The "without prejudice" principle is a tool commonly used by legal practitioners to enable them to speak freely during settlement discussions. When used correctly, any concessions made on behalf of a client, including offers to settle, cannot usually be treated as admissions of liability if the dispute in question cannot be resolved. This is because the without prejudice rule will prevent any oral or written statements, made in a genuine attempt to settle a dispute, from being put before a court or other tribunal as evidence against the interests of the party who made them.

Equally, marking correspondence as "without prejudice" can represent a useful tool for business-owners dealing with a dispute without a solicitor, although knowing when and how to use without prejudice is key to being afforded the protection offered by this common law principle.

In the recent case of AZ v BY [2023] EWHC 2388, the High Court was required to consider the legal framework as it applies to without prejudice communications, and the circumstances in which they are admissible, providing some useful insight into the limits of without prejudice privilege.

The facts of AZ v BY

On the facts of AZ v BY, an adjudication decision had been made on a dispute between the parties, resulting in a decision in AZ’s favour. However, in response to a claim issued by AZ to enforce the adjudicator’s decision, BY issued a parallel claim. This sought a declaration from the court that material deployed by AZ during the course of the adjudication was subject to without prejudice privilege and, as a result of the inadmissible material, the adjudication decision was unenforceable.

The two claims were heard together before Mr Justice Constable.

The decision in AZ v BY

In dismissing AZ’s claim and granting BY’s declaration that the adjudicator’s decision was unenforceable, Mr Justice Constable was required to determine not only the nature of the various communications in the context of the underlying contractual dispute, and whether these were subject to without prejudice privilege, but whether these documents were, as a result, inadmissible.

On the facts of AZ v BY, the court was specifically required to consider an exception to the general without prejudice rule, namely, that where the existence of a compromise agreement is disputed, a tribunal can consider the communications to decide this issue. The court was also tasked with deciding, in circumstances where the decision-maker determines that there was no agreement, whether knowledge of these communications prevents them deciding the dispute fairly due to apparent bias.

Even though the judgment in AZ v BY has been significantly redacted to preserve the confidential nature of without prejudice material in the context of any future court proceedings, Mr Justice Constable found that the particular documents submitted to the adjudicator (about which BY’s complaint was made) were subject to without prejudice privilege. He also found that the negotiations did not result in any binding agreement and, having seen the documents which contained material adverse to one party, there was a real possibility that the adjudicator was biased.

The key takeaways from AZ v BY

The "without prejudice" principle is a rule governing the admissibility of evidence and is founded upon the public policy of encouraging parties to a dispute to settle their differences without recourse to litigation. In this way, parties can fully and frankly put their cards on the table. However, the fact that a document is marked without prejudice is not necessarily conclusive as to its status. In analysing the law in this area, a number of principles were deemed relevant in AZ v BY, including:

• that the court has to determine whether or not a communication is bona fide intended to be part of or to promote negotiations, where the court must work out, on a reasonable basis, what the intention of the author was and how it would be understood by a reasonable recipient
• where negotiations are expressly made without prejudice to begin with, the burden is upon the party who wishes to change the basis of such negotiations to do so explicitly and with clarity
• whilst parties may be communicating both openly and on a without prejudice basis concurrently, the court must exercise extreme caution in embarking upon a dissection of the communications, or discussions in meetings, so as not to undermine the public policy objective
• once a communication is covered by without prejudice privilege, the court is slow to lift the cloak of that privilege unless the case for making an exception is absolutely plain
• one such exception relates to when the issue is whether without prejudice letters have resulted in an agreed settlement, where the correspondence is admissible in this situation because it contains the offer and acceptance forming a contract which has replaced the cause of action in dispute
• where the without prejudice letters have not in fact resulted in an agreed settlement which has replaced the original dispute about which the parties were negotiating, the decision-maker, having seen the without prejudice material, must then assess their own ability to go on to decide the remaining dispute fairly, in accordance with the principles which govern apparent bias.

In cases where parties in dispute are engaging in two parallel streams of communication, some without prejudice and some open, this can quickly complicate matters. This will often be the case where the parties need to continue to communicate on the practicalities of an ongoing project, alongside commercial negotiations around areas of dispute.

Seeking expert legal advice at an early stage can significantly help to maintain a positive working relationship, while negotiating settlement on any disputed issues.

Legal disclaimer

The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions.

Before acting on any of the information contained herein, expert advice should always be sought.