UK: Shipping Update - Supreme Court Reviews 'Without Prejudice Rule

Last Updated: 10 November 2010
Article by Nick Austin

In a decision relating to a dispute under forward freight agreements, the Supreme Court has recognised a new exception to the 'without prejudice' rule, known as the 'interpretation exception'.

The decision in Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44, is relevant to all parties involved in settlement negotiations and provides important clarification of the meaning of 'without prejudice'.

Background

The 'without prejudice' rule is, of course, well known and widely relied upon. Its purpose is to encourage parties to settle disputes without recourse to litigation by preventing statements or admissions made in the course of negotiation from being referred to in court in subsequent litigation.

The rule is of long standing, and although broad in effect, has a number of exceptions that have developed over the years. However, until now no exception has been recognised that would allow anything written or said in the course of without prejudice negotiations to be used to help interpret any agreement concluded as a result of those negotiations. In this important decision, the Supreme Court has taken the opportunity to extend the list of exceptions to the rule.

The issue

The appellants (TMT Asia Limited) and the respondent (Oceanbulk Shipping & Trading SA) had entered into a number of forward freight agreements ("FFAs") which were affected by the extraordinary volatility of freight markets in 2008.

The FFA contracts were swap agreements in which the parties sought to hedge against market fluctuations by effectively betting on whether the settlement rate (an average of published freight rates) was higher or lower on a given settlement day than the contract rate as defined in the FFA.

When the appellants failed to pay a sum due under those agreements, the parties entered into without prejudice settlement negotiations. The negotiations were successful and resulted in a written settlement agreement in respect of the sums due. However, a dispute subsequently arose concerning the meaning and effect of the settlement agreement. The respondent brought a claim for damages against the appellants alleging breach of a clause of the agreement. In their defence the appellants sought to rely on statements made during the without prejudice negotiations in support of their interpretation of the clause. The respondent argued that reliance on the statements made during negotiation was precluded by the without prejudice rule. The High Court held in favour of the appellants but a majority of the Court of Appeal overturned this decision in favour of Oceanbulk, holding that the evidence was not admissible. TMT appealed to the Supreme Court.

The decision

The leading judgment of the Supreme Court (approved unanimously) was delivered by Lord Clarke. The key points of the judgment can be summarised as follows:

  • The without prejudice rule is founded upon the public policy of encouraging litigants to settle their differences (as well as the express or implied agreement of the parties themselves) and provides that communications in the course of negotiations should not be admissible in evidence.
  • The rule is now very much wider than it has been historically and extends to any admissions made with a genuine intention to reach a settlement, including admissions made to reach a settlement with a different party within the same litigation, and applies whether or not settlement is reached with that party.
  • Because of the importance of the without prejudice rule, its boundaries should not be lightly eroded. Nevertheless, the authorities have established a number of exceptions to the rule where the justice of the case required it. The exceptions include:
    • Evidence to show whether without prejudice negotiations have resulted in a concluded settlement agreement
    • Evidence relevant to whether an agreement should be set aside on the ground of misrepresentation, fraud or undue influence
    • Even in the absence of agreement, evidence of a clear statement by one of the parties sufficient to give rise to an estoppel
    • Evidence of the existence of negotiations to explain delay in the context of an application to strike out proceedings - Offers made 'without prejudice save as to costs'
  • The House of Lords in Chartbrook v Persimmon Homes [2009] accepted that when interpreting contracts it may be possible to admit evidence of prior communications between the parties as part of the background which may throw light on what they meant by the language they used. Accordingly, absent the without prejudice rule, statements made in the course of negotiations may be admissible as part of the factual matrix as an aid to interpretation. There is no good reason why the ordinary principles governing the interpretation of a settlement agreement should be any different, regardless of whether the negotiations which led to it were without prejudice.
  • The respondent's approach would result in an unprincipled distinction between this class of case and other exceptions to the without prejudice rule such as that allowing admission of evidence to determine whether negotiations had resulted in a concluded compromise agreement. There is also no sensible basis on which a line could be drawn between admitting without prejudice communications in order to consider a plea of rectification and admitting them as part of the factual matrix relevant to the true construction of a settlement agreement.
  • In the circumstances, the interpretation exception should be recognised as an exception to the without prejudice rule. However, this exception is not intended to underplay the importance of the without prejudice rule and does not extend beyond evidence which is admissible in order to explain the factual matrix or surrounding circumstances to the court in accordance with the principles identified in Chartbrook.

Comment

The without prejudice rule is of great value to parties seeking to resolve disputes without recourse to the courts. Although, on the face of it, a new addition to the list of exceptions to the rule might be construed as requiring parties to exercise greater caution, in fact thisdecision has potential benefits for those entering into negotiations. As Lord Clarke put it:

"[I]f a party to negotiations knows that, in the event of a dispute about what a settlement contract means, objective facts which emerge during negotiations will be admitted in order to assist the court to interpret the agreement in accordance with the parties' true intentions, settlement is likely to be encouraged not discouraged."

Obviously it is preferable to use unambiguous language to cover every eventuality when drafting settlement agreements. However, in practice, disputes over interpretation will inevitably arise from time to time. As this case illustrates, it is not always possible to foresee or cater for every eventuality in a settlement agreement, particularly in those not infrequent cases where complex issues are addressed in a limited period of time.

This decision may therefore provide reassurance to parties engaged in negotiation that if they are able to reach a settlement, any subsequent dispute over the terms agreed is less likely to lead to an interpretation that makes no sense in the context of the facts around which the agreement was reached.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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