Clare Stothard looks at two recent cases regarding the privilege of 'without prejudice' and considers what implications they might have


It has long been established law that written or oral communications between the parties to a dispute which are made for the genuine purpose of attempting to resolve that dispute attract 'without prejudice' privilege. This means that they cannot usually be admitted in evidence or form part of disclosure in any ensuing litigation. In two recent cases, the courts have considered the application and scope of the privilege, providing helpful guidelines as to when and how it will be applied.



The underlying rule

The origins of the without-prejudice rule are in part public policy and in part contractual. The underlying public policy is that parties should, if possible, be encouraged to settle their disputes without recourse to litigation and should not be discouraged from doing so by the fear that anything they say within their settlement discussions may later be used against them if settlement is unsuccessful. The House of Lords endorsed the 'public policy' rationale in Rush & Tompkins v Greater London Council [1989] AC 1280, where Lord Griffiths described its purpose as protecting a party from being embarrassed in any litigation by an admission made purely in an attempt to reach settlement.



While recognising the importance of the public policy, Cutts v Head [1984] 120 put the privilege on a slightly different footing, finding there was also an implied agreement between the parties to put their cards on the table in negotiations between them without fear of those cards being used to their prejudice in any subsequent proceedings.



Although the phrase 'without prejudice' is regularly invoked in practice, up until recently there has been a degree of uncertainty as to the circumstances when it will apply prior to the issue of proceedings. In Cutts, the parties invoked the privilege, although litigation had not yet commenced, where there was a clear dispute between them. More recently in Bradford & Bingley v Rashid [2006] 1 WLR 2066, the House of Lords was prepared to recognise that exchanges as far removed as 21 months before the start of litigation could attract the rule in the same way as exchanges after the start of litigation.



The two May 2007 decisions have brought sharply into focus the nature and extent of the without-prejudice privilege and have provided some guidelines as to the approach that the courts are likely to apply in allowing that tag.



Framlington Group Plc and AXA Framlington Group Limited v Ian Barnetson (Court of Appeal, 24 May 2007)

The issue that occupied the Court of Appeal was whether and in what circumstances documents created prior to the threat of litigation may be classified as without prejudice.



The case concerned a dispute over the terms of Mr Barnetson's employment with Framlington. Over a five-month period, discussions took place between the parties which led to production of a draft compromise agreement in November 2005 marked 'without prejudice'. In December 2005, those negotiations broke down and Mr Barnetson threatened proceedings. He was subsequently dismissed and commenced litigation in April 2006. At trial, reference was made in some of the witness statements to the without-prejudice negotiations and draft compromise agreement. The question before the court was how proximate the negotiations had to be to the start of litigation to attract the privilege.



At first instance, the judge held that the witness statements did not offend against the without-prejudice rule because the exchanges to which they referred had taken place before any threat of litigation. The Court of Appeal disagreed. Lord Justice Auld found that the key was the subject matter of the dispute rather than how long before the issue of proceedings it had been aired.



Endorsing the public policy behind the privilege, he held that the crucial consideration was whether in the course of their negotiations, the parties had contemplated or might reasonably have contemplated litigation if they could not agree a compromise. He questioned whether the parties would have lowered their guards at the time if they had not thought or hoped that through negotiating they could avoid the need to go to court and he found that in their negotiations both parties were clearly aware of the possibility of litigation. Their discussions were therefore without prejudice and inadmissible in evidence.



The Stax Claimants v The Bank of Nova Scotia Channel Islands Limited and ors (Chancery Division, 15 May 2007)

Stax concerned the nature of the discussions themselves and the extent to which the privilege could apply to discussions about tactics in litigation. In approaching the rule from a slightly different angle, Mr Justice Warren rejected the claimants' invitation to extend the rule to confidential discussions concerning proceedings generally. Adopting a similar approach to the court in Framlington, he acknowledged the public policy underpinning the rule, and found that privilege covered only genuine settlement discussions.



The claimants sued the Bank of Nova Scotia for losses they incurred as a result of the transfer of certain benefits under a UK-approved occupational pension scheme to an offshore scheme. In denying liability, the bank argued that the claimants had retained and relied upon advice from their own independent financial advisers (IFAs) and not them. The bank brought third-party proceedings against the IFAs.



A without-prejudice meeting took place in October 2006 between the lawyers representing the claimants and the IFAs. The purpose was described as to form a 'battle plan', to discuss the proceedings generally and explore the common interest between the parties in establishing that the bank could not avoid responsibility entirely. The bank sought disclosure of the agenda for the meeting and attendance notes of the meeting, as well as correspondence between the legal advisors for the claimants' and the financial advisers. The claimants argued that the meeting was 'without prejudice', as were the documents surrounding it.



Warren J rejected the claimants' contentions. He analysed the communications, finding that the rule covered only genuine settlement discussions aimed at avoiding litigation by settling disputes. He made it clear that, in his view, to extend privilege to confidential discussions would not further the public interest. He also indicated that as a matter of practice in considering the issues of disclosure, each document should be considered individually and that privilege, including without prejudice privilege, should not simply be claimed for a wide class of documents. (As an aside, he found the battle plan, merits and tactics were likely to be covered by litigation privilege in any event.)



Conclusion

Taken together, the two cases show that the courts' approach is to apply public policy and allow without-prejudice privilege to protect discussions between the parties that are genuinely aimed at avoiding litigation, irrespective of whether that litigation has in fact been threatened expressly.



However, the courts will continue to apply the rule with restraint and the label 'without prejudice' will not by itself protect those documents which deal with the surrounding circumstances where there is no genuine attempt to further settlement. The courts will continue to look at the substance of those documents.



A practical consequence of these decisions is that parties should take particular care in drafting documents to ensure that they are without prejudice in their own right and avoid surrounding information which is not aimed at settlement. Those documents should include clear references to litigation being in contemplation to make those documents sufficiently proximate to such litigation should it be necessary.



Clare Stothard is a partner in the banking and finance team at Watford and London firm Matthew Arnold & Baldwin