Summary and inspections
When parties enter discussions to try and resolve a dispute they may state that such discussions are “without prejudice”, preventing the other party from later raising them in evidence in any proceedings.
Such a rule facilitates the discussions that lead to resolution of many disputes but it is important to understand the extent of the rule and the exceptions to it.
- In general, statements made in the course of a genuine attempt to settle on existing dispute are not admissible in a later dispute.
- The courts will not restrict the rule unless justice demands it.
- The court may look back to such discussions when interpreting disagreements over the terms of a settlement agreement.
The ‘Without Prejudice’ rule
The following scenario is not uncommon in many construction projects, the employer and contractor have a disagreement about the quality of the works, they exchange details of their respective positions, perhaps under the umbrella of the pre-action protocol, they meet on a without prejudice basis and, they reach a settlement on terms which are confirmed in writing. The ability to achieve a commercial settlement is assisted by the without prejudice rule.
Put simply, in general, statements made in the course of a genuine attempt to settle an existing dispute are not admissible as evidence of admissions against the interest of the party which made them. The rule is based partly on the public policy of encouraging parties to speak openly and freely secure in the knowledge that anything said in the course of negotiations and, in particular any admissions which they might have made to try and settle the matter, may not be used against them in subsequent proceedings should the settlement discussions fail. The without prejudice rule is not limited to admissions but now extends more widely to the content of discussions.
The importance and significance of the without prejudice rule has been judicially stressed and reinforced by the courts. In 2009 the House of Lords in Ofulue v Bossert rejected a proposed exception to the rule and the court said it would not restrict the rule unless justice clearly demanded it. The court said it was the ability to speak freely that indicated where the limits of the without prejudice rule should lie and that it was “generous in its application”.
A new exception to the rule?
The scope of the without prejudice rule has recently been addressed by the Supreme Court. In Oceanbulk Shipping Trading SA v TMT Asia Limited the court went so far as to recognise a new exception to the Rule.
Oceanbulk and TMT were in dispute concerning a series of Forward Freight Agreements (FFAs). As a result of volatility in the freight markets in 2008, TMT owed Oceanbulk some US$40m and in additional were potentially liable for US$300-$400m by way of liquidated damages if Oceanbulk had terminated the FFAs on the basis of an event of default. TMT failed to make an instalment payment in May 2008 and asked for time to make payment. The parties held discussions and negotiations which were expressed and understood to be “without prejudice”. They followed a familiar pattern, there was written communications in correspondence, a number of lengthy meetings and ultimately terms of settlement were agreed and set out in a written settlement agreement. There was no issue between the parties as to the existence or terms of the settlement agreement but, there was a subsequent disagreement as to the construction and meaning of one of the terms of the settlement. TMT in support of its case on the construction and meaning of the term in question sought to rely on representations made by one of Oceanbulk’s representatives during the without prejudice negotiations and meetings which had taken place. The issue occupied the time of both the commercial court (which held in favour of TMT and, that the evidence was admissible, despite the without prejudice rule) and then the Court of Appeal (allowing Oceanbulk’s appeal and holding that the evidence was not admissible).
The Supreme Court was then tasked with ruling on the matter and the issue on appeal was whether it was permissible for a party (TMT) to refer to anything communicated in the course of without prejudice negotiations (which it had with Oceanbulk) as an aid to the interpretation of the settlement agreement?
Oceanbulk argued that the without prejudice rule should be applied in its full rigour. TMT argued that the facts in question should be admissible as an exception to the rule because the settlement agreement could not otherwise be properly construed in accordance with the recognised principles of contractual interpretation.
The Supreme Court allowed TMT’s appeal and held that evidence in support of the representations which had been made in the without prejudice negotiations was admissible as part of the factual matrix on the true construction of the settlement agreement. The “interpretation exception” was therefore recognised and accepted by our highest court.
What conclusions can we draw?
- The judgment is clearly a departure from the strong opinions in support of the without prejudice rule given in the Ofulue case in 2009.
- It confirms a modern approach by the courts whereby the disclosure of all relevant material being placed before the court is favoured over the underlying public policy objective whereby parties are protected from the fear that anything they may say in settlement negotiations might subsequently be used to their prejudice in the course of any subsequent proceedings.
- It establishes and recognises the entitlement parties now have to pour over the record of negotiations looking for angles that will aid their arguments on the interpretation of what was agreed.
- It gives rise to the very real possibility that commercially minded parties involved in without prejudice discussions and negotiations will be now guarded and cautious about what they actually say in the course of without prejudice negotiations. That could well have a detrimental and adverse impact upon the likelihood of achieving the ultimate goal of settling the matters in dispute.
There is the obvious point, the best way of avoiding the risk of parties poring over what was said in negotiations looking for evidence to aid arguments over interpretation, is for parties and their lawyers to ensure that the terms of any settlement reached bear the hallmarks of clarity.
However, we must put all this into context, the parties will only be able to rely on evidence of facts raised during the negotiations should there subsequently be an argument as to how any result and settlement falls to be interpreted. Clarity matters.