge has decided the main points.

The purpose of this rule is to allow the Court to decide who should be awarded costs after the outcome of the dispute has been decided. The Court will consider the conduct of the parties in determining this. The Court will use these communications to assess how co-operative each party has been in the lead-up to trial and to decide whether the costs could have been avoided.

Including "without prejudice save as to costs" on correspondence therefore encourages good conduct and co-operation between the parties to avoid later being penalised on costs should the matter end up in Court. It has a significant effect upon the Court's discretion on awarding costs, and may well allow a party to recover more costs than would otherwise have been the case. However, the parties will still have the ability to speak freely in settlement negotiations.

If a Without Prejudice offer is accepted in open correspondence, this will make a binding contract of settlement.

Subject to Contract

Again, it is common to see the heading "subject to contract" across the top of correspondence. However, this may not always be in the best interest of the party that is using it. The wording should be treated carefully and used only in appropriate circumstances.

Where a communication has been marked "subject to contract", this wording prevents any negotiations or agreements between the parties from being legally binding until they are included in a valid contract.

In property transactions, we commonly see this term used during lease negotiations. It protects both parties by preventing them from being held liable should they wish to withdraw from the transaction. This can be very useful in allowing the negotiations to remain flexible.

However, the wording also has the effect of making any agreement that is subject to this term carry far less weight. It is essential to remember that any decisions made 'subject to contract' are unenforceable and may not be relied upon until the contract is signed.

"Subject to contract" can also be used in a litigious context where settlement negotiations are taking place. It has the effect of making all discussions and agreements unenforceable until they are contained in a signed settlement agreement. The purpose of the rule is again to encourage free negotiation between the parties. But, as with transactional communications, it is essential to remember that the agreements will not be set in stone until they are entrenched in a signed document. Therefore a party wishing to rely on a communication should seek advice before marking it "subject to contract".

Our views

These methods of communication are all extremely useful tools for parties involved in property disputes. However, it is essential to use them correctly, so that they do not cause more problems than they seek to solve. Advice should therefore be sought, whether you are the sender or the recipient, as to the impact on your case.