England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE ANDREW SMITH

		Royal Courts of Justice Strand, London, WC2A 2LL
		15/02/2010

Lord Justice Longmore:

1. This appeal raises the question whether evidence of "without prejudice" communications and discussions can be given if there is a dispute about the interpretation of a written settlement agreement.
2. The underlying dispute is a result of the volatility of the freight market in 2008. The parties effectively bet on the freight market going up or down by means of what are called forward freight agreements ("FFAs"). They agree a contract rate; the "seller" bets that the actual rate on a particular date in the future will be lower than the contract rate; the "buyer" bets that the actual rate will be higher than the contract rate. The appellants ("Oceanbulk") and the respondents ("TMT") entered into a large number of FFAs with each other for the year 2008. Oceanbulk thought the market would go up while TMT thought it would go down. It did go up during May, June and July, thereafter the market turned and went down to a very low point in September and the following months. The parties had agreed monthly settlements so that by the end of May TMT owed Oceanbulk about $40.5 million. TMT sought to negotiate terms for payment and a settlement agreement was reached. If (as happened) TMT did not exercise any of the options open to them under the agreement, the first sentence of clause 5 was to apply:-

"In respect of FFA open contracts between TMT Interests and [Oceanbulk] for 2008, the parties shall crystallise within the ten trading days following 26^th June 2008, as between them, 50% of those FFAs at the average of the ten days' closing prices for the relevant Baltic Indices from 26^th June 2008 and will co-operate to close out the balance of 50% of the open FFAs for 2008 against the market on the best terms achievable by 15^th August 2008."

3. The first 50% of FFAs for 2008 were successfully crystallised but there is a dispute about the meaning of the last part of this clause. Oceanbulk say TMT did not co-operate to close out the remaining 50% of FFAs by 15^th August 2008 or at all. The result has been that, because the FFAs remained open after 15^th August and during the subsequent market downturn, Oceanbulk owes TMT money instead of the other way round. TMT say that the reason why co-operation was needed was because Oceanbulk had liabilities to counterparties and it was those contracts that had to be "closed out" at figures to be agreed. Oceanbulk say the co-operation was only needed to close out the bilateral position as between Oceanbulk and TMT and had nothing to do with Oceanbulk's positions as against third parties.
4. TMT in support of their construction arguments have pleaded (and I summarise) that Oceanbulk represented in the course of negotiations over a period of 48 hours leading up to the settlement that the transactions entered into between themselves and TMT were "sleeved" transactions which meant that Oceanbulk had made a directly equivalent contract with a counterparty under which they were liable to pay to that counterparty the same sum which TMT were liable to pay Oceanbulk. The parties agree that, for the purpose of this appeal, "sleeving" can be defined as:-

"…an arrangement by which one party (party B) will, at the request of another party (party A), enter into a specific FFA trade with a third party (party C) and party B will then replicate that position back-to-back with party A. The usual reasons for such an arrangement are that (i) party C would not be willing to trade with party A (e.g. because of perceived counterparty risk) and/or (ii) party A does not wish to reveal to the market that he is seeking that position, e.g. because he is concerned that he will move the market. However, once the contracts have been concluded then (absent e.g. an agency arrangement), the two contracts are independent and each party acts as a principal: the contracts do not necessarily remain 'coupled'."

