The full version of this article was first published in Lloyd's List on 22 December 2011.

In October 2010, the Supreme Court extended the scope of the exceptions to the without prejudice rule to permit the admissibility of without prejudice negotiations for the purpose of construing the true meaning of a settlement agreement.

Is evidence of without prejudice negotiations admissible to resolve a dispute over the meaning of a term in a settlement agreement?

Until recently, the answer was probably not as this type of scenario fell outside the defined scope of the without prejudice rule's exceptions. The situation changed on 27 October 2010 when the Supreme Court extended the scope of the exceptions to the without prejudice rule to permit the admissibility of without prejudice negotiations in order to construe the true meaning of a settlement agreement (Oceanbulk Shipping and Trading S.A. v TMT Asia Ltd et al (2010)). Oceanbulk has been a useful reminder that the without prejudice rule is a general, not absolute, rule.

Exceptions to the without prejudice rule

To encourage parties to settle rather than litigate their disputes, without prejudice oral and written statements made during negotiations are generally inadmissible. Whilst this is true most of the time, it is not true all of the time. Listed below are the exceptions to the without prejudice rule with an example of how each exception may arise in practice.

Exceptions to the without prejudice rule
 

Exception

Example

(1)

Rectification exception1

Y may rely upon anything said between itself and X in without prejudice communications to show that a settlement agreement's term should be corrected because it has been misstated and does not reflect the parties' true intention.

(2)

Interpretation exception2

Where X and Y are in dispute over the true meaning of the terms of a settlement agreement, Y may rely upon without prejudice communications as an interpretive tool as evidence of facts within both parties' common knowledge.

(3)

Existence of settlement agreement exception3

Where X claims that it never concluded a settlement agreement with Y, then Y may rely upon the without prejudice communications to show that the parties did, in fact, conclude a settlement agreement.

(4)

Misrepresentation, fraud or undue influence exception4

X tells Y during negotiations that he will accept US$100,000 from Y in full and final settlement of a US$175,000 claim. Y pays X US$100,000 in reliance upon X's representation. Later, X asserts a claim against Y to recover the remaining US$75,000. Y can rely upon the without prejudice communications.

(5)

Perjury, blackmail or other unambiguous impropriety exception5

X makes a false or misleading statement while testifying in court proceedings. Y may rely upon a statement X made in without prejudice communications as evidence of X's perjury.

(6)

Reasonableness exception6

X seeks to set aside his settlement agreement with Y. Y may rely upon the without prejudice communications as evidence of the reasonableness of the settlement agreement.

(7)

Estoppel exception7

Even where there is no concluded settlement agreement, X makes a clear statement in without prejudice communications upon which Y relies and this may be admissible in evidence as giving rise to an estoppel.

(8)

Delay exception8

X files an application to dismiss Y's case against it for want of prosecution in circumstances where the parties have been engaged in without prejudice communications with a view to settling the dispute. Y may rely upon the fact that without prejudice communications occurred and the dates thereof as evidence to explain the delay.

(9)

Costs exception9

Y prevails in his claim against X. When asking the court/tribunal to award him costs, Y may rely upon statements made to X in without prejudice communications that bear the words "without prejudice save as to costs".

Some practical tips to try and avoid falling foul of the without prejudice rule.


Avoid making admissions: Prior to settlement communications beginning, both parties and their lawyers would be wise to identify which admissions and/or statements of fact would be against that party's interests, and simply not make them.


Confidentiality of proceedings: Confidentiality may be maintained during without prejudice negotiations by ensuring the settlement agreement includes a clause that requires all questions of interpretation regarding the settlement agreement to be determined in arbitration.


Contract over right to rely upon without prejudice negotiations: The parties could agree irrevocably and unconditionally to waive and abandon their rights to rely upon all without prejudice exchanges for the purposes of interpreting the settlement agreement. However, it would not be possible to enforce such a term where public policy would be offended.


Footnotes

1 Pearlman v National Life Assurance Co of Canada (1917); Butler v Countrywide Finance Ltd (1992)
2 Oceanbulk Shipping and Trading S.A. v TMT Asia Ltd et al (2010)
3 Faraday Capital Ltd v Copenhagen Reinsurance Co Ltd (2006)
4 Underwood v Cox (1912)
5 Forster v Friedland (1992) and Fazil-Alizadeh v Nikbin (1993)
6 Muller v Linsley & Mortimer (1996)
7 Hodgkinson & Corby Ltd v Wards Mobility Services (1977)
8 Walker v Wilsher (1889)
9 Cutts v Head (1984)

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.