In a recent decision, the High Court has distinguished between correspondence which is expressly stated to be “without prejudice” and that which is only impliedly so, finding that the latter category (but not the former) can be taken into account on questions of costs: Sternberg Reed Solicitors v Harrison [2019] EWHC 2065 (Ch).

There is nothing surprising in the court’s conclusion that correspondence which is expressly made “without prejudice” is not admissible on questions of costs, unless it has been marked “without prejudice save as to costs” or the right to refer to the correspondence for that purpose is otherwise reserved. That much was clear from previous authority.

What is more novel is the court’s conclusion that correspondence which is only impliedly without prejudice can be admitted on questions of costs. That is a point on which there does not appear to be any previous authority. The Court of Appeal will not however have a chance to consider it, at least in this case, as the High Court’s decision was given in an appeal on a point of law under section 69 of the Arbitration Act 1996 and, since the judge refused permission to appeal, that is the end of the road.

The practical message for those seeking to resolve disputes is to ensure that their intentions are made clear as to the purposes for which their communications may subsequently be used. Pending any further consideration at appellate level, parties should be aware that, if correspondence is received which is aimed at settlement but is not stated to be “without prejudice”, it may be taken into account in relation to costs, even if it is inadmissible in relation to the substantive dispute. That will be an important point to remember in considering how, and on what basis, to respond.

Background

The claimant firm of solicitors obtained permission to appeal against a costs award made in an arbitration between the firm and a former partner in relation to the calculation of his closing profit share on retirement.

The arbitrator had held that, when determining questions of costs, he had a discretion to take into account purely without prejudice correspondence between the parties, even though it was not marked as “without prejudice save as to costs”. This included both an initial offer that was not marked as “without prejudice” at all, and subsequent correspondence that was marked in that way.

The claimant argued that the arbitrator had erred in law in finding that he had a discretion to take into account the contents of the without prejudice correspondence.

Decision

The court (HHJ Hodge QC sitting as a High Court judge) held that the arbitrator had plainly erred in law in finding that he had a discretion to admit evidence of those communications that had expressly been made “without prejudice”. However, the initial offer, which was not expressed to be without prejudice, was admissible on questions of costs.

In the judge’s view, the Court of Appeal’s decision in Reed Executive Plc v Reed Business Information Ltd [2004] EWCA Civ 887 made it absolutely clear that communications expressly made on a “without prejudice” basis are inadmissible, even for the purpose of costs arguments, and the court has no general discretion to disapply the without prejudice rule. That will be the case unless the right to refer to the communications on issues of costs is expressly reserved, typically by marking the correspondence “without prejudice save as to costs”.

However, the judge distinguished between communications expressly made on a “without prejudice” basis and those which are treated as impliedly without prejudice – ie those communications which are aimed at resolving a live dispute. In those circumstances, the judge said, there was no reason to impute the parties with an intention that the communications should be treated as impliedly without prejudice for all purposes, and no underlying public policy jurisdiction to prevent such communications being referred to on issues of costs. As the judge put it:

“Where correspondence is treated as being ‘without prejudice’, not because it is labelled as such, but simply because it is an attempt to compromise actual or impending litigation, there can be no public policy justification for preventing it being referred to on issues of costs as distinct from the issues in the substantive litigation; and I see no basis for implying any agreement that no reference should be made to such correspondence on issues of costs once issues in the substantive litigation have been determined.”

The judge refused the claimant’s application for permission to appeal against his decision, noting that under 69(8) of the Arbitration Act 1996, he was not to give permission to appeal unless he considered that the question was one of general importance or was one which, for some other special reason, should be considered by the Court of Appeal. Although the judge was satisfied that the question in this case was one of general importance, and was a novel and interesting one, he could see no real prospect of the Court of Appeal taking a different view.