UK: Settlement Discussions - When Can Employers Safely Use The 'Without Prejudice' Rule?

For employers wanting to bring an employment relationship to an end, whether for disciplinary or performance related reasons or simply because it is not working out, it is often difficult to judge the right time to have a 'without prejudice' conversation with an employee. Get it wrong and the contents of that discussion may be used by an employee in a subsequent Tribunal claim as evidence of an admission of guilt or constructive dismissal. The recent EAT case of Portnykh v Nomura International Plc gives some useful guidance as to when the 'without prejudice' rule applies.

The 'without prejudice' rule

The 'without prejudice' rule means that communications between parties in an effort to resolve an actual or potential dispute are inadmissible in any subsequent court or Tribunal proceedings. This is important for an employer who may be involved in a dispute with an employee and wishes to bring the relationship to an end with an offer of settlement. If the 'without prejudice' rule does not apply, there are two very significant risks for employers in offering a settlement package to end the employment relationship:

  • Any offer of a financial settlement by an employer may be used by the employee as evidence of the employer's 'guilt'.
  • If the employer is concurrently running a disciplinary or performance management procedure and offers settlement to cut the procedure short, but the employee is not interested, the employee could use the offer as evidence that the employer is not interested in the ongoing performance management or disciplinary procedure, and resign and claim constructive dismissal.

There are limits, however, to the 'without prejudice' rule. It cannot be used to hide perjury, blackmail or 'unambiguous impropriety' (for example, blatant unlawful discrimination).

Two points about the 'without prejudice' rule can cause difficulty for employers:

  • When exactly are the parties 'in dispute' so the 'without prejudice' rule applies?
  • What is 'unambiguous impropriety'?

The Portnykh case provides some useful guidance on these issues.

Mr Portnykh's Case

Mr Portnykh was employed by Nomura, who sought to dismiss him for misconduct. Nomura alleged that Mr Portnykh had approached them requesting that his dismissal be categorised as being for redundancy. The parties then attempted to negotiate a compromise (now settlement) agreement and correspondence marked 'without prejudice' passed between them. The negotiations failed and Mr Portnykh brought a claim for unfair dismissal for making a protected disclosure (i.e. claiming he was a whistleblower). Nomura argued before the Tribunal that the correspondence marked 'without prejudice' should be admissible on the basis that there was no dispute between the parties or, if there was, that the 'unambiguous impropriety' rule applied because Mr Portnykh was trying to categorise his dismissal as something different to that in the 'without prejudice' correspondence.

The Tribunal agreed with Nomura. It found that the fact that the parties were in negotiations about a compromise agreement did not mean they were in dispute. Furthermore, even if there was a dispute, it would be an improper abuse of the 'without prejudice' rule for a Tribunal hearing the whistleblowing claim not to be aware that Mr Portnykh may have previously argued that his dismissal should have been categorised as a redundancy.

Mr Portnykh successfully appealed to the EAT which ruled that the 'without prejudice' correspondence was inadmissible. In coming to its decision, the EAT made some interesting observations on the 'without prejudice' rule:

  • In order to determine whether there is an actual or potential dispute, a Tribunal will need to examine the context in which any correspondence marked 'without prejudice' is produced, and not simply focus on the correspondence itself.
  • The fact that the parties are negotiating an exit does not necessarily mean that there is an actual or potential dispute.
  • The fact that a settlement agreement is being negotiated does not automatically mean that there is an actual or potential dispute between the parties but that will very often be the case.
  • The fact that Nomura and Mr Portnykh were discussing alternatives as to the reason for Mr Portnykh's dismissal meant that there was either a present dispute or the potential for a future dispute which meant that the 'without prejudice' rule applied.
  • There do not need to be legal proceedings for the parties to be in dispute, nor does an employee need to mention that they are minded to bring a particular claim such as discrimination or unfair dismissal.
  • 'Unambiguous impropriety' is a very narrow concept. The fact that Nomura would be disadvantaged by the exclusion of the 'without prejudice' correspondence did not mean that the 'unambiguous impropriety' exception applied. There would need to have been something more such as Mr Portnykh actually perjuring himself while giving evidence at the Tribunal and the 'without prejudice' correspondence being evidence of that perjury.

What does this mean for employers?

The ability for employers to have discussions with employees to end the employment relationship has been made easier by the introduction of 'protected conversations' last year (referred to in a previous blog). However, the protection afforded by 'protected conversations' applies only to ordinary unfair dismissal cases, not discrimination claims or unfair dismissals where whistleblowing is alleged. Employers do, therefore, still need to bear in mind the rules about when 'without prejudice' conversations may take place. Fortunately, as the EAT made clear in Portnykh, those rules are relatively liberal. Despite that, though, an 'out of the blue' approach to an employee with a settlement offer where there is nothing to suggest an actual or potential dispute is still unlikely to attract 'without prejudice' protection and it may be necessary for an employer to fall back, where possible, on a 'protected conversation' in those situations.

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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