To encourage parties in dispute to see if they can settle their differences, a court, arbitrator or adjudicator cannot generally look at without prejudice communications. If, however, agreement is reached then the without prejudice protection is no longer needed, but if the existence of an agreement is disputed, a tribunal can consider the communications to decide the issue. But what if the tribunal decides that there was no agreement? Does its knowledge of the communications prevent it deciding the dispute fairly, because there could be apparent bias?
In AZ v BY the court considered the case law and summarised the relevant principles of without prejudice protection:
- the without prejudice rule is founded partly in public policy and partly in the agreement of the parties;
- the court has to determine whether or not a communication is bona fide intended to be part of, or to promote, negotiations. To determine that, the court has to work out what, on a reasonable basis, the intention of the author was and how it would be understood by a reasonable recipient;
- the fact that a document is marked “without prejudice” is not conclusive as to its status, although it is often a strong pointer;
- where negotiations are expressly made without prejudice to begin with, the burden is upon the party who wishes to change the basis of such negotiations to do so explicitly and with clarity. Whether they have done so is assessed objectively;
- whilst parties may be communicating both openly and on a without prejudice basis concurrently, the court must exercise extreme caution in embarking upon a dissection of the communications, or discussions in meetings, so as not to undermine the public policy objective;
- once a communication is covered by without prejudice privilege, the court is slow to lift the cloak of that privilege unless the case for making an exception is absolutely plain;
- one such exception relates to when the issue is whether without prejudice letters have resulted in an agreed settlement. In this situation, the correspondence is admissible, because it contains the offer and acceptance forming a contract which has replaced the cause of action previously in dispute. However, where the without prejudice letters have not in fact resulted in an agreed settlement which has replaced the original dispute about which the parties were negotiating, the decision-maker, having seen the without prejudice material, must then assess their own ability to go on to decide the remaining dispute fairly, in accordance with the principles which govern apparent bias and the rules of natural justice.
The court cited the test for apparent bias set out by the Court of Appeal in In Re Medicaments and Related Classes of Goods (No. 2):
“The Court must first ascertain all the circumstances which have a bearing on the suggestion that the Judge was biased. It must then ask whether those circumstances would lead a fair-minded and informed observer to conclude that there was a real possibility, or a real danger, the two being the same, that the tribunal was biased.”