What lawyers write – or don’t write – at the top of letters and emails can adversely affect their clients or employers. The temptation to put “without prejudice and subject to contract” at the top is a strong one but needs to be thought about. If litigation follows, the incorrect use of, or failure to use, these terms can lead to costly and embarrassing consequences. This is what happened in Avonwick Holdings Ltd v Webinvest Ltd

The background

Avonwick Holdings Ltd v Webinvest Ltd concerned the ill-advised use of the phrase “without prejudice and subject to contract” on draft heads of terms concerning the restructuring of the defendants’ obligations under a loan agreement and guarantee. The claimant’s solicitors had drafted the heads of terms and the same phrase was copied over into the covering email sent by the claimant’s accountants, and was then repeated by both parties in the correspondence that followed immediately afterwards. 

Before looking further at what happened in Avonwick, it’s important to consider the precise effect of the terms “without prejudice” and “subject to contract”. 

Without prejudice rule

The without prejudice rule applies to exclude evidence of negotiations genuinely aimed at settling a dispute. It is sometimes described as a form of privilege but while one party can decide whether or not to waive privilege in a document, in general both parties to without prejudice correspondence must agree before the document can be put before the court. 

The rule does not apply where a letter merely states what the writer thinks his rights are. It can be difficult to work out whether the communication merely asserts rights (as in a letter before action) or whether it asserts rights as part of initiating negotiation with a view to settlement (often described as an “opening shot” - see Rochester Resources Ltd v Lebedev for a recent example). 

Putting “without prejudice” at the top of a letter says that it concerns settlement negotiations and should not be referred to without the consent of the writer. The fact that the phrase is used, or not used, by a lawyer will carry weight with the court when it determines the status of the correspondence but it is not conclusive. 

“Subject to contract”

The “subject to contract" rule developed in connection with property transactions but became a recognised concept in wider commercial transactions. If the term is used, it is extremely difficult to persuade the court that the parties intended to be legally bound before drawing up a formal agreement. 

In the context of litigation, you should use the phrase when making an offer if there is no intention to be bound before a formal written settlement agreement and/or consent order has been drafted and agreed. The absence of “subject to contract” indicates that the letter is an offer of terms capable of acceptance as it stands. 

There is an exception to this rule. Where parties instruct their lawyers to settle shortly before a trial, it can only be on the basis that any previous “subject to contract" umbrella has been lifted, even where the term is repeated on subsequent correspondence. There is no point in negotiating immediately before a trial begins if the parties have to go away and draw up documents that then have to be considered before the settlement is binding (Jirehouse Capital v Beller). 

Why did it matter in Avonwick?

In Avonwick, the claimant’s solicitors used the term “without prejudice” incorrectly since at that point there was no dispute between the parties. The negotiation was about how and when an admitted liability should be discharged – the restructuring of the defendants’ debt. 

When litigation ensued, the claimant‘s solicitors wanted to rely on the heads of agreement and associated correspondence but by marking the documents “without prejudice” had rather shot themselves and their client in the foot. As the judge put it, “I must approach this issue on the basis that a litigation solicitor would deliberately use the term “without prejudice” in its usual sense”. 

However, after analysing the contemporaneous evidence, the judge concluded that there was no genuine dispute at the relevant time and that the only conclusion he could reach, “itself not an impossible one” as he put it, was that the claimant’s solicitors had made a mistake. The claimant could therefore rely on the documents as evidence at the trial. 

Comment

In Jirehouse Capital v Beller, the judge commented: “The old observation that solicitors' typewriters had two extra keys marked ‘subject to contract’ and ‘without prejudice’…is not without a modicum of truth”. 

One conclusion you could draw from both Avonwick and Jirehouse is that it doesn’t really matter what you put at the top of letters because the court will work out what was really going on and ignore the presence or absence of these terms as appropriate. 

That conclusion ignores the collateral damage caused by using (or not using) these terms incorrectly. Lawyers, whether in-house or in private practice, do not want to look foolish, and inappropriate labelling of correspondence can lead to satellite litigation about the admissibility of evidence and/or whether a settlement has been reached. Not only does this waste time and money, but the process can also give the other side a tactical advantage affecting the litigation as a whole. 

Click here to read the judgment in Avonwick Holdings Ltd v Webinvest Ltd.