5. Oceanbulk say that, if those representations as to sleeving were made, they were made in the course of negotiating the settlement agreement and were expressly or impliedly made in the course of "without prejudice" discussions and should not be referred to. They have, therefore, applied to strike out the paragraphs of the re-amended defence and counterclaim which refer to them. TMT accept that some of the representations and statements on which they rely were made on "without prejudice" occasions, but say that, just as without prejudice discussions can be referred to for the purpose of determining whether a settlement agreement was made and what the terms of that agreement were, so also they can be referred to as an aid to the construction of those terms if there is a dispute about their meaning, at any rate if they evidence the background against which or the matrix within which the parties were contracting. Oceanbulk say that the recognised exceptions to the "without prejudice" umbrella do not go as far as that.
6. Oceanbulk will apparently also seek to say at any trial that reference to the statements about sleeving were part of the negotiations and should not be referred to in evidence for that reason also. The difficulty about that is that Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 has decided that evidence of negotiations can be given to establish that "a fact which may be relevant as background was known to the parties". It is said that the statement about sleeving was such a fact and that is why this appeal concentrates on the without prejudice aspect of the negotiations leading up to the settlement agreement and does not deal with the fact that the representations relied on were made in the course of pre-settlement negotiations.
7. Accordingly the main issue on this appeal is whether without prejudice discussions can be given in evidence in support of arguments about construction if they arguably establish a fact which is arguably part of the background to or the matrix of the contractual agreement. Not surprisingly, the court asked Mr Eder QC for the respondents to specify (more clearly than the pleadings did) what the fact was which he wanted to establish as a fact known to both parties which was arguably relevant to the construction of clause 5. He replied that the relevant fact was a representation made by Mr Pappas both in e-mails and oral discussions (accepted to be without prejudice) that all or most of the FFAs made by Oceanbulk with counter-parties were originally sleeved and continued to be so at the time of the settlement negotiations. It is noteworthy that the relevant fact is said to be that the representation was made, not that the fact said to have been represented was true. This fact is then said to be relevant to the submission that the word "co-operate" in clause 5 of the agreement means that Oceanbulk positions against their counterparties had to be closed out before any question could arise in relation to the position as between Oceanbulk and TMT.
8. Andrew Smith J has held that evidence about this representation can be given and now that his judgment is reported at [2009] 1 WLR 2416, I need not refer to the factual background to this case in any further detail.
9. There are undoubtedly some occasions on which without prejudice statements can be referred to in evidence. In Unilever Plc v Procter & Gamble [2000] 1 WLR 2436 Robert Walker LJ described three of the most relevant of them as follows at page 2444:-

"(1) ….when the issue is whether without prejudice communications have resulted in a concluded compromise agreement, those communications are admissible …. (2) Evidence of the negotiations is also admissible to show that an agreement apparently concluded between the parties during the negotiations should be set aside on the ground of misrepresentation, fraud or undue influence … (3) Even if there is no concluded compromise, a clear statement which is made by one party to negotiations and on which the other party is intended to act and does in fact act may be admissible as giving rise to an estoppel. That was the view of Neuberger J in Hodgkinson & Corby Ltd v Wards Mobility Services Ltd [1997] FSR 178, 191 and his view on that point was not disapproved by this court on appeal."

It is worth remarking that the exception to the without prejudice rule which has been relied on by the judge is not specifically mentioned in Robert Walker LJ's list. The question for us is whether it should now be recognised as another exception, perhaps, as a necessary part of the first example.

10. The judge gave four reasons for saying that this exception does (or ought to) exist:-

i) the distinction between identifying the terms of an agreement and interpreting them is a fine one and will often be difficult to apply;

ii) there was authority for the existence of the exception in Admiral Management Services Ltd v Para Protect Europe Ltd [2002] 1 WLR 2722;

iii) evidence of without prejudice exchanges is admissible if there is a plea of rectification and it would be illogical not to admit it for the purpose of construction;

iv) a court which is deprived of evidence of the background against which an agreement was made will be less well equipped to discern the parties' intentions and less likely to construe the contract in accordance with them.

11. Before dealing with the judge's four reasons it is useful to consider the reason why it is that the general rule is that it is impermissible to give evidence of without prejudice communications and discussions.
12. An early statement of the rule is that of Lindley LJ in Walker v Wilsher (1889) 23 QBD 335, 337:-

"What is the meaning of the words "without prejudice"? I think they mean without prejudice to the position of the writer of the letter if the terms he proposes are not accepted. If the terms in the letter are accepted a complete contract is established, and the letter, although written without prejudice, operates to alter the old state of things and to establish a new one."

