In Oceanbulk Shipping & Trading SA v TMT Asia Limited [2009] EWHC 1946 (Comm) Andrew Smith J in the Commercial Court ruled that evidence of 'without prejudice' exchanges was admissible, not only to identify the terms of a settlement agreement, but also to explain the meaning of those terms. Oceanbulk has applied to the Court of Appeal for permission to appeal and is awaiting the Court's decision. However, in the meantime (and unless it is overturned on appeal), the judgment extends the exceptions to the without prejudice rule.

Key points:

  • Oceanbulk suggests that evidence of without prejudice negotiations is admissible to aid the interpretation of a settlement agreement (not just to decide whether there was a concluded agreement).
  • The impact of Oceanbulk is limited by the law of evidence which generally limits the admissibility of pre-contractual negotiations in the interpretation of contracts (the so-called 'exclusionary rule').
  • Nonetheless, Oceanbulk challenges the degree of confidence that parties negotiating a settlement agreement can have that their without prejudice negotiations will not later become admissible against them, if there is a dispute as to the meaning of the agreement.

Context

Without prejudice privilege is a rule governing the admissibility of evidence. It operates to withhold otherwise admissible evidence of discussions which have been conducted with a view to settling a dispute, subject to certain exceptions. The context of without prejudice privilege is outlined in our recent e-bulletin on this topic following the decision of the House of Lords in Ofulue v Bossert [2009] UKHL 16.

The judge in Oceanbulk noted that without prejudice privilege was based on the important public policy of encouraging parties to settle disputes without recourse to litigation, as well as the express or implied agreement between the parties to without prejudice negotiations not to use such negotiations against each other. The judge also acknowledged that the House of Lords in Ofulue had emphasised the importance of the without prejudice rule and that the courts should be careful not readily to allow exceptions.

Summary of facts

Oceanbulk and TMT had entered into certain freight forward swap agreements. Oceanbulk presented TMT with an invoice for approximately US$40.5 million. TMT failed to pay, following which the parties entered into without prejudice discussions, resulting in a settlement agreement (the "Settlement Agreement"). Oceanbulk subsequently claimed against TMT for breach of certain terms in the Settlement Agreement. TMT in its defence and counterclaim sought to rely on the parties' without prejudice communications which had led to the Settlement Agreement on the basis that they were relevant to its interpretation, as well as remoteness of damages and an estoppel argument.

Oceanbulk's application

Oceanbulk applied to strike out part of TMT's pleading which was based on the without prejudice communications and sought a declaration that the evidence relied on by TMT was "inadmissible, absent mutual waiver" of its without prejudice status.

For the purposes of its application, Oceanbulk accepted that the evidence was admissible if it was not protected by the without prejudice rule, although Oceanbulk reserved its position to invoke the separate exclusionary rule at trial. The exclusionary rule was recently reviewed by the House of Lords in Chartbrook Limited v Persimmon Homes Limited [2009] 3 WLR 267. It generally renders evidence of pre-contractual negotiations inadmissible for the purpose of drawing inferences about what a contract meant, normally on the basis that such evidence is irrelevant to the question of what the parties objectively intended the language chosen for their final agreement to mean.

High Court decision

Andrew Smith J identified three recognised exceptions to the without prejudice rule which he said were relevant for present purposes, namely where the communications are relevant to issues of whether: (1) the communications resulted in a concluded agreement; (2) an agreement should be set aside for misrepresentation, fraud or undue influence; and (3) there is any statement which, independently of any agreement, gives rise to an action in estoppel. Oceanbulk accepted exception (1), but contended that this exception did not extend to evidence about the proper construction and meaning of the settlement.

Andrew Smith J concluded that evidence of the without prejudice exchanges was admissible to the extent that it would have been admissible had the exchanges not been without prejudice, saying that although the first exception above had been expressed in terms of whether a settlement agreement was concluded, it would make little sense for the law to admit evidence about this without also admitting evidence about what the terms of a settlement agreement were. The judge could see no cogent public policy or other reason to admit evidence of the terms of the agreement, without also admitting evidence about the proper construction and meaning of the agreement. Andrew Smith J considered that in many cases it would be difficult to apply such a distinction. The judge rejected as too broad a statement that pre-settlement negotiations are not admissible to aid the construction of a resulting settlement agreement.

In the judge's view, the interests of justice required the meaning of a settlement agreement to be ascertained by reference to the without prejudice exchanges. Andrew Smith J identified that the law generally admits evidence of the contractual context because it is recognised that such information assists in ascertaining the parties' (objectively evinced) intention. The judge noted that it is not unusual for parties to seek to adduce evidence about pre-contractual communications which in fact throws little light upon a contract's meaning and is of little or no assistance to the court. In the judge's opinion, that factor could not affect the question whether, in principle, evidence of without prejudice exchanges was admissible, although it underlined the need to scrutinise carefully whether it was probative (that is, relevant) before admitting it. However, the judge considered that, if such evidence was probative, it would not be right to require it to pass some higher test of probative value due to its without prejudice status.

Comment

Oceanbulk establishes that evidence of pre-contractual negotiations conducted in a without prejudice context will be admissible to aid in the construction of a concluded settlement agreement to the extent that such evidence would have been admissible if it was not protected by without prejudice privilege.

It may be argued that this result is unremarkable. The exceptions to the without prejudice rule often allow in evidence of pre-settlement negotiations in circumstances where the exclusionary rule does not apply, such as where the claim is for rectification of an agreement or based on an estoppel arising out of a statement made in the negotiations. As for when evidence of pre-contractual negotiations would be admissible (aside from the without prejudice rule) to aid the interpretation of an agreement, Chartbrook re-affirms that the situations will be exceptional: the usual rule is that such evidence is inadmissible.

However, the without prejudice rule and exclusionary rule have different mechanisms and distinct objectives. The without prejudice rule is based, in part, on an important public policy objective, namely encouraging parties to settle their disputes without resort to litigation, and not discouraging settlement discussions by the fear that anything said might be used to their prejudice in the course of the proceedings. As Oceanbulk argued, it is also based on the express or implied agreement of the parties not to use such discussions as evidence. This judgment arguably does much to erode that objective, since parties to settlement negotiations will (or should) now be conscious that what is said may become admissible if there is a dispute as to the proper construction of the contract.

The judgment is particularly surprising following on the heels of Ofulue, which emphasised the importance of the without prejudice rule and that it should not be restricted unless justice clearly demands. It will be interesting to see whether or not the Court of Appeal agrees with the judge's approach.