Without prejudice

In the context of a dispute, parties and their lawyers in common law jurisdictions often engage in “without prejudice” negotiations for the purpose of trying to reach a settlement. This column considers the following questions:

• What is the purpose of the “without prejudice” rule?
• In what circumstances is it effective?
• Is a similar rule recognised under Chinese law?

What is the purpose of the ‘without prejudice’ rule?

In essence, when the parties to a dispute, or their lawyers, enter into “without prejudice” negotiations for the purpose of settling a dispute, they do so on the basis that if their negotiations fail, the details of their negotiations (including any admissions) cannot be used as evidence against them in a court or other dispute resolution forum (e.g. arbitration). Take, for example, a contractual dispute where a party claims that it has suffered loss as a result of a breach of contract by the other party. In an attempt to settle the dispute, the parties enter into “without prejudice” negotiations, during which the relevant party admits liability and makes an offer of compensation. If the negotiations fail and the party claiming breach sues the other party in a court, it cannot use the admission of liability or the offer of compensation as evidence against the other party.

The rationale behind the rule is quite simple: it is designed to encourage the parties to reach a settlement without the risk that any statements or admissions will be used against them in subsequent proceedings. As one judge explained in a well-known statement: “The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability … The rule applies to exclude all negotiations genuinely aimed at settlement, whether oral or in writing, from being given in evidence.” (Oliver LJ in Cutts v Head [1984])

In what circumstances is it effective?

An important qualification in the above statement is that the negotiations must be “genuinely aimed at settlement”. As a result, the phrase cannot be used indiscriminately to protect all communications from being used as evidence in court proceedings. In other words, inserting the phrase “without prejudice” in a document does not automatically confer protection on the document or its contents. It is only where the document is used as part of negotiations genuinely aimed at settlement that the protection will arise.

In addition, the courts in common law jurisdictions have recognised certain exceptions to the “without prejudice” rule. These include the following situations (for a useful summary of the exceptions, see the English Court of Appeal decision in Unilever v Procter & Gamble [2001]):

• “Without prejudice” communications are admissible in circumstances where there is a dispute about whether the parties have in fact reached an agreed settlement. This is because the issue is not the content of the communications, but whether the parties have reached agreement.
• Similarly, a “without prejudice” letter containing a threat is admissible to prove that the threat was made.
• “Without prejudice” correspondence is admissible to explain any delay in commencing or undertaking litigation.
• A court will allow a party to give evidence of what the other party said or wrote in “without prejudice negotiations” if the rule would otherwise be used for the purpose of hiding perjury, blackmail or improper behaviour.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.