Practice and procedure – Privilege – “Without prejudice” correspondence – Parties engaging in correspondence with a view to restructuring loan agreement – Correspondence headed “Without Prejudice & Subject to Contract” – Whether correspondence admissible in proceedings between parties – Whether covered by “without prejudice” privilege – Whether such privilege attaching only to correspondence made at time when dispute or issue existing between parties – Whether appropriate to make order for disclosure of correspondence between appellant and third party – Appeal allowed in part
The appellant borrowed sums from the respondent on the terms of a loan agreement in order to make a further loan to a third party. Although the appellant made payments of interest, it did not repay any of the principal. In April 2014, the respondent served demands on the appellant under the loan agreement followed by statutory demands under the Insolvency Act 1986.
Correspondence ensued between the parties with regard to a possible restructuring of the loan, with communications on both sides headed “Without Prejudice & Subject to Contract”. The date for compliance with the respondent’s notices expired at the end of May 2014 without agreement being reached. The appellant then made applications to the court to restrain the respondent from presenting a winding-up petition and to set aside the statutory demands. In those applications, it asserted the existence of a collateral contract establishing a “pay when paid” arrangement, under which the principal loan sum would not become repayable until the appellant itself received repayment from the third party.
An issue arose as to whether the earlier correspondence was admissible in evidence in the proceedings or whether “without prejudice” privilege attached to it. The judge held that “without prejudice” privilege would attach only to correspondence made at a time when a dispute or issue existed between the parties which they were trying to resolve. He found that, at the time of the correspondence in question, there was no dispute about the appellant’s liability under the loan agreement since the allegation of a collateral contract had not been made until later. He concluded that the correspondence did not attract privilege and was admissible: see [2014] EWHC 3322 (Ch); [2014] PLSCS 277.
The appellant appealed. It contended that parties could extend the “without prejudice” privilege by agreement, such that the privilege attached to all correspondence expressly marked “Without Prejudice” even if there was no extant dispute. It also appealed against an order, made by a different judge, for disclosure of documents leading up to the settlement of arbitration proceedings between the appellant and the third-party borrower.
Held: The appeal was allowed in part.
There were two bases for the operation of the “without prejudice” rule. The first, which rested on the public policy of encouraging people to settle their differences, was engaged only where there was a dispute. The concept of “dispute” was wide in scope, so that an opening shot in negotiations might fall within the policy even though the other party had not rejected the offer. In order to decide whether the public policy was engaged, the court had to determine, on an objective basis, whether there was in fact a dispute or issue to be resolved. If there was not, then that head of public policy was not engaged. On the facts of the instant case, the judge had properly found that, at the date of the correspondence in issue, there had been no dispute between the parties about the appellant’s liability under the loan agreement.
The second basis for the rule was contractual, in that parties could, by contract, extend the usual ambit of the “without prejudice” rule: Cutts v Head [1984] Ch 290, Unilever plc v The Proctor & Gamble Co [2000] 1 WLR 2436, Bradford & Bingley plc v Rashid [2006] UKHL 37; [2006] 1 WLR 2066; [2006] PLSCS 166 and Rush &Tompkins Ltd v Greater London Council [1989] AC 1280 [1988] EGCS 145 considered. Freedom of contract was a basic principle of English law and if the parties agreed, for valuable consideration, that their communications would not be used in civil proceedings in court, then it was difficult to see why, as a matter of principle, the court should not uphold their agreement. Confidentiality clauses were the stuff of commercial life and it was open to two parties by agreement to immunise their acts from what would otherwise be their legal consequences. However, that had to be done by agreement and one person could not unilaterally impose a rule on another. In the instant case, there was no contract between the parties to the effect that communications would not be used in civil proceedings. It was relevant that the communications were headed “Subject to Contract”, which generally meant that no legal consequences were to flow from the communications so headed. The words “Without Prejudice” had many usages apart from the settlement of extant or contemplated disputes. One such usage was to indicate that the user did not mean to give up any right that he might have; that was the sense in which the words were used in the instant case.
In relation to the communications leading up to the settlement between the appellant and the third party borrower, the judge had wrongly found that privilege had been waived in relation to those negotiations. The privilege was a joint one, to which the third party was also entitled, and there was no evidence that the third party had consented to the waiver. If the “without prejudice” privilege had not been waived in relation to those negotiations, then there was no basis on which the appellant was entitled to disclosure. The general rule was that “without prejudice” negotiations, once privileged, remained so even after settlement: Rush & Tompkins Ltd applied; Muller v Linsley & Mortimer [1996] PNLR 74 distinguished. The appeal against the disclosure order was allowed to that limited extent.
Philip Marshall QC and Matthew Morrison (instructed by Fladgate LLP) appeared for the appellant; Steven Berry QC, Tom Smith and Henry Phillips (instructed by Dechert LLP) appeared for the respondent.
Sally Dobson, barrister
