New Exception to Without Prejudice Rule

May 10, 2011

Oceanbulk Shipping & Trading SA v TMT Asia Ltd & Ors [2010] UKSC 44 (27 October 2010)

Introduction

Evidence of 'Without Prejudice' negotiations are now admissible to the Court when attempting to determine the true meaning of the terms of a Settlement Agreement.

A recent ruling of the Supreme Court has created a new exception to the rule on admissibility of 'Without Prejudice' correspondence.

The 'Without Prejudice' rule is a long-established legal principle that communications between parties in a dispute declared to be 'Without Prejudice' are not admissible as evidence. There are certain exceptions to the rule; most notably, the decision of Robert Walker LJ in Unilever plc v Procter & Gamble Co [2001] All ER 783 which states that when the issue is whether 'Without Prejudice' communications have resulted in a concluded Compromise Agreement, they are then admissible in evidence.

Facts

Oceanbulk and TMT were involved in the trading of forward freight agreements. Oceanbulk invoiced TMT for approximately US$40.5 million which TMT failed to pay. The parties' representatives and solicitors entered into 'Without Prejudice' settlement negotiations which were partly in writing and partly the result of two meetings. The parties entered into a written Settlement Agreement but Oceanbulk later sued for damages citing TMT’s failure to comply with the Agreement.

The parties agreed on the existence of the terms of the written Settlement Agreement but they disputed the true construction of one of its terms. The appeal centred on whether it was permissible to refer to anything written or said in the course of the 'Without Prejudice' negotiations in order to assist the Court when interpreting the Agreement.

Outcome

  • When considering a contract between two parties, evidence is admitted in order to enable the Court to make an objective assessment of the parties' intentions. This stands even when such evidence was made during 'Without Prejudice' negotiations;
  • The Court emphasised the need not to "underplay the importance" of the 'Without Prejudice' rule or to extend the new exception "beyond evidence which is admissible in order to explain the factual matrix or surrounding circumstances"; and 
  • The "interpretation exception" should be recognised as an exception to the 'Without Prejudice' rule, yet only when "justice clearly demands it". The Court’s use of the exception will ultimately depend on the facts of the case.


Implications

  • 'Without Prejudice' negotiations are now admissible to the Court when the Court considers the construction of an Agreement.
  • Parties to Settlement Agreements must ensure the terms are clearly defined and understood. Minutes of any meetings during settlement negotiations should be recorded to assist the Court with its interpretation.
  • Whilst the 'Without Prejudice' rule could be seen to be weakened, only information that resolves an ambiguity in a Settlement Agreement is admissible. Parties should still attempt to settle wherever possible and as the recent Court of Appeal case, Rolf v De Guerin [2011] showed, the Courts will penalise parties should they decide not to mediate when involved in litigation.

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