Lender entitled to rely on debt restructuring negotiations marked 'without prejudice', court rules

In its judgment, the court said that the documents were not protected by privilege rules as they had not been created in preparation for actual legal proceedings or when legal proceedings were reasonably anticipated. Instead, the documents merely formed "a negotiation as to how and when" an already-agreed liability should be discharged, the court said.

The decision was upheld by the Court of Appeal last week, only days after the original judgment was delivered.

Litigation expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said that the case showed how the use of the term 'without prejudice' on documents was "often misunderstood".

"A genuine 'without prejudice' communication is privileged, that is protected from disclosure in court proceedings," he said. "This enables parties to a dispute to  communicate freely, including making concessions, without worrying that their case might be damaged at trial if the court became aware of their 'without prejudice' communication. In the absence of this privilege, communications between the parties are treated as 'open' and can be shown to the court."

"However, in order for a communication to attract 'without prejudice' privilege, as the judge said here, there must be both a genuine dispute and a genuine attempt to settle it. This is a question of substance rather than form. Although the label 'without prejudice' is neither necessary nor conclusive, use of the label is a strong indication that the communication satisfies the requirements for 'without prejudice' privilege," he said.

He added that it was common to see the phrase 'subject to contract' used in settlement negotiations, as well as in contract negotiations more generally, as it enabled parties to "seek to reach an agreement in principle, without being bound unless and until a formal contract has been drawn up and signed".

A company, Avonwick, had lent a substantial amount of money to another, Webinvest, which defaulted on repayment. Some written negotiations about how to re-schedule the repayments took place, however Webinvest alleged that there was an oral 'pay when paid' agreement which meant that the payment was not due at all. Avonwick argued that the negotiations could be used as evidence at trial, because at that stage Webinvest did not disagree that it was liable.

In his judgment, Mr Justice Richards said that although courts tended to view the express marking of documents as without prejudice as "a highly material factor in determining their status", the wording was certainly not conclusive. He said that the court had to be satisfied that there was a "genuine dispute to which the proposals were directed".

"At first blush, one might assume that communications expressly marked 'without prejudice' between parties, starting on the same date as the service of a contractual demand and continuing after the service of statutory demands, would attract the privilege," he said. "But it is the case of Avonwick that at the time of these communications where was no dispute at all about the liability of Webinvest to repay the loan, and hence no dispute as to the liability of Mr Shlosberg under his guarantee."

"The issue is whether at the time of the relevant communications there existed a genuine dispute, and in my view it is clear that none existed at that time. Communications made at a time when there is no dispute cannot, with retrospective effect, be made subject to the without prejudice privilege by subsequently raising a dispute," he said.

In upholding the judge's decision, the Court of Appeal also rejected an argument that use of the term 'without prejudice' was intended to create an agreement that the correspondence would not be used in court proceedings. Such an agreement could not be imposed unilaterally; and the argument that any agreement existed was undermined by use of the term 'subject to contract', the Court of Appeal said.