UK: Without Prejudice Gone Barmy? Oceanbulk Shipping v TMT Asia

Last Updated: 17 February 2010
Article by Andrew Howell

The point is a simple one. When can without prejudice negotiations be used in evidence for the interpretation of a settlement agreement?

Or, as Ward LJ put it in his droll dissenting judgment in Oceanbulk Shipping v TMT Asia (15 February 2010): "Why on earth can you not use negotiations to establish the truth of what the concluded contract means? Not to do so would strike my mother as "barmy"."

Oceanbulk v TMT was a case about forward freight agreements (FFAs): effectively, contracts gambling on the state of the freight market as at a particular future date. Oceanbulk and TMT had entered into a large number of FFAs, as a result of which TMT owed Oceanbulk about US$40.5m. The parties then entered into a settlement agreement to determine the payment terms.

The dispute centred on a clause in the settlement agreement which referred to "co-operating" to close out positions. The question was whether this "co-operation" referred to closing out bi-lateral positions between Oceanbulk and TMT, or referred instead to Oceanbulk's liabilities to third parties on various back-to-back or "sleeved" transactions.

TMT, in support of its construction of the agreement, wanted to put in evidence of without prejudice discussions about the "sleeving". Following the House of Lords' recent judgment in Chartbrook v Persimmon Homes (2009), evidence of negotiations can be given to assist the interpretation of a contract where it is to establish that "a fact which may be relevant as background was known to the parties". TMT said that the pre-contractual statements about sleeving were just such a fact. The question was whether this evidence was admissible even though the statements had been given in the course of without prejudice negotiations.

The short answer was no, a majority of the Court of Appeal overturning Andrew Smith J's first instance judgment. Longmore LJ (with whom Stanley Burnton LJ agreed) gave the leading judgment, citing a number of reasons:

  • First, there were various exceptions to the rule of non-admissibility of without prejudice statements (Unilever v Procter & Gamble (2000)). So, without prejudice statements can be referred to in evidence where:
    • the issue is whether settlement negotiations have resulted in a concluded deal;
    • it is argued that an agreement should be set aside for misrepresentation, fraud or undue influence; or
    • there were clear statements in negotiations on which another party acted which may give rise to an estoppel. This case did not fall within those exceptions, however.
  • Secondly, as last year's House of Lords' judgment in Ofulue v Bossert (2009) made clear, there is clear policy in ensuring that parties should be able to speak freely in settlement discussions: to "negotiate openly without having to worry that what they say may be used against them subsequently".
  • Thirdly, the effect of previous authorities was not (as TMT argued) that once a settlement agreement had been made, any prior without prejudice negotiations became open and so could be referred to in any ensuing dispute.

This was no doubt a pragmatic result on the facts of this case. It is also true to say that the whole point of the without prejudice rule is that, in order to promote settlement, some relevant material will inevitably not be made available to the court. The arguments in some ways mirror those in Chartbrook as to the extent to which a court should bind itself from looking at background material in determining the proper meaning of a contract.

Nonetheless, there was force in the points made in Ward LJ's dissenting judgment:

  • Why should there be one rule for identifying a term of the contract (here, without prejudice material is admissible) but another for interpreting the terms of the same contract (where without prejudice material is inadmissible)?
  • On a rectification case (i.e., an argument that the settlement agreement should be re-written to accord with the parties' intentions), without prejudice negotiations are admissible to prove an agreement. Why should it be any different when interpreting the settlement agreement?
  • Further, if the purpose of clothing negotiations with privilege is to facilitate a compromise, why continue to wrap those negotiations in secrecy once the settlement has been agreed, at least between the parties themselves?

Either way, the practical pointers seem clear from the Oceanbulk decision. First, the premium on clear drafting is all the more important on settlement agreements where it will be that much more difficult to bring in evidence of pre-contractual negotiations. Secondly, much like Chartbrook, if a party wishes to bring in evidence on background discussions, rectification arguments are an obvious way of doing so.

The last word, however, went to Ward LJ, in an aside about an earlier judgment of one of his fellow Court of Appeal judges:

"I prefer the instincts of the youthful Stanley Burnton J before he became corrupted by the arid atmosphere of this Court. It goes to prove what every good old-fashioned county court judge knows: the higher you go, the less the essential oxygen of common sense is available to you."

A debate on the effectiveness of our appeal system, though, is perhaps one for another day.

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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