The High Court revisits the issue of "mediation privilege" and proposes (obiter) broadening the "without prejudice" exceptions

The High Court has found a party to a settlement agreement reached at mediation liable for misrepresentation and breach of the agreement, where it emerged after the mediation that the party was not in fact the legal owner of a property that the agreement required it to transfer. In doing so, the court considered the extent to which evidence of what occurred at the mediation could be relied on, under one of the limited exceptions allowing evidence of "without prejudice" (WP) settlement negotiations to be admitted for certain narrow purposes: Pentagon Food Group Ltd and others v B Cadman Ltd [2024] EWHC 2513 (Comm).

Notably, the judge's analysis of the relevant WP exceptions includes an opinion – albeit obiter – proposing "modest" expansions to the circumstances in which two key exceptions apply:     

• The exception that admits evidence from WP negotiations of facts within the parties' common knowledge where relevant to interpreting contractual words (the Oceanbulk exception) should apply similarly where the facts are relevant to whether a contractual term can be implied.
   
• The exception that admits evidence to show that an agreement should be set aside for misrepresentation, fraud or undue influence should extend to negligent misrepresentation.

The judgment is also of interest for comments addressing the relevance of the WP negotiations being in the form of a mediation. While the judge acknowledged the "undoubted enhanced importance of mediation" in recent years, he was not convinced that this justified an enhanced form of "mediation privilege" beyond traditional WP, with narrower exceptions.    

Further, he observed that, given that settlement agreements entered into at mediation are typically drafted quickly and concisely – often at the end of a long day, the evidential context of the agreement (to which the Oceanbulk WP exception is directed) can be particularly important when a court is seeking to ascertain what the parties really agreed – perhaps more so than in the context of a settlement negotiated in granular detail over weeks.  

The merits of the court's obiter views will no doubt be explored in future cases. However, in any event, cases such as this demonstrate why parties recording settlements at mediation should give specific thought to whether there are any key assumptions underlying the settlement which should be expressly recorded in the agreement – either in recitals or within the relevant terms, or even as a formal warranty if appropriate. 

Background

The settlement agreement in this case was to resolve proceedings brought by a company (BCL) against a commercial tenant following a fire at the leased property.                  

A key element of the settlement reached at mediation was that one of the tenant's related companies would purchase the property from BCL. However, in the days following the mediation it emerged that the registered owner of the property was not BCL but rather three individuals associated with the company, as trustees for a related pension fund. There was also an independent professional trustee of the pension fund, whose approval would be needed for the sale of the property.

After nearly a year of attempts to agree steps that would enable the transfer to still take place, the claimant commenced the current proceedings seeking damages for breach of the agreement and/or misrepresentation.

Decision

The court (HHJ Tindal) held that the claimant had established: (i) that the settlement agreement had been induced by fraudulent (in the sense of recklessness) misrepresentations regarding the ownership of the property; and (ii) breach of express and/or implied terms requiring BCL to effect the transfer.

The judge was ultimately able to reach those conclusions based on non-privileged material, including the terms of the settlement agreement itself and the pleadings in the proceedings, which were consistent with the claimant's position that it was an unspoken underlying premise of the entire settlement that BCL was the legal owner of the property. 

However, the judge examined in detail the extent to which he could have admitted evidence from the mediation for the separate purposes of interpreting express terms, implying terms, and identifying any actionable implied misrepresentation. The analysis included the following issues.

"Mediation privilege" ?

The judge commenced by considering the relevance of mediation to the WP issues. He observed that the recently published current edition of Phipson on Evidence (20th Edition, 2024) referenced suggestions by some ADR commentators of the possible existence of a different type of privilege to WP and going further, called "mediation privilege".

The judge noted that the court in Brown v Rice [2007] EWHC 625 Ch had considered similar suggestions of a distinct privilege, under which (at least) a mediator could not be required to give oral or documentary evidence, even if the parties consented. He noted that the court there was not persuaded that the parties' arguments supported the existence of such a distinct privilege. However, it was unnecessary to decide the issue in that case (because it was common ground between the parties that the court could not properly require the mediator to give evidence, and they were not intending to call him, so were content for the court to apply traditional WP).

