The Supreme Court has in Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors held that without prejudice negotiations which form part of the factual matrix leading to a settlement agreement will be admissible as evidence to assist in the interpretation of that settlement agreement.

Statements made in the course of genuine settlement negotiations are subject to without prejudice privilege and evidence of those statements are only admissible evidence in court in limited circumstances, such as where there is a dispute whether a settlement was reached.  The rationale for this rule is to encourage the parties to openly discuss in order to settle a dispute without having to worry about admissions made in the negotiations being used against them in court. 
  
In the present case, it was held at first instance that as evidence establishing whether a settlement agreement was reached was admissible so should be evidence as to the terms of that agreement.  The Court of Appeal overturned that decision and held that communications in the course of settlement negotiations could not be admitted as an aid to interpretation of the settlement agreement. 

The Supreme Court disagreed with the Court of Appeal and held that no sensible distinction could be drawn between "admitting without prejudice communications in order to resolve the issue whether they have resulted in a concluded compromise agreement...and admitting them in order to resolve the issue what that agreement was".  The Supreme Court also accepted that if a party to the settlement negotiations knew that objective facts which emerge during the negotiations will be admissible in the event of a dispute about what the settlement agreement means, this would encourage settlement and thus be in line with the public policy underpinning the without prejudice rule.  Therefore, the Supreme Court was of the view that if the communications would be admissible under ordinary principles of interpretation of contracts (i.e. they formed part of the factual matrix) then the fact that the communications were subject to the without prejudice privilege was no bar to their admissibility. 

This decision creates consistency when interpreting contacts and avoids the need to apply differing principles in the case of settlement agreements.  Ultimately, a settlement agreement is a contract and it ought to be interpreted as one. 

Please click here  for a copy of the Supreme Court judgment.

Case reference: Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors [2010] UKSC 44

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 28/10/2010.