Court of Appeal explores ambit of the without prejudice rule

The Court of Appeal has recently held that certain correspondence marked "without prejudice" was admissible in evidence despite this label, because there was no dispute between the parties at the time of the correspondence and the parties had not agreed that the without prejudice rule should apply in any event: Avonwick Holdings Limited v Webinvest Limited & Anor [2014] EWCA Civ 1436.

The decision is a reminder that marking a communication "without prejudice" is not conclusive as to whether the rule will apply. It is also of interest in suggesting that parties can, notwithstanding the lack of a dispute, expand the ambit of the without prejudice rule by agreement, so that communications which would not normally be covered by the rule are rendered inadmissible as evidence in potential future proceedings. It is not clear how far such a principle might apply to stretch the protection beyond its generally recognized ambit, i.e. communications aimed at settlement of a dispute between the parties.

Gregg Rowan and Alex Sharples consider the decision further below.

Background

The claimant (Avonwick) loaned money to the defendant (Webinvest).  Following a demand by the claimant for repayment, the parties engaged in written communications about restructuring the loan.  The communications were marked "Without Prejudice & Subject to Contract".  Solicitors for both parties were involved in drafting the communications.  No agreement was reached and the claimant began proceedings.  At that stage and for the first time, the defendant sought to argue that there was a collateral oral agreement in place which had the effect that repayment was not yet due.

An issue arose as to whether the communications between the parties relating to the proposed restructuring were admissible evidence or fell within the ambit of the without prejudice rule.

Decision

The Court of Appeal upheld Richards J's first instance decision that the communications were not protected by without prejudice privilege and were therefore admissible.  In doing so, Lewison LJ (with whom Sharp and Burnett LJJ agreed) referred to the two accepted bases for the operation of the without prejudice rule, public policy and contractual:

1. Public policy: There is a public policy in favour of encouraging the settlement of disputes. The without prejudice rule facilitates settlement by enabling parties to communicate openly, without concern that what might be said or conceded could be used against them in subsequent legal proceedings.  In order for the public policy to be engaged, a dispute must be in existence or contemplation at the time of the communications.

2. By agreement: Citing Unilever Plc v Proctor & Gamble Co [2000] WLR 2436 as authority, Lewison LJ said that parties may extend the usual ambit of the without prejudice rule by agreement. He rejected the submission that this ability to extend the ambit of the rule applied only if a dispute was in existence or imminent, saying if that were the case it would be hard to see what it added to the public policy justification for the rule. He concluded that if the parties agree for valuable consideration that their communications are made without prejudice and should not be used in civil proceedings, the court will look to uphold that agreement.

On the facts, however, the Court of Appeal found that neither basis for the without prejudice rule was engaged.

On the first basis, the defendant had only sought to rely upon the alleged collateral agreement after the relevant communications had been made.  The Court of Appeal agreed with Richards J that the communications were not an attempt to settle a dispute.  Instead, at the time of the communications they were simply negotiations as to how and when an accepted liability should be extinguished.

In relation to the second basis, the Court of Appeal found that no agreement expanding the ambit of the without prejudice rule had been made by the parties, despite the communications having been marked "without prejudice".  This appears to be in part because the communications were also headed 'Subject to Contract' which would negate a concluded contract.  The Court of Appeal also noted that there are many usages of the phrase "without prejudice" apart from in relation to the settlement of extant or contemplated disputes, such as where the user of the phrase does not intend to give up any rights that he may have.  In the Court of Appeal's view, this was the way in which the phrase "without prejudice" was being used here; it therefore did not amount to an agreement that the communications fell within the ambit of the without prejudice rule.

Comment

There is a tendency for parties to negotiations to use the words "without prejudice" liberally, assuming or at least hoping that this will protect their communications from being admissible in legal proceedings.  The Court of Appeal's decision is a reminder that this will not always be the case.  It is only where the negotiations are genuinely aimed at settlement of a dispute, or (perhaps) where the parties have agreed that the without privilege rule will apply, that marking correspondence "without prejudice" will be effective.