Court of Appeal majority preserves sanctity of without prejudice communications in a settlement

16/02/2010

The Court of Appeal has ruled that "without prejudice" communications should not be admissible as evidence at a trial as evidence of the interpretation of a term in a settlement agreement. They indicated that when balancing the conflicting principles of without prejudice communications remaining inadmissible and ensuring the best and most useful evidence is before the court, it is preferable to preserve the privilege attached to without prejudice communications in order to encourage parties to have confidence in their ability to freely negotiate settlements.

The appellant, Oceanbulk, appealed the decision of Mr. Justice Andrew Smith ((2009) EWHC 1946 (Comm)) which allowed without prejudice communications to be used in court by the respondent, TMT, in order to assist its interpretation of a clause in their settlement agreement. The Judge found that this instance was an exception to the general rule that without prejudice communications are not admissible. The two parties had settled their dispute in relation to a number of freight forwarding agreements between them. Oceanbulk later sued TMT for not complying with the settlement agreement and a disagreement over the interpretation of a clause within that settlement agreement arose.

The Judge's reasons for finding that this case was an exception to the general rule were, inter alia, that the difference between properly identifying the terms of an agreement and interpreting them is a fine and difficult one; and that a court which is deprived of evidence relating to the formation of a settlement agreement will have difficulty interpreting it.

The Court of Appeal, with Ward LJ dissenting, allowed the appeal against the Judge's findings. The issue that the Lord Justices addressed, was summarised as follows:

"whether the veil of privilege can be lifted to admit evidence of without prejudice negotiations to establish background facts known to the parties as an aid to the construction of the settlement agreement reached in the course of those without prejudice negotiations." (paragraph 36)

Lord Justice Longmore, giving the leading judgment, gave a number of reasons why the issue was answered in the negative. The most significant reason was that preservation of the without prejudice principle was more important than allowing the court access to any relevant information by way of background which would arguably be relevant to the construction of the document. The general rule applied even though instances would exist where background communications may show that the parties' intentions were different from those evidenced in the terms of the settlement. Longmore LJ said that:

"Although there are conflicting policy considerations pointing in opposite directions, the policy of protecting without prejudice communications seems to me to be stronger than the policy of providing the judge with every conceivable help to arrive at a just solution." (paragraph 26)

Another reason for the appeal, which related to the trial judge's findings, was that he did not agree that there was a fine line between identifying the terms of settlement and interpreting them, particularly when the settlement agreement is written. If the exception was allowed on this ground then there would be an unwelcome increase in the number of parties trying to use without prejudice to imply terms into settlement agreements, which the court is generally reluctant to do.

The judgment at first instance attracted much attention and the result of the appeal will come as a relief to legal practitioners and business professionals alike since the scope of the exceptions to the rule that without prejudice communications leading to a settlement remain privileged has not been extended.

As the majority of the Court of Appeal recognise, this judgment is important in upholding the CPR mantra of settlement being preferable to litigation. Parties who seek settlement are therefore protected when so doing.

Oceanbulk Shipping & Trading SA v. TMT Asia Ltd [2010] EWCA Civ 79

Contact: henryfarris@city-law.net

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