In Avonwick Holdings Ltd v Webinvest Ltd the Chancery Division considered the use of ‘without prejudice’ as a topper for letters and emails. The case concerned draft heads of terms over the restructuring of the defendant’s obligations under a loan agreement after Webinvest had defaulted on a debt due.
Avonwick’s solicitor started marking correspondence between the parties (and the draft heads of terms) as ‘Without Prejudice & Subject to Contract’ and all parties followed suit in further communications. The parties were later unable to reach an agreement to restructure the heads of terms and Webinvest wanted to restrain Avonwick from submitting a wind-up petition against it. The Court was asked to consider whether the correspondence between the parties should be admissible as evidence at trial or whether it was protected by the ‘without prejudice’ rule as marked.
The ‘without prejudice’ rule is used to exclude evidence of communications where parties genuinely seek to settle a dispute. It is intended to allow parties to communicate openly, without fear of prejudice in court if negotiations fail and encourage settlement outside of litigation. The general rule is that both parties must agree for a ‘without prejudice’ document to be put before the court.
There are three limbs for the ‘without prejudice’ rule to apply there must be:
- An existing dispute of some sort, but need not yet be litigious;
- A genuine effort to settle the dispute; and
- Substance over form: just because the document is marked without prejudice it does not mean the rule applies.
In Avonwick, it was ruled the term ‘without prejudice’ was used incorrectly because at the point of communications there was no dispute between the parties. The judge said the negotiations between the parties concerned how and when an admitted liability should be repaid and this was different from seeking to settle a disputed liability.
It was also confirmed that communications cannot benefit from ‘without prejudice’ privilege in retrospect when a dispute is later raised – the dispute has to be in existence at the time the ‘without prejudice’ rule is intended to apply.
The judge considered that Avonwick’s solicitor had made a mistake in marking the communications as ‘without prejudice’ and held that the communications between the parties were not subject to the protection of the ‘without prejudice’ rule and were therefore admissible at the forthcoming trial.
Give careful consideration to marking documents ‘without prejudice’ as it will not be a comprehensive means of protection. It will ultimately be the court who considers what is actually happening in the matter and it may ignore the without prejudice label. Be prepared to be called upon by the court to explain your reasoning for marking correspondence as ‘without prejudice’.