Up for interpretation

The Supreme Court judgment in Oceanbulk Shipping and Trading SA v TMT Asia Limited [2010] UKSC 44 has been hailed as creating a new exception to the without prejudice rule, now known as the 'interpretation exception'. But has the law changed or are public policy considerations merely being consistently applied?

These were inevitably complex and related to an argument between the parties as to who was responsible for delay in closing out several open freight forwarding agreement (FFA) contracts between them. In two meetings the parties and their lawyers decided to resolve matters by agreeing to 'cooperate to close out [the FFAs] against the market' by a certain date (15 August 2008). Had closing taken place by that time, Oceanbulk would have been in the money and receiving a payment from TMT. Instead, the market moved dramatically following the collapse of Lehmans and the position was reversed with Oceanbulk now owing TMT.

The delay meant that TMT would be receiving a payment on closing. Oceanbulk claimed the difference between what it would have had in the market and what TMT was to receive, and the parties argued over who was responsible for the failure to close out on the agreed date.

Ambiguous cooperation

Oceanbulk had a tolerably clear case on the settlement agreement that the cooperation term required the parties to close out bi-laterally and that to the extent that TMT had dragged its feet it was in breach and had caused loss under the terms of the agreement.

Although the defence arguments were complex, in essence TMT argued the cooperation term was ambiguous (and almost all the judgments en route to the Supreme Court agreed with this). So, the only issue was whether that ambiguity could be clarified by reference to what the parties had discussed in the without prejudice meetings.

At first instance Andrew Smith J in the Commercial Court refused to shut out reference to the without prejudice communications and allowed representations of fact made by Oceanbulk to be used to plead an estoppel defence. Although the Court of Appeal overturned that ruling, on the basis that the without prejudice negotiations were inadmissible, it was on the basis of a majority.

In a strong dissenting judgment Ward LJ essentially took the view that the privilege in the without prejudice rule lived and died on a public policy platform. As such it was not necessary to create a new exception to it, but simply to ensure that it went no further than public policy properly permitted. Accordingly, if there was ambiguity in the settlement agreement then resort may be had to what was said during the negotiations to identify the true intentions of the parties, consistently with normal rules of contractual interpretation. In essence the Supreme Court agreed, and unanimously so.

Negotiation and interpretation

So, how did the negotiations help the contractual interpretation? The evidence made clear that during the without prejudice negotiations Oceanbulk had represented that it had 'sleeved' its FFAs with TMT. Essentially this amounted to a form of swap under which any losses that Oceanbulk might suffer on closing were covered by back-to-back hedges with a third party. Once it was established that both parties had agreed the terms of settlement on the basis of a common understanding of that fact, it didn't matter that this had been said in without prejudice communications. Otherwise, a critical and objective fact would be lost to the court when interpreting the contract.

Looked at another way, if those facts could not be taken to account they would constitute a fundamental exception to the principle in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 which established that an ambiguous contract could be interpreted with reference to objective facts known to the parties at or before the point of contracting.

The Supreme Court sought to suggest not. The same principle which established the without prejudice rule gave rise to its 'exceptions'. Thus it could not be used to further a fraud or to deny rectification. Why, therefore, should it be used to deny justice being done where a settlement agreement was ambiguous?

In the leading judgment, Lord Clarke explained: '[I]f 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.' While his conclusion may be debatable, it is suggested that his view that the 'interpretation exception' is not new is undoubtedly correct.

Loud and clear

The 'interpretation exception' is not an opportunity for the parties to open up all without prejudice negotiations whenever arguments about a settlement agreement occur. If their agreements are clear and unambiguous then there will be no need to resort to the negotiation. If there is ambiguity, then resort may be had only to objective facts raised and used as a platform in the negotiations.

Parties that try to achieve an advantage by relying on ambiguous wording in their favour will doubtless be frustrated, and rightly so as a matter of policy. There will also be an incentive on the part of the parties and their advisers to draft clearer settlement agreements.

The decision should also provide clarity as to how to resolve a number of disputes still pending and arising from similar facts as Oceanbulk where parties resolved their differences before the market collapse in September 2008, but failed to make contractually clear what would happen if the market moved dramatically. Oceanbulk should help to reduce the number of these disputes still to be judicially determined.