Eroding the boundaries of the ‘without prejudice’ rule

The first priority in efforts to achieve a negotiated settlement in a dispute is allowing both parties to speak frankly, without prejudicing their position regarding liability, should the matter proceed to trial. This is known as the 'without prejudice' rule. Under this rule both parties can openly exchange offers and solutions, knowing that any admissions will not be repeated at trial to imply liability.

Judges have sought to protect this rule in a bid to prevent congestion of an already overcrowded court system. Without this rule more cases would have to be decided at trial.

The recent case of Oceanbulk Shipping & Trading SA v TMT Asia Limited and others [2010] UKSC 44 has, however, added an extra exception to the 'without prejudice' rule.

The case involved a dispute regarding forward freight agreements between these two companies. It is usual for parties requiring large cargo ships to seek to reduce risk by agreeing a set hire cost over a period, irrespective of whether the actual rates change everyday.

The terms of this agreement were accurately recorded in two lengthy, 'without prejudice', meetings and neither side disputed the terms of the contract at the point of signing. But a dispute did arise. The issue in the case, when brought to trial, was whether the parties could refer to anything written or said in the 'without prejudice' meetings in making their case over the interpretation of the contract. Knowing the context of the agreement can greatly assist the court with its interpretation and resulting decision.

The recent judgement on this case stated that evidence from the 'without prejudice' meetings, which allowed the court to understand the terms of an openly accepted contract, could indeed be referred to by the parties.

To this point it was widely understood that judges would allow relevant background information from 'without prejudice' communications to be disclosed in later proceedings as long as that evidence did not specifically relate to the liability being disputed. This recent judgment extends the 'without prejudice' rule, on the same basis, by allowing the disclosure of information which assists the court with understanding context but still not anything that would suggest liability.

As a result of this judgment, a party cannot make blatant misrepsentations or fraudulent statements they know will be relied upon by the other party and then rely on the shield of the 'without prejudice' rule to pretend that those statements were never made.

The law has not reached the stage where parties will have to run everything past their legal advisor before making statements in 'without prejudice' settlement discussions. It is important to remember, however, that just because a meeting or letter is 'without prejudice' it does not give the parties free rein to say anything and hope to avoid any potentially negative consequences.