UK: "Without Prejudice" Statements can be Admissible

Oceanbulk Shipping & Trading SA v. TMT Asia Limited & Others
[2009] EWHC 1946 (Comm)

Oceanbulk Shipping & Trading SA v. TMT Asia Limited
[2010] EWCA Civ 79

Oceanbulk Shipping & Trading SA (Respondents) –v- TMT Asia Limited and others (Appellants) [2010] UKSC 44

Ince & Co has won an important case in the Supreme Court regarding the protection afforded by 'without prejudice' discussions.

The Supreme Court unanimously held that, when construing a settlement agreement 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 that agreement. 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 'without prejudice'.

The 'Without Prejudice' General Rule

The 'without prejudice' rule will generally prevent statements made in a genuine attempt to settle an existing dispute, whether made in writing or orally, from being put before the court as evidence of admissions against the interest of the party which made them. The justification for excluding 'without prejudice' negotiations from evidence is that (i) parties should be encouraged to settle their disputes without recourse to litigation, and (ii) they will be so encouraged if they know that any admissions they make in the course of confidential negotiations will not be used against them.

Brief Facts

The Claimant, Oceanbulk, and the Defendants, TMT, were parties to a number of forward freight agreements (FFAs) with settlement dates in 2008. Under these FFA contracts, parties essentially speculate against movements in the freight market and the party that is the 'seller' under a FFA makes a profit if the market drops below the contract rate and the 'buyer' makes a profit if the market rises.

In early summer 2008, the exceptionally high freight rates were such that at the end of May 2008 TMT was said to owe Oceanbulk approximately US$40.5 million. Thereafter, Oceanbulk and TMT entered into a settlement agreement pursuant to which TMT's obligation to pay the May settlement sums and any subsequent 2008 settlement sums was postponed on terms. A dispute subsequently arose as to the proper construction of one of the clauses of the settlement agreement. According to Oceanbulk the proper construction of the relevant clause meant that it was owed a substantial amount of money by TMT. However, according to TMT, the proper construction meant that TMT owed Oceanbulk nothing, but rather Oceanbulk owed TMT a substantial amount of money.

Oceanbulk applied to strike out those parts of TMT's Defence to their High Court Action which referred to statements made by Oceanbulk's representatives in the course of 'without prejudice' negotiations (both written and oral) which led to the signing of the settlement agreement. TMT opposed the application on the basis that the statements should be admissible because they related to the background facts as Oceanbulk and TMT understood them at the time, and which were material for the proper interpretation of the relevant term of the settlement agreement. TMT also argued that the statements should be admissible because they were sufficiently clear as to give rise to an estoppel in TMT's favour, and because they were relevant to the question of whether Oceanbulk's damages were too remote to be awarded.

Judgment at First Instance

Andrew Smith J held at first instance that evidence of background facts should be admissible to inform the proper interpretation of a settlement agreement, notwithstanding that the relevant facts were statements made in 'without prejudice' negotiations. If evidence of 'without prejudice' negotiations could be admitted on the question of whether a settlement had been reached, and what the terms of a settlement were, then it was logical that it could also be admitted on the question of the proper meaning of those terms.

Court of Appeal Judgment

That decision was overturned by the majority of the Court of Appeal (Longmore and Stanley Burnton LJJ). The Court held that the factual matrix and remoteness purposes for which TMT wished to rely on statements allegedly made during the 'without prejudice' negotiations did not justify the creation of any new or enlarged exception to the 'without prejudice' rule. It held that the well-settled policy of protecting negotiations conducted 'without prejudice' is stronger than that of admitting evidence of 'without prejudice' negotiations which may be said to be arguably relevant, either as part of the factual matrix as an aid to construction or as concerning remoteness.

Ward LJ, in his dissenting judgment, agreed with Andrew Smith J's judgment and strongly disagreed with the majority's decision. If one can use the antecedent negotiations to prove the agreement, to rescind it, or to rectify it, he asked rhetorically, why could one not use the negotiations to establish the truth of what the concluded contract means? He described the argument to the contrary as "barmy" and "illogical" and considered that the majority's decision "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."

