Two recent English cases have further addressed legal privileges discussed in two previous Brief Counsels: the operation of "without prejudice" communications and the ambit of legal professional privilege.

These decisions are significant and are likely to be considered in due course by the New Zealand courts.

The cases

The cases in point are:

  • Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors [2010] UKSC 44 (27 October 2010) in which the UK Supreme Court confirmed that regard may be had to without prejudice communications in interpreting contracts, such as a settlement agreement, and
  • R (on the application of Prudential PLC and Anor) v Special Commissioner of Income Tax and Ors [2010] EWCA Civ 1094 (13 October 2010) in which the English Court of Appeal declined to extend legal professional privilege to chartered accountants giving legal advice on tax matters.


This decision involved a full bench of seven judges, instead of the usual five.

The basic facts were that the two parties had entered into settlement negotiations on a without prejudice basis, including two full days of meetings culminating in a written settlement agreement. There was no issue between the parties around the existence or terms of the settlement agreement, and the case did not involve an application for rectification.

There was, however, a dispute between the parties as to the true construction of one of the terms of the agreement. The question for decision was whether it is permissible to refer to anything written or said in the course of the without prejudice negotiations as an aid to the interpretation of the agreement.

All seven judges agreed that background facts communicated between the parties as part of without prejudice negotiations are admissible for the purposes of interpreting any settlement agreement resulting from the without prejudice negotiations.

The lead judgment was given by Lord Clarke, with whose judgment five of the other judges joined. Lord Phillips gave a separate concurring judgment. Lord Phillips' judgment consisted of a single paragraph, but it summarised the reasoning nicely (at [48]):

The principle to be derived from this appeal can be shortly stated. When construing a contract between two parties, evidence of facts within their common knowledge is admissible where those facts have a bearing on the meaning that should be given to the words of the contract. This is so even where the knowledge of those facts is conveyed by one party to the other in the course of negotiations that are conducted "without prejudice". This principle applies both in the case of a contract that results from the without prejudice negotiations and in the case of any other subsequent contract concluded between the same parties. Accordingly I would allow this appeal.
In coming to this conclusion, the Supreme Court has followed the general approach to the exclusionary rule on the admissibility of prior negotiations reaffirmed in Chartbrook v Persimmon Homes Ltd [2009] 1 AC 1101 (HL), one of the final decisions to be handed down by the House of Lords. In that case, Lord Hoffmann confirmed that, while recourse to prior negotiations was prima facie excluded as part of an interpretation exercise, this would not be the case where such evidence is used "to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel" at [42].

The Oceanbulk approach may well be adopted in New Zealand in due course. A difference is that New Zealand's privilege laws are now codified. Section 57(1) of the Evidence Act 2006, which codifies the without prejudice rule, provides that a party to a civil dispute has a "privilege in respect of any communication between that person and any other person who is a party to the dispute if the communication: ... (b) was made in connection with an attempt to settle or mediate the dispute between the persons".

This provision does not expressly provide that the effect of this privilege is to preclude assistance in the interpretation of a subsequent settlement agreement (particularly when read in light of s 7, which provides that all relevant evidence is admissible unless specifically declared inadmissible). Whether s 57 could be read down to allow use of without privilege communications for interpretation purposes is, in our view, a question for the New Zealand courts to determine.

It would be in keeping with the New Zealand Supreme Court's expansive (if not altogether coherent) approach to the admissibility of evidence of prior negotiations in Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, in which – albeit based on different reasoning – all five judges had regard to what appeared to be pre-contractual negotiations. In particular, Tipping J's approach, which emphasised that "objective evidence directed to the context, factual or linguistic, in which the negotiations were taking place...can properly inform an objective approach to meaning" (at [29]), and that "[s]uch evidence includes any objectively apparent consensus as to meaning operating between the parties", is consistent with the reasoning in Oceanbulk.

