Without prejudice communications should be disclosed to a third party because two exceptions to the without prejudice rule applied (the “concluded settlement agreement” and “reasonableness of mitigation” exceptions). Previous case law in this area involved one of the parties to the without prejudice communications (rather than a third party) relying on these exceptions. The court drew a distinction between the waiver of without prejudice privilege (which must be done jointly) and merely “showing” a without prejudice communication to a third party (which, the court said, can be done unilaterally).

Mr Halborg, a solicitor, was instructed by his parents and a family company (the Halborg Claimants) in relation to a dispute between the Halborg Claimants and a firm of architects (the Architects). With the agreement of the Halborg Claimants, Mr Halborg instructed another firm of solicitors, EMW Law LLP (EMW), to assist him in the conduct of the case. EMW was retained on the basis of a conditional fee agreement (the Agency CFA) which provided that it would only be paid once Mr Halborg had recovered EMW's costs from the Architects.

The Halborg Claimants issued proceedings against the Architects. These proceedings were settled by a £350,000 Part 36 offer from the Architects. As a result, the Architects became liable to pay the Halborg Claimants’ costs. Mr Halborg entered into without prejudice negotiations with the Architects’ solicitors to settle these costs, in relation to which a bill of cost was served which sought just over £1.3 million (including £123,590 for EMW’s “agency charges”).

No amount was paid to EMW. It therefore started these proceedings against Mr Halborg for breach of various implied terms in the Agency CFA which it claimed resulted in EMW not being paid.

Without prejudice communications sought by EMW

On disclosure, Mr Halborg withheld his communications with the Architects’ solicitors on the recovery of costs on the basis they were protected by without prejudice privilege. EMW argued that the normal without prejudice rule did not apply as what was at issue was whether a settlement agreement had been reached and/or the mitigating steps taken by Mr Halborg in relation to settlement.

The matter came before Newey J in the High Court on appeal.

Without prejudice reminder

The court noted that the without prejudice rule operates to protect negotiations genuinely aimed at settlement from being given in evidence. This means that such negotiations are immune from disclosure.

The rule can continue to apply even after a compromise has been reached and its implications are capable of extending beyond the parties to the relevant negotiations. The privilege is a joint one and can therefore only be waived jointly. It is not open to one of the parties to the negotiations to waive the privilege unilaterally.

There are, however, settled exceptions to the without prejudice rule. This case considered two exceptions, which provide that without prejudice communications are admissible (and discloseable):

  • for the purpose of determining whether a settlement agreement has been concluded (the concluded settlement agreement exception);
  • where there is an issue as to whether a party has acted reasonably in mitigating his loss by virtue of his settlement negotiations and conduct (the reasonableness of mitigation exception); and
  • the second exception encompasses the facts in Muller v Linsley Mortimer [1996] 1 PNLR 74.

Both exceptions apply

The court held that both the concluded settlement agreement exception and the reasonableness of mitigation exception (“or, another, comparable, exception”) applied.

Concluded settlement agreement exception

The concluded settlement agreement exception applied as there was in fact a dispute as to whether a settlement agreement had been reached. The court dismissed Mr Halborg’s concerns that allowing a third party to rely on this exception would mean that a stranger to without prejudice negotiations could obtain communications which the parties themselves were entitled to assume enjoyed the protection of privilege. The court noted that “while a party to without prejudice negotiations is generally entitled to assume that the negotiations will not generally be capable of being deployed in Court proceedings without his consent he has no absolute assurance of that” given there are exceptions to the rule. The risk of the concluded settlement agreement exception applying is not "significantly increased if it is understood as allowing not merely a party to the negotiations, but someone else with a legitimate interest in their outcome, to rely on it.”

Reasonableness of mitigation exception

The court also held that the reasonableness of mitigation exclusion applied.

The judge said that “justice clearly demands” that there is an exception “(whether that encompassing the facts of the Muller case or another, comparable, exception)” because:

  • It would be difficult for EMW’s claim to be justiciable without disclosure of the without prejudice communications.
  • Mr Halborg made reference to his without prejudice negotiations in his defence (when he explained to EMW that the Architects’ solicitors “ascribed no value at all to [EMW’s] work”).
  • There was "no likelihood" that recognising that an exception should apply here would deter parties seeking to settle as they will, if well informed, be aware of the two exceptions to the without prejudice rule relevant to this case.
  • There is a persuasive argument that if a client (like the Halborg Claimants) authorises his solicitor to employ an agent on the basis that the agent’s remuneration depends on what agreement as to costs is reached with the other side, “the client can hardly complain if his negotiations with the opposing party are susceptible to being revealed to and relied on by the solicitor-agent”.
  • Where there is a need the court could make an order to restrict the use of a disclosed document, even where read out in open court.

Waiver v “showing” distinction

The judgment records that there was some debate during the hearing as to whether a party to without prejudice communications could “show” a third party documents without obtaining the consent of the counterparty to that communication. The court noted that it was accepted that a waiver of without prejudice privilege can only happen with the consent of both parties, which protects the negotiations from unilateral disclosure. However, the court tentatively considered (“[t]he answer, I think, must be…”) that a party to without prejudice negotiations is free to “show” them to someone else if he so chooses, “at least if there is a legitimate reason for doing so”. The judge said that if the position were otherwise, a litigant “might find himself unable to provide relevant documents to, say, an expert unless and until the other side agreed, which would be absurd.”

COMMENT

This case is interesting in that it has allowed a third party to make use of the concluded settlement agreement and reasonableness of mitigation exceptions, despite no party to the negotiations seeking to rely on the without prejudice material. Although the judge in this case came to the view that allowing a third party with a legitimate interest in negotiations to rely on these exceptions will not deter parties from settling, there may be cases where that risk needs to be given serious consideration and this may affect what is said in negotiations (although its effect may be tempered to some extent by obtaining a court order to prevent the collateral use of the material). We understand that an application for permission to appeal has been filed in relation to this judgment.

The judge’s distinction between waiver of without prejudice and merely "showing" a communication to a third party is troubling. It is generally accepted that parties to without prejudice negotiations owe each other a private law duty of confidentiality (although that duty is subject to certain exceptions). Despite this, the judgment does not address how “showing” a without prejudice communication to a third party would not be a breach of such a duty, beyond suggesting that there needs to be a “legitimate reason” for "showing" the documents to the third party. If this decision is seen as broadening the circumstances in which a party can “show” without prejudice communications to third parties, there is a risk it could act as a significant disincentive to engaging in settlement negotiations, in particular in cases where a party is aware that third parties may have similar claims or is concerned about adverse publicity. If settlement negotiations are particularly sensitive or where there is a clear risk of harm if the details of those settlement negotiations are shown to third parties, parties may wish to consider expressly agreeing that their negotiations are confidential and cannot be shown unilaterally to third parties to bolster their legal rights and help manage counterparty behaviour.