Running out of common sense

“Without prejudice” is a label commonly used in negotiations when seeking settlement. Parties, however, do not always consider the impact such words might have and the legal principles that decide if and how these statements can be used.

The general principle is that without prejudice communications are protected from disclosure, except with regard to costs issues, but the precise scope of the rule is not clear.

It was just last year that the Technology and Construction Court held in the case of RWE NPower vs Alstom Power that an adjudicator did not breach the rules of natural justice if they looked at without prejudice material when considering a challenge to their jurisdiction.

A useful reminder is that it is the substance of the communications, rather than the label that will determine whether they are to be regarded as without prejudice.

More recently, the Court of Appeal reversed the decision in Oceanbulk Shipping & Trading vs TMT Asia. The case concerned the interpretation of a settlement and one of the parties sought to introduce representations made by the other in the 48 hours leading to the settlement. The other party argued that all such representations were excluded as they were made on a without prejudice basis.

The trial judge decided it was permissible for him to look at the communications. This was for several reasons, including the fact that such evidence was permissible at a later date if rectification was asked for, so it would be illogical to exclude it now. The judge also held that if the court were unable to use such evidence, it would be less well equipped to identify the true meaning of the agreement. The judge thought the distinction between identifying terms and interpreting them was too fine.

The judge’s findings do seem to go against accepted authorities. It is also inconsistent with the well established principle that excludes pre-contractual communications as evidence that can be used to construe a contract, which was recently reaffirmed by the House of Lords in Chartbrook vs Persimmon. Not surprisingly, the Court of Appeal reversed the decision but there was one dissenting judgment.

most believe it is more important to preserve the without prejudice rule than to have the full evidence

Still, the majority in the Court of Appeal agreed with the House of Lords decision last year in Ofulue vs Bossart, where it was decided that the public policy behind the rule (that is, encouraging parties to speak freely when negotiating a settlement) meant a statement in without prejudice negotiations should not be admissible other than in exceptional circumstances. In other words, it is more important to preserve the without prejudice rule than to have the full evidence that might affect how an agreement is interpreted.

The majority view was also that this protection of matters that occurred during negotiations would continue even after agreement was reached.

However, both the House of Lords and the Court of Appeal had dissenting opinions, demonstrating that the precise scope of the policy is yet to be fixed. Indeed, the number of high-level decisions on this issue show the law is not as clear as it could be. Exceptions have been identified in case law as potential inroads into the rule and in the Oceanbulk case,

Lord Justice Ward, in his dissenting opinion, emphasised that even the House of Lords accepted that the rule would not apply when there was a good reason for it not to. What is a good reason, however, remains unclear and provides an opening

for any party seeking to rely on “without prejudice” communications. Lord Justice Ward felt strongly enough about this issue to refer to what he said every good old fashioned county court judge knows, namely that “the higher you go, the less the essential oxygen of common sense is available to you”.

Strong words, but it can be difficult to apply in practice general principles handed down by the higher courts, all the more so when there is disagreement between the judges on how the rules apply.

For the time being it looks like the without prejudice rule will be applied widely. Nonetheless, cases like RWE NPower vs Alstom Power show that the rule is not absolute.