R v Special Commissioner of Income Tax

Turning from without prejudice communications to legal professional privilege (LPP), the English Court of Appeal has recently confirmed that LPP applies only to advice given by qualified lawyers, in refusing an application to extend LPP to chartered accountants giving legal advice on tax matters. Following the recent disquiet in the UK after the ECJ's denial of privilege for in-house counsel, the decision provides a detailed discussion of the policy grounds behind LPP.

The case arose in the context of a judicial review, with Prudential seeking to quash a number of notices to produce documents issued by the Special Commissioner under s 20 of the Taxes Management Act 1970. Prudential sought to resist production of the documents on the basis they were legally privileged, it being settled law that s 20 does not override the protection of privilege. What made the case interesting, however (as well as sufficiently controversial to include the UK's Institute of Chartered Accountants, Bar Council and Law Society as interveners), was that Prudential argued that the legal advice they received on tax matters from the chartered accountancy firm PricewaterhouseCoopers (PwC) ought also to be considered privileged.

In essence, Prudential argued that the Court should revisit the law of privilege to establish that it turned on the function of a person engaged in giving legal advice, rather than their status as a qualified lawyer or otherwise. At first instance, Charles J accepted that there is "real strength in the argument that the extent of the right to refuse disclosure should not relate to the nature of the legal qualification of the person giving the advice". He went on, however, to hold that he was bound by precedent to the position that privilege was only available to clients of lawyers, not those of accountants.

Writing the judgment of the Court of Appeal, Lloyd LJ held that it too was bound by precedent, but even were it not, the extension of the law Prudential sought was one appropriately to be made by Parliament. Citing recommendations by various committees on the issue that have not been taken up by the legislature, Lloyd LJ concluded that "Parliament's failure to change the law in this respect is not an accident". This is further demonstrated by the existence of some limited statutory extensions of privilege to those outside the legal profession, such as trade mark agents and licensed conveyancers. Lloyd LJ also noted that the difficulty of accurately and succinctly defining who is an "accountant" makes it a project much more appropriate for the legislature.

At the level of principle, Lloyd LJ cited Balabel v Air India [1988] Ch 317 and Three Rivers District Council v Governor and Company of the Bank of England (No. 6) [2004] UKHL 48, [2005] 1 AC 610 in staunchly defending the importance of privilege for uninhibited communication between lawyer and client. Equally, however, he noted that given (para [71])

the significance of the rule, and its potentially controversial nature, as a virtually absolute exception to the general rule as to the availability and disclosability of relevant evidence... exemplified by the amount of litigation over the past decades in which issues arising from it have been debated before the courts, up to the highest level... it is particularly important that the rule should be certain, so that its application can be readily understood.

Thus while Lloyd LJ accepted that the question of function is relevant to the legal test of privilege (as a lawyer must be consulted in his or her professional capacity), the proper position is that the question of status is also central to the test, providing as it does a clear delineation of when privilege will apply. Any variation of that delineation must be undertaken by Parliament.

Accountants advising on legal matters do not enjoy privilege under New Zealand law. Under s 54 of the Evidence Act 2006, privilege will apply only to communications with "legal advisers". That term is defined in s 51 to include a "lawyer", "registered patent attorney" and "overseas practitioner". "Lawyer" is further defined in the Lawyers and Conveyancers Act 2006 as someone holding a current practicing certificate.

Interestingly, the New Zealand legal community has undertaken a similarly explicit consideration and rejection of extending privilege to tax advisers. The Law Commission's 1994 discussion paper Evidence Law: Privilege proposed a "radical revision" of LPP, that would have determined the status of legal adviser by function rather than status, extending privilege to, inter alia, legal tax advice. The 1999 Law Commission's Report 55 Evidence – Volume 1: Reform of the Law, however, reconsidered the proposals, returning to the more orthodox position now enunciated in the Evidence Act 2006. This history indicates a similar attempt to judicially extend privilege in New Zealand would be similarly unlikely to succeed.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.