Shareholder disputes can involve significant commercial interests, sensitive information and, at times, strong personal emotions. During negotiations for concessions, settlements or other forms of resolution, parties will naturally wish to communicate openly and explore potential compromises without the concern that their statements may later be used against them as evidence in court. This is the purpose of without prejudice communications, which provide a degree of protection to encourage genuine settlement discussions.
However, there is a common misconception that without prejudice protection is absolute and applies in all circumstances. In reality, the protection has defined limits, and parties who misuse without prejudice communications or seek to rely on them outside their proper scope may face serious legal consequences.
The scope of without prejudice
When the without prejudice rule applies, all negotiations whether oral or in writing are excluded from being submitted in front of the court as evidence. This is only applicable to negotiations that are genuinely aimed at settlement. It is in the interest of public policy that parties are able to negotiate settlement without the worries of certain statements or offers being put before the court as admissions for decisions on liability or quantum (Cutts v Head [1984]).
In practice, offers such as buy-outs, concessions about the value of shares, and admissions about the position of the shareholders in a genuine attempt to resolve disputes are shielded from being used as trial in the event of negotiations breaking down.
Conditions of without prejudice
Two conditions must be satisfied for the protection to apply:
- There must be an existing dispute between the parties
- The communication must constitute a genuine attempt to settle that dispute
Communication is not without prejudice simply because it is marked to be so. For example, if a letter is not actually part of settlement negotiations, it will not fall under the protection of the rule. In addition, in order for the protection to apply, the communications must have occurred during the course of the dispute.
Exceptions to the rule
The court’s firm position is that the without prejudice rule must not be used to shield parties from wrongdoing under the guise of attempts to settle.
The court will not uphold without prejudice privilege where communications involve clear misconduct, such as blackmail, perjury or where the correspondence was not genuinely intended to facilitate settlement negotiations. However, the threshold for this exception is a high one and is generally reserved for the most obvious cases of abuse. The mere fact that a party seeks to rely on without prejudice privilege to prevent disclosure of inconsistencies or unfavourable statements will not, by itself, amount to the level of unambiguous impropriety required to remove the protection.
Another exception to without prejudice privilege is estoppel. This means that a party can be prevented from going back on a representation made during without prejudice negotiations. Where one party makes a clear and unambiguous statement (for example, regarding a settlement term) within privileged communications, and the other party relies on it to their detriment, the statement may be admitted before the court to establish an estoppel. However, this can only be used for statements made by the opposite party/parties.
Without prejudice communications is a powerful tool in aiding parties to reach more amicable agreements or even out-of-court settlement, but it must be used with care and not be abused. Just because a statement is labelled “without prejudice” does not automatically position it under privilege. However, if used right, it can be imperative to the outcome of disputes.
If you need advice or assistance, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.