Court of Appeal decision shows “unambiguous impropriety” exception to without prejudice rule will be applied only in clear cases

The Court of Appeal has held that the narrow “unambiguous impropriety” exception to without prejudice privilege, which permits courts to admit evidence of settlement discussions where a party has abused the protection of the privilege, is to be applied only where there is clear evidence of impropriety: Motorola Solutions Inc v Hytera Communications Corp Ltd [2021] EWCA Civ 11.

The court allowed an appeal against a freezing order granted on the basis of evidence from settlement discussions in which the defendants had allegedly threatened to move assets into jurisdictions in which enforcement of any judgment would be difficult if the claimants succeeded at trial. The Court of Appeal disagreed with the High Court’s decision (considered here) that, where there was a dispute as to what was said by a party, the question was whether there was a “good arguable case” or “plausible evidential basis” that the statement was made.

The decision establishes that, rather than taking at face value an applicant’s evidence of without prejudice discussions, their account should be rigorously scrutinised. As the court recognised, this means the exception will rarely be applied where there is scope for dispute as to what was said – ie in cases where there is no written or other record of the discussions. The decision also shows that, even in cases where there is no dispute about the words used, if the statement in question is open to more than one plausible interpretation then the requirement for an “unambiguous” impropriety will not be met. In this case, the court held that, if the claimants’ evidence was plausible, the defendants’ evidence was equally so, and so the evidence of the statements should not have been admitted.

The judgment promotes parties’ ability to have frank, open discussions in without prejudice meetings on the basis that the public interest in settling litigation outweighs the risk in individual cases of improprieties being left unexposed. It remains the case, however, that where there is clear evidence of impropriety, the cloak of without prejudice protection will be withdrawn.

Background

The respondents (“Motorola”) had secured judgment against certain of the appellants (“Hytera”) in a US court for more than US$345m in damages for copyright infringement and misappropriation of trade secrets.

Motorola then applied to the English High Court for orders freezing assets held by Hytera and certain related companies within the court’s jurisdiction. It sought to rely on what was said in the settlement discussions (among other matters) to establish a real risk that Hytera’s assets would be dissipated, as required for the grant of a freezing order.

Motorola argued that Hytera had lost the “without prejudice” protection that would ordinarily have applied to such discussions, as they fell within the “unambiguous impropriety” exception to the without prejudice rule. This was on the basis that, as Motorola alleged, Hytera had presented a “Retreat to China” plan under which Hytera would undercapitalise subsidiaries operating outside of China and would move assets from jurisdictions where it would be easier for Motorola to enforce any judgment into so-called “murky” jurisdictions in which Motorola would struggle to do so.

The High Court (Jacobs J) found that there was a “plausible evidential basis” for Motorola’s account of the settlement discussions and that, if that account was accurate, Hytera’s conduct constituted an unambiguous impropriety. On that basis, the High Court admitted the evidence of the settlement discussions and granted the freezing order sought.

Hytera advanced two grounds of appeal against the admission of the evidence: first, that the High Court was wrong to hold that a good arguable case was sufficient to establish an unambiguous impropriety; and, second, that the Court was wrong to hold that the alleged statements were unambiguously improper.

Decision

The Court of Appeal allowed the appeal and set aside the freezing order made by the High Court. Males LJ gave the lead judgment, with which Rose and Lewison LJJ agreed.

The High Court had referred to the Court of Appeal decision in Dora v Simper (unreported, 15 March 1999) when admitting evidence of the parties’ settlement discussions. That judgment had indicated that, where there was a factual dispute, the court should consider whether a statement, if made, would amount to an unambiguous impropriety.

The Court of Appeal in the present case disagreed with that approach. The court referred to an earlier Court of Appeal judgment, in Fazil-Alizadeh v Nikbin (25 February 1993, unreported), which demonstrated three points of importance to the present appeal: (i) the without prejudice rule must be “scrupulously and jealously protected”; (ii) even if the "improper" interpretation of what was said at a without prejudice meeting is possible, or even probable, that will not satisfy the demanding test that there is no ambiguity; and (iii) the evidence asserted to satisfy this test must be rigorously scrutinised.

The Court of Appeal concluded that Dora v Simper was not binding authority that the evidence of impropriety must be taken at face value, including because it was inconsistent with previous authority (in particular Fazil-Alizadeh v Nikbin) and because there was no trace of that approach in subsequent cases.

The adoption of such an approach was also wrong in principle. The risk of leaving improper discussions unexposed in individual cases was outweighed by the broader interest in permitting frank discussions and therefore promoting the settlement of proceedings more generally. Accordingly, the court determined that an applicant would need more than a “good arguable case” or a “plausible evidential basis” to assert that an improper threat was made. The judge should simply have asked himself whether the evidence before him established an unambiguous impropriety.

The Court of Appeal noted that the case law had consistently emphasised that the test was deliberately demanding, and that the courts must rigorously scrutinise any evidence which is asserted as satisfying it. The cases in which the test had been met had been truly exceptional and (leaving aside Dora v Simper), there had been no scope to dispute what a party had said – for example, because the statement was recorded or in writing. As the court recognised, it was possible that evidence of statements at unrecorded meetings could be so clear that the court could reach a firm conclusion that it was admissible, but such instances were likely to be rare.

As to whether the test was met in the present case, while a threat to transfer assets to a third party other than in the ordinary and proper course of business could in some circumstances amount to an unambiguous impropriety, the evidence in this case – when rigorously scrutinised – did not demonstrate one. There was scope for misunderstanding what Hytera had said in the settlement discussions, which were not scripted or recorded; the evidence was taken out of the context of the parties’ extended discussions; and Hytera’s account – that it had indicated that the commercial reality of judgment against it would force its retreat to key profitable markets – was plausible. It was also common for parties to refer to potential problems of enforcement in settlement discussions.

On that basis, the Court of Appeal held that there was not sufficient evidence of an unambiguous impropriety and the High Court had erred in admitting evidence of Motorola and Hytera’s settlement discussions.

Note: The Supreme Court refused an application for permission to appeal in this case on 23 February 2022.