{"id":352,"date":"2010-11-12T22:01:41","date_gmt":"2010-11-12T20:01:41","guid":{"rendered":"http:\/\/ourblog.greenwoods.org\/?p=352"},"modified":"2010-11-12T22:01:41","modified_gmt":"2010-11-12T20:01:41","slug":"the-without-prejudice-general-rule","status":"publish","type":"post","link":"https:\/\/greenwoods.org\/the-without-prejudice-general-rule\/","title":{"rendered":"The \u2018without prejudice\u2019 General Rule"},"content":{"rendered":"

\"\"<\/a>The UK Supreme Court unanimously<\/em> held that, when construing a settlement agreement 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 that agreement.<\/p>\n

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 ‘without prejudice’<\/em>.<\/p>\n

The \u2018without prejudice\u2019 <\/em>General Rule<\/strong><\/p>\n

The \u2018without prejudice\u2019 <\/em>rule will generally prevent statements made in a genuine attempt to settle an existing dispute, whether made in writing or orally,<\/span><\/em><\/strong> from being put before the court as evidence of admissions against the interest of the party which made them. The justification for excluding \u2018without prejudice\u2019 <\/em>negotiations from evidence is that:<\/p>\n

(i)\u00a0\u00a0\u00a0 parties should be encouraged to settle their disputes without recourse to litigation, and<\/p>\n

(ii) they will be so encouraged if they know that any admissions they make in the<\/p>\n

course of confidential negotiations will not be used against them.<\/p>\n

Brief Facts<\/strong><\/p>\n

The Claimant, and the Defendants, was parties to a number of forward freight agreements (FFAs) with settlement dates in 2008. Under these FFA contracts, parties essentially speculate against movements in the freight market and the party that is the ‘seller’<\/em> under a FFA makes a profit if the market drops below the contract rate and the ‘buyer’<\/em> makes a profit if the market rises.<\/p>\n

In early summer 2008, the exceptionally high freight rates were such that at the end of May 2008 Defendants was said to owe Claimant approximately US$40.5 million.<\/p>\n

Thereafter, Claimant and Defendants entered into a settlement agreement pursuant to which Defendants\u2019s obligation to pay the May settlement sums and any subsequent 2008 settlement sums was postponed on terms. A dispute subsequently arose as to the proper construction of one of the clauses of the settlement agreement. According to Claimant the proper construction of the relevant clause meant that it was owed a substantial amount of money by Defendants. However, according to Defendants, the proper construction meant that Defendants owed Claimant nothing, but rather Claimant owed Defendants a substantial amount of money.<\/p>\n

Claimant applied to strike out those parts of Defendant\u2019s defense to their High Court Action which referred to statements made by Claimant’s representatives in the course of \u2018without prejudice\u2019 <\/em>negotiations (both written and oral)<\/span><\/em><\/strong> which led to the signing of the settlement agreement. Defendants opposed the application on the basis that the statements should be admissible because they related to the background facts as Claimant and Defendants understood them at the time, and which were material for the proper interpretation of the relevant term of the settlement agreement. Defendants also argued that the statements should be admissible because they were sufficiently clear as to give rise to an estoppel in Defendants favor, and because they were relevant to the question of whether Claimant’s damages were too remote to be awarded.<\/p>\n

Judgment at First Instance<\/strong><\/p>\n

Andrew Smith J held at first instance that evidence of background facts should be admissible to inform the proper interpretation of a settlement agreement, notwithstanding that the relevant facts were statements made in \u2018without prejudice\u2019 <\/em>negotiations. If evidence of \u2018without prejudice\u2019<\/em> negotiations could be admitted on the question of whether a settlement had been reached, and what the terms of a settlement were, then it was logical that it could also be admitted on the question of the proper meaning of those terms.<\/p>\n

