Supreme Court creates new exception to 'without prejudice' rule

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 this morning 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, 23 February 2010).

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.

He accepted TMT's arguments that 'if a party to negotiations knows that, in the event of a dispute about what a settlement contract means, objective facts which emerge during negotiations will be admitted in order to assist the court to interpret the agreement in accordance with the parties' true intentions, settlement is likely to be encouraged not discouraged.

'Moreover this approach is the only way in which the modern principles of construction of contracts can properly be respected.'

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.

'In both cases the evidence is admitted in order to enable the court to make an objective assessment of the parties' intentions.'

Lord Clarke added that he was not seeking to 'underplay the importance' of the without prejudice rule or extend the new exception 'beyond evidence which is admissible in order to explain the factual matrix or surrounding circumstances' to the court whose responsibility it was to construe the contract.

He 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.