Tags “without prejudice” and “subject to contract”, when correctly used, provide powerful protection against unintended consequences. However, they are widely misunderstood and misused and, as recent cases illustrate, need to be used with more care.

Without prejudice

The tag “without prejudice” enables a party to make a proposal which cannot prejudice it and use will protect documents from disclosure during litigation. In Cutts v Head [1984] Ch 290, Oliver LJ said:

“…parties should be encouraged so far as possible to settle their disputes without resort to litigation and 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. They should…be encouraged fully and frankly to put their cards on the table…The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability.”

Surprisingly, the policy does not depend on use of the tag if it is clear from the surrounding circumstances the parties were seeking a compromise and the document was written to begin or continue negotiations. However, unless the parties to the dispute agree the tag applies, the one claiming privilege must apply to the court to have its claim upheld (a frustrating and costly exercise). Equally, if used, a document so tagged must be written during genuine negotiations. In Avonwick Holdings Ltd v Webinvest Ltd and another [2014] EWCA Civ 1436; [2015] EGLR 4 the court held the “without prejudice” tag on correspondence had no effect as, at the time, there was no dispute. Further, an admission of or demand for total capitulation is unlikely to be privileged.

There are exceptions to the rule, including where an agreement apparently reached should be set aside on the grounds of misrepresentation, fraud or undue influence, or where exclusion of evidence would act as a cloak for perjury, blackmail or other impropriety.

Both parties may consent, expressly or by implication, to documents, tagged or not, being admitted in evidence, or not. However, the Court of Appeal in Gresham Pension Trustees v Cammack [2016] EWCA Civ 635 re-confirms that without prejudice privilege cannot be waived unilaterally. Following late settlement of a dispute, the parties agreed costs should be decided by the trial judge at first instance. The Claimant’s counsel showed the judge an undisclosed attendance note referring to settlement discussions between counsel for each party. As a result, the judge ordered the Defendant to pay the Claimant’s costs from the discussion date. However, the Court of Appeal considered it to be “plain beyond any argument” that the recorded conversations were “without prejudice”. The Defendant had not consented to waive privilege. The note was wrongly put before the judge and use of his discretion re costs was flawed.

Correspondence marked “without prejudice save as to costs” may be read by the court after judgment in the main dispute to ascertain whether a party has acted reasonably, who has really “won”, and to allow the implications for costs to be considered.

Finally, unless a without prejudice offer is expressly made “subject to contract”, acceptance of a without prejudice offer will create a binding agreement, unless greater formality is required - for example, by statute in respect of contracts relating to disposal of land.

Subject to contract

Property professionals often send letters or e-mails headed “subject to contract” (or subject to lease or licence) intending the contents will have no legal effect until the condition is satisfied and the contract is completed and exchanged. This protection is in addition to that given by statute (section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 which requires that for the sale or other disposition of land to be binding, a contract must be in writing incorporating all the agreed terms in one signed document or, where contracts are exchanged, in each part).

However, difficulties can arise with so called “unilateral consents”, eg where a tenant requires landlord’s consent for alterations, assignment or subletting. In these circumstances a “subject to licence” tag giving consent in principle, subject to certain matters or formalities, will not alone prevent the letter or e-mail giving a binding consent. Additional wording is advisable: for example, the following has been held to avoid consent:

“For the avoidance of doubt, we must stress that this letter forms no consent in itself, and no consent will be granted until the execution of a formal licence to assign.”

The tag is not all about property matters, however. Parties may wish to negotiate an agreement or settlement of any dispute. Here, “subject to contract” means what it says and the parties will not be bound unless and until agreement is complete.

A land promotion agreement (which comes in many forms) may be thought to be a contract for the sale or disposition of an interest in land. In Gladman Developments Ltd v Sutton and others [2016] EWHC 1597 (Ch); [2016] PLSCS 244 the High Court considered whether an agreement made between the Claimant, which promoted land for development, and the Defendants, landowning farmers, was binding. The parties agreed it was not a contract for the disposition of an interest in land and hence did not have to be in writing. However, the Claimant asserted a legally binding oral agreement had been made, the implications of which would have been significant financially. The Defendants argued there had been no agreement, only negotiations about a possible agreement.

After hearing evidence, the judge held there was no binding agreement. He stated:

“…even though the parties may have reached agreement on essential matters, their agreement may be ‘in principle’ only and not, at that point, binding because there are further terms to be agreed. Further… in the context of commercial contracts, the courts will approach a dispute as to the formation or existence of a contract on the basis that the more complex the subject matter and terms the more likely the parties are to want to refrain from committing themselves to be bound until they have a written document, prepared or reviewed by lawyers, which they have considered and executed.”

Doubt, he held, may:

“…be easily avoided by conducting negotiations ‘subject to contract’; however such a preface would not be relevant unless the parties were engaging in negotiations. Analysis of whether or not there is a binding agreement depends not upon the subjective state of mind of the parties but upon whether, viewed objectively, the communications between them by words and/or conduct, leads to the conclusion that they intended to create legal relations and had agreed upon all of the terms essential for the formation of legally binding relations."

He emphasised the importance of contemporaneous documentation in cases such as this where the witnesses are required to recall events as “human memory is fallible.” He endorsed an earlier case, Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), where it was held that the best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance upon witnesses’ recollections of what was said in conversations or transpired at meetings and to base factual findings on inferences to be drawn from the documentary evidence and known or probable facts.

Handle with care

The powerful magic of tags remains important as recent cases have re-emphasised. Failure to use them may leave negotations unprotected from strict disclosure rules or a contract concluded ahead of its time. However, use them with care and with a full understanding of their implications.

This article was co-authored by Vivien King, a consultant to Malcolm Hollis LLP..

This article first appeared in Estates Gazette on October 8th 2016