Without Prejudice - Admissability of Exchanges as an Aid to Interpretation

Oceanbulk and TMT entered into several freight forward swap agreements. In June 2008, Oceanbulk invoiced TMT for a sum in excess of US$40million, which TMT failed to pay. Without prejudice discussions ensued, resulting in a settlement agreement.

 

Subsequently Oceanbulk brought a claim against TMT for breach of the settlement agreement. In its defence, TMT sought to rely on those without prejudice communications which had resulted in settlement on the grounds that they were relevant to the interpretation of the settlement reached. Oceanbulk sought to strike out part of TMT’s pleading which was based on the without prejudice exchanges.

 

Without prejudice privilege is a rule which governs the admissibility of evidence. It works so as to prevent the disclosure of what would otherwise be admissible evidence provided the communications have been made with a view to settling a potentially litigious dispute. There is also no requirement that the communications be “labelled” without prejudice if it is clear that negotiations to settle are the purpose. The rule is founded on public policy considerations “that parties should be encouraged so far as possible to settle disputes without resort to litigation and should not be discouraged by the knowledge that anything that could be said in the course of such negotiations...may be used to their prejudice in the course of the proceedings” as per Oliver LJ in Cutts v Head [1984] Ch 290.

 

There are a handful of exceptions to the without prejudice rule when the discussions can be relied on. The court considered three to be relevant. These are:

 

1. To evidence that an agreement was in fact made;
2. To set aside an agreement for, inter alia, misrepresentation; and
3. To support an action in estoppel.

 

The essence of Oceanbulk’s argument was that the first exception did not extend so far as to include construction and interpretation of the settlement agreement that Oceanbulk argued had been concluded.

 

Smith J disagreed. It would make little sense for a court to admit privileged exchanges to consider whether a settlement agreement had indeed been reached if it did not also admit evidence as to what the terms of that settlement were. The distinction between identifying the terms of an agreement and interpreting them is a fine one and would be difficult to apply. 

 

Smith J said that “in my judgment the interests of justice require the meaning of a settlement agreement to be ascertained by reference to the privileged exchanges.” 

 

The law generally admits evidence of contractual context, if relevant, to assist in ascertaining the parties’ objectively evinced intention.   There was no reason to set a higher test to without prejudice communications other than whether the exchanges were relevant to assess the parties’ intention. The exchanges were admissible to the extent they would have been had they not been without prejudice.

 

Oceanbulk Shipping & Trading SA v TMT Asia Limited [2009] EWHC 1946 (Comm)

Update

See report on Supreme Court decision in this case.