If, therefore, in a simple case a proposal to settle a dispute is made in a without prejudice letter and that proposal is accepted either orally or in writing (or by conduct) that letter can be referred to so as to establish that a contract was made and what the terms of that contract are. That was decided in Tomlin v Standard Telephones and Cables Ltd [1969] 1 WLR 1378 and is the origin for the first exception to the rule given by Robert Walker LJ in Unilever v Proctor & Gamble.

13. The more modern law begins with Cutts v Head [1984] Ch 290 in which Oliver LJ said at page 306:-

"… the convenient starting point of the inquiry is the nature of the underlying policy [of the rule]. It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations … may be used to their prejudice in the course of the proceedings."

This statement of the policy was approved by the House of Lords in Rush & Tompkins v Greater London Council [1989] AC 1280. Having cited it Lord Griffiths continued at page 1299G:-

"The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence."

At page 1300 G he considered Walker v Wilsher and said:-

"I cannot accept the view … that Walker v Wilsher … is authority for the proposition that if the negotiations succeed and a settlement is concluded the privilege goes, having served its purpose. In Walker v Wilsher the Court of Appeal held that it was not permissible to receive the contents of a "without prejudice" offer on the question of costs and no question arose as to the admissibility of admissions made in the negotiations in any possible subsequent proceedings."

14. The last sentence of the above quotation indicates that an argument could be available that the "without prejudice" rule only applied to exclude admissions and not more general statements made in the course of without prejudice negotiations. In Muller v Linsley & Mortimer [1996] PNLR 74 the Court of Appeal did decide that the rule was only intended to exclude actual admissions but the House of Lords have recently held in Ofulue v Bossert [2009] 1 AC 990 that the rule is not so confined.
15. Unilever v Proctor & Gamble was, however, decided while Muller was still good law. In the course of without prejudice negotiations the defendant's representatives alleged that Unilever in marketing their product had infringed the defendants' patent and the defendants threatened to bring an action for infringement of that patent. Under section 70 of the Patents Act 1977, a person who is threatened with an action for infringement of a patent is entitled to bring an action against the threatener for a declaration, injunction and damages; the question therefore was whether an action could be brought relying on a threat made in the course of without prejudice negotiations. The Court of Appeal held that the action was not maintainable. At page 2443 H Robert Walker LJ said:-

"… I have no doubt that busy practitioners are acting prudently in making the general working assumption that the rule, if not "sacred" …, has a wide and compelling effect. That is particularly true where the "without prejudice" communications in question consist not of letters or other written documents but of wide-ranging unscripted discussions during a meeting which may have lasted several hours."

In reaching his conclusions at para 2448 – 2450 Robert Walker LJ said:-

"parties cannot speak freely at a without prejudice meeting if they must constantly monitor every sentence, with lawyers or patent agents sitting at their shoulders as minders … The expansion of exceptions should not be encouraged when an important ingredient of Lord Woolf's reforms of civil justice is to encourage those who are in dispute to engage in frank discussions before they resort to litigation."

16. These considerations have been much reinforced by Ofulue in which the question was whether an offer to buy by a squatter could amount to an acknowledgment of the landlord's title constituting a fresh date for the accrual of the claimants' cause of action for possession. The House of Lords decided that such an offer, made in the course of without prejudice negotiations, could not be referred to and upheld the first instance judgment in favour of the defendant squatter. Lord Hope of Craighead described the nature of the without prejudice protection (para 12):-

"It is the ability to speak freely that indicates where the limits of the rule should lie. Far from being mechanistic, the rule is generous in its application. It recognises that unseen damages may lurk behind things said or written during this period, and it removes the inhibiting effect that this may have in the interests of promoting attempts to achieve a settlement. It is not to be defeated by other considerations of public policy which may emerge later, such as those suggested in this case, that would deny them that protection."

