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New exception to 'without prejudice' rule

1 November 2010

The Supreme Court has created a new exception to the rule that statements made in ‘without prejudice’ negotiations are inadmissible in court.

Seven justices decided last week that, where a contract is being construed, an ‘interpretation exception’ should be recognised, overturning a majority ruling of the Court of Appeal (see Solicitors Journal 154/7, 23 February 2010).

David Hughes, head of banking disputes at BLP and acting for Oceanbulk Shipping, said that the Supreme Court ruling meant that businessmen and lawyers would have to be more cautious in what they said in important negotiations.

Delivering the leading judgment in Oceanbulk Shipping v TMT Asia [2010] UKSC 44, Lord Clarke said there was no “sensible basis” on which a line could be drawn between the traditional rectification exception and his new exception.

Oceanbulk and TMT were involved in the trading of forward freight agreements, with TMT seeking to rely on comments made by Oceanbulk in the 48 hours before the signing of a settlement agreement.

Oceanbulk argued that the comments were made during without prejudice discussions and should not be referred to in court.

TMT argued that without prejudice discussions could be referred to as “an aid to construction” of the terms of the settlement and at the very least as evidence of the background against which the parties were contracting.

Relying on Lord Hoffmann’s judgment in the leading case of Chartbrook v Persimmon Homes [2009] UKHL 38, Lord Clarke said: “The language should be construed in the same way and the question posed by Lord Hoffmann should be the same, namely what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.

“That background knowledge may well include objective facts communicated by one party to the other in the course of the negotiations. As I see it, the process of interpretation should in principle be the same, whether the negotiations were without prejudice or not.”

Lord Clarke allowed TMT’s appeal. Lords Rodger, Walker, Brown, Mance and Sir John Dyson agreed, together with Lord Phillips, who added a brief explanation of his own.

Hughes said Lord Clarke had added a tenth exception to the without prejudice rule, to sit alongside the nine already recognised by the courts.

“When courts are looking at the factual matrix as an aid to interpretation, they can open up without prejudice negotiations,” he said.

“We were arguing that parties, businessmen and lawyers, up and down the country, were looking to explore settlement under the cloak of without prejudice, so that anything they said would not see the light of day in a court of law.

“Until now the courts have made every attempt to observe that sanctity. In future parties will have to more cautious in what they say in important negotiations.

“Once they conclude a settlement they must conclude it in the clearest possible terms to avoid any difficulties with interpretation.”

Will Marshall, partner at Ince & Co, acted for TMT. “Commercial lawyers agreed at the time that the first instance judgment was correct,” he said.

“I don’t think this will alter the way people carry out without prejudice negotiations, as acknowledged in the Supreme Court judgment.

“Only matters of fact raised during those negotiations can be raised to help explain what the contract was meant to mean. It reinforces the rule that you must not make false statements in discussions.”

Marshall said that, had the Court of Appeal judgment stood, it could have led to two “classes of meetings” depending on whether or not the meeting was without prejudice.

Hughes and Marshall both said the underlying dispute between Oceanbulk and TNT had been resolved.

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