When parties attempt to settle a dispute they can do so on a 'without prejudice' basis, which means that any admissions they make generally cannot be brought up in court.
The rule was created to encourage the resolution of disputes without court action. Communication can be explicitly labelled 'without prejudice' or can qualify automatically as long as it is part of a genuine attempt at compromise.
The rule does not always prevent the admission of evidence of what was said in without prejudice exchanges. Evidence of without prejudice negotiations may be admissible where fraud or misrepresentation was the basis of an agreement, for example.
It has also been established previously that evidence of without prejudice negotiations can be admitted to show whether a compromise agreement has been concluded. Now the High Court has ruled that it can be admitted to determine the meaning of the terms of such an agreement.
Shipping companies TMT and Oceanbulk are in a dispute about the settlement of debts between them. Like other shipping firms, they effectively bet on the future cost of freight and settle those bets between themselves.
As a result of one series of deals Oceanbulk said that TMT owed it $40.5 million. There emerged a dispute about whether this was owed outright to Oceanbulk or whether it was part of a more complicated transaction in which companies hedged their positions on future freight prices through intermediaries. The practice is called 'sleeving'.
The two companies reached a settlement agreement, but TMT argued that some of the negotiations over that agreement showed that the debt in question related to a sleeved deal, which would mean that it may owe less in damages to Oceanbulk.
TMT wanted to present evidence of those negotiations, but Oceanbulk argued that they were not admissible because they were conducted without prejudice.
Mr Justice Andrew Smith recognised the without prejudice exception relating to whether an agreement had been concluded or not.
"It would, to my mind, make little sense for the law to admit evidence about this without also admitting evidence about what the terms of a settlement agreement were," he said in his ruling. "I can see no cogent reason, either of public policy or of any other kind, that evidence of without prejudice exchanges should be admissible to identify terms but inadmissible as to the meaning of the terms: in many cases it would be difficult to apply such a distinction."
He also said that the case would have a fairer result if the exchanges were admissible.
"The interests of justice require the meaning of a settlement agreement to be ascertained by reference to the without prejudice exchanges," he said. "The law generally admits evidence of the contractual context, by way of background facts known or taken to be known to both or all the parties, because it is recognised that such information assists in ascertaining the parties' (objectively evinced) intention."
"It undeniably follows that, if the court is deprived of such evidence in the case of settlement agreements following without prejudice exchanges, it will be the less well equipped to discern the parties' intentions and the less likely to construe the contract in accordance with them," he said.
"I therefore conclude that evidence of the without prejudice exchanges is admissible to the extent that it would be admissible had the exchanges not been without prejudice," said the ruling.
John MacKenzie, a partner with Pinsent Masons, the law firm behind OUT-LAW.COM, said the ruling was unsurprising.
"At first glance it might seem that the court has weakened the protection of the without prejudice rule, but in fact the judgment just applies the existing rule to a new set of circumstances," he said.
"Litigators have always known that the without prejudice rule is not an absolute one, so parties need to be really careful about what they say in their settlement talks," said MacKenzie.
But he said that the protections offered by the rule remain strong.
"Most without prejudice communications will retain their secrecy and they won't be subjected to courtroom scrutiny," he said. "Information that resolves an ambiguity in a settlement agreement might be admitted, but the stuff that's most important in the majority of settlement talks – the evidence that reveals your true bargaining position – that remains off limits."