It is for this reason that he had earlier said in para 2 that the court should be "very slow" to lift the umbrella (of without prejudice) "unless the case for doing so is absolutely plain". In para 43 Lord Rodger of Earlsferry gave his rationale of the rule:-

"it is that parties and their representatives who are trying to settle a dispute should be able to negotiate openly, without having to worry that what they say may be used against them subsequently, whether in their current dispute or in some different situation."

Lord Walker of Gestingthorpe agreed saying (para 57):-

"As a matter of principle I would not restrict the without prejudice rule unless justice clearly demands it. In England the rule has developed vigorously (more vigorously, probably, than in other common law jurisdictions, and more vigorously than some overseas scholars, notably J H Wigmore approved….)"

The judge's reasons

17. In the light of these firm statements about the rationale of the rule I can turn to the judge's reasons for saying that evidence of an arguably relevant background fact can be given even if the evidence of that fact comes from without prejudice communications and discussions.

(1) The fineness of the distinction between identifying the terms of an agreement and interpreting them.

This distinction is not usually a fine one especially if the result of the negotiations is a written agreement. There is then, as in this case, no difficulty in identifying the contract or its terms. Interpretation of those terms is another matter altogether and can give rise to considerable dispute. The judge says that the reasoning by which a court seeks to give effect to the parties' intentions can be classified either as an identification of an implied term or an exercise of construction. But courts do not often imply terms into a contract and it does not seem to me that because, in rare but obvious cases, that can happen, one should be able to adduce evidence of what occurred in without prejudice negotiations. Arguments about implications would become even more prevalent than they are if without prejudice negotiations could be given in evidence.

18. (2) The Admiral Management case

My Lord, Stanley Burnton LJ, is better qualified to assess this authority than I but, as it seems to me, this is not a decision on extending or creating any kind of exemption from the without prejudice umbrella. He was only concerned with the separate question whether a written settlement agreement, which expressly or implicitly referred to another written document, could be explained by reference to that document if it was a without prejudice document. He (with respect rightly) held that it could. But that was because it was referred to as part of the agreement not because it was a background fact in the light of which the document had to be construed. My Lord referred to Tomlin's case as authority for the proposition that without prejudice communications are admissible on the question whether a contract was concluded. He added

"Similarly, in the case of a settlement made in without prejudice correspondence, the correspondence, although privileged when sent and received, is admissible in the event of a dispute as to the terms and meaning of the settlement, on the same basis that any correspondence in which a contract is made is admissible."

This is an unexceptionable statement of the law. If the terms of an agreement have to be gathered from correspondence, that correspondence will be looked at to determine the terms of the contract and (to that extent) their meaning. My Lord was not, I think, intending to suggest that the correspondence would be admissible in relation to some background fact which was not part of the terms; still less was he suggesting that oral without prejudice negotiations could be given in evidence for such a purpose. Cross and Tapper, Evidence, 11th ed (2004) page 506 confines itself to saying that, if without prejudice negotiations succeed and constitute a binding contract, that can be proved by the use of without prejudice material. The latest (17^th) edition of Phipson (2009) says the same (para 24-24) citing Admiral Management as authority for the proposition, without apparently considering that it could be read more widely. Passmore on Privilege 2^nd ed (2006) para 10 – 057 expressly states that settlement negotiations are not admissible to aid the construction of the agreement to which they give rise. In the light of Ofulue this seems to me to be both good sense and good law.

19. (3) Inconsistency with the position if rectification is alleged

I cannot see this inconsistency. If a plausible case of rectification is made, the court is ascertaining the true terms of the contract. The court is not considering background facts in order to ascertain the contract's meaning.

20. (4) Interests of justice

This argument proves too much. In one sense every court wants the maximum possible assistance in order to arrive at a correct answer. But the whole point of the without prejudice rule is that, in order to serve the higher purpose of promoting settlements, some relevant material is not to be made available to the court. The only question is: what is the scope of the rule? No doubt the policy behind the rule conflicts with the policy of having the best and most useful evidence available. But one cannot resolve that conflict merely by saying the latter policy trumps the former. One has to decide whether the logic of the rule requires the exclusion of the admission of the evidence which it is sought to admit. Indeed, the citations from the speech of Lord Hope and Lord Walker in Ofulue would tend to indicate that the policy of the particular rule should trump the more general policy of enabling the court to have the maximum possible assistance in ascertaining the parties' (objective) intentions.