The judge here noted that much has happened in the field of ADR since Brown v Rice in 2007 – not least of which being the Court of Appeal's recent decision in Churchill v Merthyr Tydfil BC [2024] 1 WLR 3827 that the court does have a power to compel ADR. That begged the question whether "the undoubted enhanced importance of mediation and ADR generally" now justifies a more enhanced form of mediation privilege beyond traditional WP – for example, with narrower exceptions. However, in agreement with the editors of Phipson, the judge was "not convinced by that":

"The authorities do not - at least yet - support the view that ‘mediation privilege’ is
distinct from ‘without prejudice privilege.’"

Nevertheless, the judge noted that the contractual and formal context of mediation means that it is a particularly clear example of where WP applies. In addition, in mediation, the WP protection can be enhanced by the mediation agreement imposing "superadded" duties of confidentiality – which "can even be raised by the mediator if they are called upon to give evidence, even if the parties both waive ‘without prejudice privilege’: Farm Assist v DEFRA [2009] EWHC 1102 (TCC)".
 

Without prejudice: The exception to prove misrepresentation

The judge went on to examine the exception that allows material from within a negotiation to be admitted to show that an agreement apparently concluded during the negotiation should be set aside on grounds of misrepresentation, fraud or undue influence (often referred to as "the Uniliver 2nd exception").

He noted that this exception has been developed further in Berkeley Square Holdings v Lancer Property [2021] 1 WLR 4877 (CA), where Richards LJ (as he then was):

• highlighted that this exception is directed to the question of whether an apparent agreement has been made with the necessary consent of the parties;
• noted that misrepresentation, fraud and undue influence are not the only matters that can vitiate a party's consent. For example, duress would also qualify;
• commented that he was "far from sure" that Simon J in Jefferies Group Inc v Kvaerner International Ltd [2007] EWHC 87 had been correct to hold that this exception did not extend to a negligent misrepresentation. However he did not need to decide that issue. 

In the present case, as fraudulent (reckless) misrepresentation had been established, the "negligent or fraudulent only" issue similarly did not require resolution. However, the judge indicated that he agreed with Richards LJ’s provisional view that the exception extends to negligent misrepresentation. It was hard to see any relevant difference between negligent and fraudulent misrepresentation in the context of rescission of a settlement agreement (leaving aside any other contract). Rescission is available for both, or even for innocent misrepresentation and, in the judge's view, it could not make a difference if the remedy claimed was damages rather than rescission.
 

Without prejudice:  The exception for contractual interpretation

In Oceanbulk Shipping v TMT [2010] 3 WLR 1424 , the Supreme Court confirmed this exception in the following terms:

“When construing a contract 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. 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 conducted 'without prejudice’."

The judge acknowledged that, on its face, the exception therefore applies only to interpretation (or construction) of contractual words and not the implication of contractual terms – which are two different, sequential processes. However, both processes draw on the same evidential context: the surrounding circumstances known to both parties at the time of the contract and commercial common sense. In his view, justice clearly demanded that implication of terms should be able to draw on the same material as interpretation of terms via the Oceanbulk exception.  

That would avoid artificial distinctions and would promote rather than frustrate settlement. Given that terms cannot be implied so as to re-write a contract, but only so as to make a contract work, the judge reasoned that access to WP material for this purpose was just as, if not more, likely to enable a court to implement what the parties really agreed by their settlement. That reassurance would be more likely to encourage parties to negotiate freely than anxiety that they must be incredibly precise in drafting their settlement agreement for fear that a court would take a pedantically literal approach to it.

However, the judge acknowledged that that opinion was obiter – both because he had already upheld the claim for breach of express terms and because it would have been possible to imply the relevant terms without recourse to evidence regarding the mediation.