Court of Appeal Judgment<\/strong><\/p>\n

That decision was overturned by the majority of the Court of Appeal. The Court held that the factual matrix and remoteness purposes for which Defendants wished to rely on statements allegedly made during the \u2018without prejudice\u2019 <\/em>negotiations did not justify the creation of any new or enlarged exception to the \u2018without prejudice\u2019<\/em> rule. It held that the well-settled policy of protecting negotiations conducted \u2018without prejudice\u2019<\/em> is stronger than that of admitting evidence of \u2018without prejudice\u2019<\/em> negotiations which may be said to be arguably relevant, either as part of the factual matrix as an aid to construction or as concerning remoteness.<\/p>\n

Ward LJ, in his dissenting judgment, agreed with Andrew Smith J’s judgment and strongly disagreed with the majority’s decision. If one can use the antecedent negotiations to prove the agreement, to rescind it, or to rectify it, he asked rhetorically, why could one not use the negotiations to establish the truth of what they concluded contract means? He described the argument to the contrary as “barmy<\/em>” and “illogical<\/em>” and considered that the majority’s decision “goes to prove what every good old-fashioned county court judge knows: the higher you go, the less the essential oxygen of common sense is available to you.<\/em>”<\/p>\n

Supreme Court Judgment<\/strong><\/p>\n

The Supreme Court unanimously overturned the Court of Appeal’s majority judgment and reached essentially the same conclusion as Andrew Smith J at first instance and by Ward LJ in the Court of Appeal. The lead judgment was handed down by Lord Clarke and recognized that an interpretation exception should be recognized as an exception to the \u2018without prejudice\u2019<\/em> rule.<\/p>\n

The Court noted that the principles which govern the correct approach to the interpretation of contracts have been the subject of some development or clarification in recent years. Trial judges nowadays have to distinguish between material which forms part of the pre-contractual negotiations which is part of the factual matrix and therefore admissible as an aid to interpretation and material which forms part of the pre-contractual negotiations but which is not part of the factual matrix and is not therefore admissible. The Supreme Court’s view is that the problem is not relevant to the question of whether, where the pre-contractual negotiations that form part of the factual matrix are ‘without prejudice’,<\/em> evidence of those negotiations is admissible as an aid to construction of the settlement agreement. These are two separate questions.<\/p>\n

The Court saw no reason why the ordinary principles governing the interpretation of a settlement agreement should be any different regardless of whether the negotiations which led to it were ‘without prejudice.’ Lord Clarke went on to say:<\/p>\n

“I would accept the submission made on behalf of <\/em>Defendants that, if a party to negotiations knows that, in the event of a dispute about what a settlement contract means, objective facts which emerge during negotiations will be admitted in order to assist the Court to interpret the agreement in accordance with the parties’ true intentions, settlement is likely to be encouraged not discouraged. Moreover this approach is the only way in which the modern principles of construction of contracts can properly be respected<\/em>.”<\/p>\n

The Court also considered that the admissibility of evidence of what was said or written in the course of \u2018without prejudice\u2019<\/em> negotiations is important not only in relation to the principles of construction, but also in relation to the principles of rectification, which are closely related.<\/p>\n

Implications<\/strong><\/p>\n

The \u2018without prejudice\u2019 rule<\/em><\/strong><\/strong><\/p>\n

The rule operates to prevent statements which are made in a genuine attempt to settle an existing dispute from being admissible in Court as evidence which can be used against the party that made the statement. However there are exceptions to this rule which are important to bear in mind and which have been expanded by the Supreme Court’s decision.<\/p>\n

The Exceptions<\/em><\/p>\n

Although the Supreme Court’s decision focused on settlement agreements, it is likely to be applicable to all contracts that arise out of \u2018without prejudice\u2019<\/em> discussions. The Supreme Court’s decision in Claimant \u2013v- <\/em>Defendants has added one more exception to the current exceptions to the \u2018without prejudice\u2019<\/em> rule. The following is a practical list of the current exceptions:<\/p>\n

(i) Settlement Agreements<\/em><\/p>\n