21. Mr Eder's strongest point, as it seems to me, is that the logic of the exception enabling parties to give evidence as to the terms of an agreement, if there is a dispute in that regard, extends also to permissibly relevant evidence of background if that is relevant to construction. Otherwise one could, in theory, have a term which would mean one thing if without prejudice material is excluded and another meaning if it is not excluded. That danger is more forensic than real. Very few disputes about interpretation are truly informed by evidence about preceding without prejudice oral discussions. The policy of encouraging settlements in commercial disputes is not out-weighed by the consideration that in a few cases the court may have some limit put on the material available to help it.
22. It is, perhaps, not entirely easy to see how the fact (if it be a fact), that Mr Pappas represented that all (or most) of the FFAs, which Oceanbulk had made with counter-parties, were not only sleeved transactions when made but continued to be so, can assist on the construction of the last part of the first sentence of clause 5 of the settlement and particularly on the distinction between 'crystallisation' and 'co-operation to close out' on which Mr Eder relies. But that is nothing to the point. This appeal raises a pure point of law as a matter of principle. Looking at this case as a matter of principle, it seems to me to be more important to preserve the 'without prejudice' principle then to allow it to be breached so as to permit the admission of evidence of background facts arguably relevant to construction.
23. Mr Eder then made a more fundamental submission that, as a matter of law, once a settlement agreement had been made any prior without prejudice negotiations became open and could be referred to by the parties, for what they were worth, in any ensuing dispute. For this purpose he relied on Walker v Wilsher for the proposition that, once agreement had been reached, that new agreement altered the old state of things and established a new one. That, on its own, does not carry the argument very far. But he than referred to an unreported judgment of Peter Gibson J in Sport International Bussum v Inter-Footwear Ltd. In this case there had been a dispute about the use of the name Inter and an associated 'K' mark on sports footwear. The dispute was resolved by a Tomlin order made by the Commercial Court in which the defendant agreed to make certain payments to the plaintiffs, it acknowledged the plaintiffs' proprietary right in the name and the trade mark of "Inter" and the 'K' mark, it was given a two year licence to use the mark in specified territories and it agreed further that if any payment was not made on its due date the licence would determine. The defendant missed one payment and the plaintiffs sought interlocutory relief with the assistance of an affidavit referring to the negotiations which took place and which resulted in the Tomlin order. But for a new plea of rectification the judge would have acceded to a request to strike out the paragraphs referring to the negotiations on the ground that prior negotiations were inadmissible. There was a subsidiary argument that they should also be struck out on the grounds that the negotiations were without prejudice. The judge would not have done so if that had been the only ground relied on. The judge relied on Walker v Wilsher and its reference to a "new order" to hold that the without prejudice umbrella no longer applied since the litigation had been settled. In answer to the submission that a settlement had not, in fact, been achieved he responded:-

"The fact that subsequently new disputes have arisen does not, I think, have the effect of making negotiations in respect of the previously settled disputes inadmissible for the purpose of the without prejudice rule. "

This is not further elaborated but I do not think it can stand with the subsequent House of Lords authority of Rush and Tompkins v Greater London Council in which, as I have already said, Lord Griffiths said that Walker v Wilsher was not authority for the proposition that the without prejudice privilege is lifted once agreement is reached. The privilege must, in my judgment, continue to provide protection in relation to matters occurring during the negotiation of the new agreement even after that agreement has been reached.

