In Sternberg Reed Solicitors v Harrison  EWHC 2065 (Ch), the High Court decided that an arbitrator had made an error in law in deciding that he could consider correspondence marked “without prejudice” when deciding costs. However, correspondence that is impliedly “without prejudice” could be taken into consideration. Arbitrators usually have broad discretion when considering costs but the established English law rules on privilege will still limit what evidence of the parties’ discussions is admissible. The court’s decision on impliedly “without prejudice” correspondence is significant and may impact how parties to an arbitration (or litigation) react to settlement offers.
Admissibility of “without prejudice” communications
A detailed analysis and practical guidance following the court’s findings on admissibility of expressly and impliedly “without prejudice” communication is explained in this post on our Litigation Notes blog. Parties to an arbitration should be mindful of the same issues. In particular, if correspondence is received which is aimed at settlement but is not stated to be "without prejudice", a tribunal may still take it into account in relation to costs, even if it is inadmissible in relation to the substantive dispute.
The court’s approach to s69 applications
The judgment was in respect of an application under s 69 of the English Arbitration Act 1996 which allows parties to appeal to the court on a question of English law, save where such appeal is excluded (which is the case under many institutional arbitration rules). On the court’s approach to such appeals where they are concerned with an award of costs, the court referred to SOS Corporación Alimentaria SA v Inerco Trade SA  EWHC 162 (Comm) where Hamblen J found that the appellant had to show, from the reasons given by the arbitrator, that the award on costs was unlawful in the sense that there were no grounds on which the arbitrator could properly in law have made the order which he did, or that he made the order on grounds which he could not properly in law have taken into account, or that he failed to exercise his discretion at all.
The court acknowledged that such circumstances are likely to be rare. However, the court found that the arbitrator’s conclusion that expressly “without prejudice” correspondence could be taken into account when deciding costs was not supported by authorities. It was therefore an error of law.
The court went on to find that the correspondence that the arbitrator took into account was impliedly “without prejudice”. That is, it was it was not marked “without prejudice”, but was created as part of an attempt at compromise. Such correspondence, the court found, could not be taken into account on substantive issues, but could be taken into account when deciding costs.
The court declined to interfere with the outcome of the arbitrator’s decision on costs. While the arbitrator had made an error of law, the court had found that the correspondence was admissible on the issue of costs. In other words, the arbitrator had arrived at the correct result but for the wrong reasons. Applying the test in SOS Corporación, the court found that the arbitrator had weighed up the relevant factors and arrived at a decision. It was “an evaluative decision, and one which the arbitrator reached in the exercise of the generous ambit of his discretion as to costs” and therefore it was not an error of law.
The court’s finding that impliedly “without prejudice” correspondence is admissible for the purposes of assessing costs is a novel one. Parties to a dispute should ensure correspondence aimed at settlement is marked expressly “without prejudice” if they do not intend that it be taken into consideration when costs are being decided. Alternatively, correspondence should be marked “without prejudice save as to costs” if a party wishes to be able to refer to it at the costs stage.
The court’s approach to s 69 applications is consistent with previous practice and shows that English courts will be slow to intervene with an arbitrator’s exercise of discretion. At the same time, if an arbitrator makes an error of law, the court may be willing to overturn those aspects of the tribunal’s decision.
Finally, the court’s reasoning on its refusal to give permission to appeal is interesting. S69(8) of the Arbitration Act provides that leave to appeal may be granted if the question is one of general importance, or is one which, for some other special reason, should be considered by the Court of Appeal. While the court agreed that the question in this case was of general importance, it found that it should also consider whether there was a real prospect of the appeal succeeding. The court held that there was no real prospect of the Court of Appeal taking a different view and refused permission to appeal. There is a low success rate for applications under s69 and this case illustrates the high threshold for applications for permission to appeal to the Court of Appeal.
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