Court of Appeal finds settlement offer not subject to "without prejudice" protection as it amounted to an unambiguously improper threat

The Court of Appeal has recently considered the rarely invoked "unambiguous impropriety" exception to without prejudice ("WP") privilege: Ferster v Ferster [2016] EWCA Civ 717.

Upholding the decision of Rose J at first instance, the Court of Appeal found that a settlement offer made on behalf of the claimants following an unsuccessful mediation constituted an unambiguously improper threat in the nature of blackmail and, as such, was not protected by WP privilege.

The decision serves as a reminder that WP privilege cannot be used as a cloak for impropriety.  It also underlines the fact that there is a distinction to be drawn between the use of proper leverage in the context of settlement discussions and the making of improper threats.  The courts will take a dim view of the latter. Alan Watts, Catherine Emanuel and Victoria O'Dea consider the decision further below.

Legal background

The purpose of WP privilege is to encourage parties to communicate openly with one another without fear that things said in the context of settlement will later be relied upon in court. However, as noted by Walker LJ in Unilever plc v The Procter & Gamble Co [2000] 1 WLR 2436, "the veil imposed by public policy may have to be pulled aside…in cases where the protection afforded by the rule has been unequivocally abused".  Such will be the case where there has been "perjury, blackmail or other 'unambiguous impropriety'".  

Historically, most of the authorities have dealt with perjury-type cases.  In view of the public interest in encouraging honest admissions to facilitate the resolution of disputes, the courts have been slow to make findings unambiguous impropriety in such cases.  More recently, however, there have been a number of cases involving improper threats or blackmail, including in the well-publicised case of Republic of Djibouti v Boreh [2015] EWHC 769 (Comm), and now also Ferster.  In those sorts of cases, the courts have shown greater willingness to make findings of unambiguous impropriety, thereby exposing the conduct in question. 

Factual background

In Ferster, the question of unambiguous impropriety arose in the context of acrimonious and fiercely fought litigation between three brothers (Jonathan, Warren and Stuart) regarding their respective interests in an online gaming business.  Acting through the company, Warren and Stuart brought a variety of claims against Jonathan, which they commenced by way of search and freezing orders. Jonathan, in turn, issued an unfair prejudice petition alleging that Warren and Stuart had procured the company to bring the claims against him for the improper purpose of forcing him to pay an inflated price for their shares.

A mediation took place during which Warren and Stuart offered to sell their shares to Jonathan but no price could be agreed.  Over the next few months the parties, through their legal advisers, remained in contact with the mediator and further offers were exchanged.

In April 2015, DAC Beachcroft on behalf of Warren and Stuart sent, via the mediator, an email (the "DACB Email") in which they claimed they had discovered that Jonathan had failed to disclose the existence of certain overseas bank accounts pursuant to the freezing order.  They went on to say that, unless Jonathan agreed, within 48 hours, to pay an increased sum (being more than £2m in excess of what they had previously sought by way of settlement) for Warren and Stuart's shares, they would bring committal and other criminal proceedings against Jonathan, ruin his reputation and make it impossible for him to operate a business in the online industry in the future.  Those threats were exacerbated by further threats made against Jonathan's life partner, who was not a party to the proceedings, that he too may be investigated and/or charged.

Jonathan denied having any undisclosed bank accounts and pressed Warren and Stuart to set out the basis for their belief that any such accounts existed.  Warren and Stuart declined to do so, claiming that the information in question was privileged.  In the event, no evidence of "hidden bank accounts" ever materialised.

Decision

The Court of Appeal agreed with Rose J's view that the DACB Email amounted to improper threats and thus fell within the unambiguous impropriety exception to WP privilege. That meant Jonathan was able to rely upon it as evidence of Warren and Stuart's improper motive in the petition proceedings.  

The Court of Appeal offered some useful guidance as to what amounts to unambiguous impropriety and identified the types of factors the court will take into account when assessing whether a privileged occasion has been abused. Relevant factors included:

1. The threats went far beyond what was reasonable in pursuit of civil proceedings, by making the threat of criminal action.
2. The threats extended to Jonathan's family.
3. It was unnecessary to determine whether Warren and Stuart had a genuine belief in the substance of the allegations made because the impropriety arose from the nature of the threats made.
4. The purpose of the threats was to obtain for Warren and Stuart personally a financial advantage which ought to have accrued to the benefit of the company.
5. The "settlement offer" made no attempt to connect the wrongdoing alleged to have been committed by Jonathan to the increased demand.  In particular, the increased demand was tied to threats affecting Jonathan's liberty, family and reputation, not to the value of the claim.  

The court rejected the suggestions that it should be inferred that the email was proper because it had been composed by a reputable firm of solicitors or passed on by the mediator. The court also distinguished the situation in Ferster from one where the threat could only be discerned by picking through many hours of negotiation, often between laymen using colourful or exaggerated language.  In Ferster, the email was a single, carefully drafted communication.

It is also worth noting that Rose J, at first instance, similarly rejected an argument that privilege in unambiguously improper conduct was protected by a separate and distinct species of "mediation privilege" or the contractual terms of the mediation agreement itself.  Such an extreme consequence would require an agreement in clear and unmistakable terms and, even if such an agreement could be established (which it had not) there would be significant issues as to whether, as a matter of public policy, it could ever be effective.  

Comment

Ferster is of interest as it confirms the position taken in a number of recent cases that the courts are ready to take a robust approach to lifting WP privilege in cases involving improper threats.  This is in contradistinction to the softer approach which has historically been taken in the so-called "perjury" cases. 

Ferster follows on from the recent decision in Boreh (referred to above), where threats against Mr Boreh made during recorded without prejudice discussions were accepted as being unambiguously improper. There, Flaux J observed that:

"…the threats made to Mr Boreh go way beyond what is permissible even in the hardest fought commercial litigation. What was being said was that, if he settled the litigation (in fact for more than it was worth) he could avoid the risks of extradition to Djibouti, being in prison there for the rest of his life, money laundering and similar criminal-related actions in the US and elsewhere…".

The public policy considerations behind these judgments are readily understandable.  It is in the public interest to encourage parties to make candid admissions which may facilitate an early, cost-effective resolution of a dispute.  It is not in the public interest to encourage parties to make improper threats and indeed doing so is likely to be counterproductive when it comes to settlement.