24. This seems to have been the view of Lloyd J in the later case of David Instance v Denny Bros [2000] FSR 869 in which there had been a settlement agreement in relation to two patent actions. There was then a dispute whether the settlement agreement had been complied with and seven further patent actions were begun. There was then an attempt at mediation which failed. Proceedings were then begun in the United States and the question arose whether what the judge called Without Prejudice Material and Settlement Agreement Material could be deployed in the United States. The judge held that the Without Prejudice Material could not be used in spite of the fact that some of that material related to the negotiations that preceded the settlement that had been agreed in 1993. The judge distinguished cases which were subject to an express without prejudice agreement and cases where the law implied an agreement that without prejudice material could not be referred to and dealt first with this latter category. Since the application before him was an interlocutory one, he used the language of probability (rather than actual decision) and said this (page 884):-

"In my judgment it is very strongly arguable, and indeed probable, that the without prejudice communications are indeed governed by an implied agreement that they will not be used in the current or any subsequent litigation between the same or related parties … It is correct in my judgment to regard the protection as extending to subsequent litigation because otherwise on the one hand the public policy recognised by Lord Griffiths and other judges and on the other hand the expectation of the parties would not be fulfilled but rather would be subverted. The position may perhaps be different in practice between two parties who are brought together for example by the circumstances of a road accident and may never have anything else to do with each other, but the holders of patents in related areas, whether or not they are to be regarded as competitors, may well, through themselves or their licensees, come up against each other in a number of different commercial circumstances giving rise, not only among the litigation-prone, to several different disputes over time, such that it cannot be assumed that one piece of litigation is the last there will ever be."

25. If it be relevant, it seems to me that the parties in this case are more similar to the patent-holders in the Instance case than the parties in a road accident. But it is noteworthy that Lloyd J was dealing with a case of subsequent different (although connected) litigation. The case of a disputed settlement is to my mind a stronger case than one of different litigation. I cannot believe that the decision of Lloyd J would have been any different if the only subsequent litigation had been litigation in England on the meaning of the disputed English settlement. In these circumstances I prefer the decision of Lloyd J to that of Peter Gibson J and, although grateful for Mr Leabeater's industry in discovering it from a myriad of unreported judgments, I would on this point say that it should not be followed. For the same reason the emphasis on the need for any negotiations to have failed, before the privilege of without prejudice can be claimed, contained in Wharton's Law Directory of 1872 (see also 14^th ed (1937)), relied on by the Oxford English Dictionary to define the phrase "without prejudice", should not be regarded as correct today.
26. I would, therefore, conclude in disagreement with the judge, that evidence of without prejudice communications cannot be given at the trial of these proceedings. The fact that such communications might reveal some background fact which could arguably be relevant to the construction of the settlement agreement does not suffice to lift the without prejudice umbrella. Although there are conflicting policy considerations pointing in opposite directions, the policy of protecting without prejudice communications seems to me to be stronger than the policy of providing the judge with every conceivable help to arrive at a just solution.
27. That is not the end of the matter because, even if TMT cannot rely on the relevant communications in support of their "background fact" argument, they wish nevertheless to rely on the representations allegedly made either as an estoppel or in support of arguments in relation to remoteness of damage.

