In the case of Oceanbulk Shipping & Trading SA v TMT Asia Limited, the Court of Appeal has overturned the High Court's ruling and reaffirmed the rule that without prejudice material may not be put before a court to assist in the interpretation of a settlement agreement.

Background

The without prejudice rule will generally prevent statements made in a genuine attempt to settle a dispute from being put before the court as evidence of admissions against the interest of the party which made them. The public policy reason behind the rule is to encourage parties to settle disputes, in that settlement will be facilitated if they are able to speak freely. In particular any admissions they made have made in an attempt to settle the dispute may not later be used against them.

There are a number of exceptions to the without prejudice rule. Without prejudice communications will be admissible:

  • When the issue is whether the without prejudice communications have resulted in a concluded settlement agreement;
  • To show that a settlement agreement apparently concluded between the parties during without prejudice communications should be set aside on the ground of misrepresentation, fraud or undue influence;
  • As giving rise to an estoppel where a statement made in without prejudice communications is intended to induce the recipient to act in reliance on it and the recipient does in fact act in reliance on it.  

In Chartbrook v Persimmon, the House of Lords confirmed that when interpreting a clause of an agreement the court should take into account the background knowledge that would have been available to the parties at the time of the contract but that evidence of the pre-contractual negotiations is not admissible. This is known as the exclusionary rule.  

Facts  

The High Court's ruling was reported in the July/August edition of this Bulletin. The facts of the case were that a dispute arose between the parties over the interpretation of a settlement agreement which, if interpreted one way, would result in a payment of US$47 million to Oceanbulk or, if interpreted the other, would result in a payment of US$86 million to TMT. In support of its interpretation, TMT sought to adduce without prejudice communications between the parties before the settlement agreement was concluded. It argued that these communications would establish a fact which was part of the background material which the court should have available to it when interpreting the settlement agreement, in line with the Chartbrook v Persimmon approach to interpretation. Oceanbulk argued that the without prejudice communications were inadmissible as they did not fall within any of the recognised exceptions to the without prejudice rule.

Andrew Smith J in the High Court held that the without prejudice communications were admissible. The judge considered the existing exception to the without prejudice rule which allows without prejudice communications to be looked at to determine whether they have resulted in a concluded settlement agreement. He held that it would be illogical to admit without prejudice communications for this purpose but not for the purpose of determining what the terms of that agreement were. Andrew Smith J held:

  • The distinction between identifying whether a concluded settlement agreement had been reached and its terms and interpreting them was a fine one which would often be difficult to apply;
  • There was authority for allowing evidence of the without prejudice communications for the purpose of interpretation in Admiral Management Services Limited v Para-Protect Europe Limited [2002] (a decision of Stanley Burnton J, now LJ and hearing this appeal);
  • Evidence of without prejudice exchanges is admissible if there is a plea of rectification and it would be illogical not to admit it for the purpose of interpretation;
  • A court which is deprived of evidence of the background against which an agreement was made will be less well equipped to discern the parties' intentions and less likely to construe the contract in accordance with them.  

Decision  

Giving the leading judgment (with which Stanley Burnton LJ agreed), Longmore LJ overturned the High Court's ruling and reaffirmed the rule that without prejudice communications were not admissible for the purpose of construing the resulting settlement agreement. He dealt with each of Andrew Smith J's four reasons as follows:

  • The distinction between identifying whether a concluded settlement agreement has been reached and its terms and interpreting them is not a fine one, especially if the settlement agreement is written (as in this case). There is then no difficulty in identifying the contract and its terms. Interpretation of those terms would be a different matter altogether.
  • The Admiral Management case – this case was not the authority that Andrew Smith J had taken it to be. This case was in fact authority for the principle that a without prejudice document referred to in a written settlement agreement could be looked at by the court when interpreting the agreement. This decision only concerned a situation where a without prejudice document was referred to in, and so formed part of, the settlement agreement. It could not be extended to make admissible some background fact which was not part of the terms of the agreement.
  • There was no inconsistency between allowing without prejudice communications to be reviewed where the claim was for rectification but not where the issue was interpretation. In the case of rectification the court is ascertaining the true terms of the contract. It is not considering the background facts in order to ascertain the contract's meaning.
  • The policy of protecting without prejudice communications and facilitating dispute settlement was stronger than the policy of providing a judge with every conceivable help to arrive at a just interpretation of an agreement.  

Ward LJ gave a robust dissenting judgment. He was in favour of lifting the without prejudice veil as between the parties to the negotiations for the purpose of interpreting the resulting settlement agreement. He said:

"So, if you can use the antecedent negotiations to prove the agreement, to rescind it, or to rectify it, why on earth can you not use the negotiations to establish the truth of what the concluded contract means? Not to do so would strike my mother as "barmy". Perhaps I should simply say it strikes me as illogical.

There is little point in expanding upon [my] reasons for I am outnumbered, nay outgunned, by the commercial colossi seated either side of me. I prefer the instincts of the youthful Stanley Burnton J. before he became corrupted by the arid atmosphere of this Court. It goes to prove what every good old-fashioned county court judge knows: the higher you go, the less the essential oxygen of common sense is available to you. So I am unrepentant. With, of course, great respect to my Lords, I dissent. In my judgment Andrew Smith J. was absolutely correct for the reasons he gave. I would dismiss the appeal".  

Comment

This decision unequivocally confirms that the need to promote dispute resolution ranks above the desirability of having all material relevant to interpretation before the court.  

Further reading  

Click here for a copy of the judgment