Supreme Court Judgment

The Supreme Court unanimously overturned the Court of Appeal's majority judgment and reached essentially the same conclusion as Andrew Smith J at first instance and by Ward LJ in the Court of Appeal. The lead judgment was handed down by Lord Clarke and recognised that an interpretation exception should be recognised as an exception to the 'without prejudice' rule.

The Court noted that the principles which govern the correct approach to the interpretation of contracts have been the subject of some development or clarification in recent years. Trial judges nowadays have to distinguish between material which forms part of the pre-contractual negotiations which is part of the factual matrix and therefore admissible as an aid to interpretation and material which forms part of the pre-contractual negotiations but which is not part of the factual matrix and is not therefore admissible. The Supreme Court's view is that the problem is not relevant to the question of whether, where the pre-contractual negotiations that form part of the factual matrix are 'without prejudice,' evidence of those negotiations is admissible as an aid to construction of the settlement agreement. These are two separate questions.

The Court saw no reason why the ordinary principles governing the interpretation of a settlement agreement should be any different regardless of whether the negotiations which led to it were 'without prejudice.' Lord Clarke went on to say:

The Court also considered that the admissibility of evidence of what was said or written in the course of 'without prejudice' negotiations is important not only in relation to the principles of construction, but also in relation to the principles of rectification, which are closely related.

Implications

The 'without prejudice' rule

The rule operates to prevent statements which are made in a genuine attempt to settle an existing dispute from being admissible in Court as evidence which can be used against the party that made the statement. However there are exceptions to this rule which are important to bear in mind and which have been expanded by the Supreme Court's decision.

The Exceptions

Although the Supreme Court's decision focused on settlement agreements, it is likely to be applicable to all contracts that arise out of 'without prejudice' discussions. The Supreme Court's decision in Oceanbulk –v- TMT [2010] UKSC 44 has added one more exception to the current exceptions to the 'without prejudice' rule. The following is a practical list of the current exceptions:

(i) Settlement Agreements

• 'Without Prejudice' communications are admissible in order to determine whether a concluded compromise agreement has been reached;

(ii) Misrepresentation, fraud or undue influence

• 'Without prejudice' material may be admissible to show that a concluded settlement agreement should be set aside on grounds of misrepresentation, fraud or undue influence;

(iii) Estoppel

• If, during negotiations which did not result in a settlement agreement, a statement was made, giving rise to an estoppel, 'without prejudice' material may be admitted to prove that the statement was made;

(iv) Perjury, blackmail or other impropriety

• One party may be permitted to give evidence of the other party's communications in 'without prejudice' negotiations if the exclusion of the evidence would otherwise conceal perjury or blackmail;

(v) Delay

• Evidence of the fact of 'without prejudice' negotiations may be admitted in order to explain any delay;

(vi) Reasonableness of a settlement

• Evidence of 'without prejudice' negotiations may be admitted in relation to whether the claimant acted reasonably to mitigate any loss in the context of agreeing a settlement;

(vii) Without prejudice save as to costs offers

• Parties may limit the operation of the 'without prejudice' rule by agreeing that communications, which would otherwise be 'without prejudice' may be submitted to the Court on the determination of the question of costs;

(viii) Relevant terms of a settlement agreement

• Relevant terms of a settlement agreement may well be disclosable, even if the irrelevant and commercially sensitive material can be redacted;

(ix) On certain types of without notice application

• Parties must comply with the duty of full and frank disclosure and, more generally, must not mislead the court. In certain types of without notice applications, the fact of 'without prejudice' correspondence should be drawn to the judge's attention in order that the application may comply with these obligations;

(v) Interpretation

• When construing an agreement 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, even where the knowledge of those facts is conveyed in the course of 'without prejudice' negotiations.

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.