Estoppel

28. This part of TMT's contentions is misconceived. It will be remembered that it is merely the fact of the representation (not its truth) on which Mr Eder wishes to rely. If he is not permitted to adduce evidence of the fact that the representation was made in order to bolster his arguments on construction, it makes no sense to say that he can use a "magic doctrine" of estoppel so as to enable him to get in by the back door evidence which he cannot get in by the front door.
29. It is true that the third of Robert Walker LJ's exceptions (set out in para 9 above) is where, in the absence of a concluded agreement, a representation is made on which the other party is intended to act and does act. But that is a representation made (where no concluded agreement is achieved) and the representee suffers loss or takes some action as a result. The final position is thus outside the area in which the without prejudice umbrella is intended to operate.
30. The authority relied on by Robert Walker LJ is the first instance decision of Neuberger J in Hodgkinson & Corby Ltd v Ward Mobility Services Ltd [1997] FSR 178. In that case the claimants' instituted passing-off proceedings in which they obtained an interim injunction but ultimately failed. The defendants then instituted proceedings pursuant to the undertaking in damages given by the claimants in order to procure the injunction. The claimants then sought to say that the injunction could have been justified on the separate ground that the defendants were in breach of copyright. The defendants said, relying on Henderson v Henderson, that it was too late for the claimant to take the point. The claimants said they had raised the claim in negotiations but had refrained from taking proceedings in relation to the claim because the defendants in those negotiations had asked them to hold fire with respect to that claim. The defendants' riposte was that those negotiations were without prejudice and could not be referred to. Neuberger J said that a without prejudice argument could not be used for the purpose of "unambiguous impropriety". In those circumstances reliance on the privilege would be "plainly unconscionable". No allegation of "impropriety" or "unconsconability" has been made in the present case and, to that extent therefore, Hodgkinson is distinguishable.
31. Neuberger J did, however, also refer to Tomlin's case which had decided that without prejudice correspondence could be looked at to determine whether a settlement had been reached and added (page 191):-

"Although, of course, contract and estoppel are quite separate concepts, it appears to me logical and consistent that if "without prejudice" correspondence can be looked at to see if it gives rise to a contract, then such correspondence can also be looked at to see if it gives rise to an estoppel. However, I do not suggest that there is an absolute rule to that effect."

I do not think that these cautious remarks were intended to say more than that, if the true position was that, for some reason, there was no contract but that in law one or other party was (or ought to be) estopped from denying that there was a contract, without prejudice communications could be admitted to establish the latter state of affairs just as much as it could be to establish the former. I do not read this passage as suggesting that any allegation of estoppel is sufficient to override the privilege. If it were so suggesting I would respectfully disagree with it.

32. For these reasons I do not consider that Mr Eder can achieve by estoppel what he cannot achieve by construction.

Remoteness

33. The same sort of consideration applies to questions of remoteness of damage. If the privilege of the without prejudice umbrella means that arguments about construction cannot be employed, I cannot see how such arguments can be employed on the different (but essentially lesser) question of remoteness of damage. If I understood the argument correctly, TMT wish to say that, although they acted in breach of contract in refusing to co-operate with Oceanbulk in closing out their bilateral positions, they can only be liable to the extent that the transactions were not sleeved. But that is really the same argument as the argument on construction. To the extent that any losses were not within the reasonable contemplation of the parties (which is what the law of remoteness is about in relation to breach of contract claims) arguments will be available which do not need to rely on communications which are without prejudice. Once the umbrella of "without prejudice" covers the pre-contract negotiations it must do so for all purposes.

Conclusion

34. I would therefore allow this appeal. That I think, means that we should so declare and should also order that sub-sub-sub paragraphs 18(1)(i)(3) and (4) of the re-re-amended defence and counterclaim should be struck out. But I would ask counsel to co-operate in drawing up the precise form of an appropriate order.

Lord Justice Stanley Burnton:

35. I entirely agree with the judgment of Longmore LJ, including his analysis of my own judgment in Admiral Management in paragraph 18 above. Parties who enter into a binding settlement agreement following without prejudice discussions are taken to have agreed that the documents comprising their agreement should be referred to in the event of litigation, since otherwise their agreement would be unenforceable. But this consideration does not apply to communications other than those that contain, or are incorporated in, their agreement. In Admiral Management, a letter sent without prejudice had been referred to and effectively incorporated in the settlement agreement contained in a court order. As in the present case, there was no allegation of misrepresentation. In paragraph 71 of my judgment I said that in the absence of a claim for rectification, antecedent without prejudice correspondence cannot be adduced in evidence for two reasons: privilege and irrelevance. These reasons are independent: the privilege applies even if the correspondence is relevant. If relevance alone displaced the privilege, the privilege would have no content.

Lord Justice Ward:

36. The factual background to this appeal can be very shortly stated. There was a dispute about liability under the forward freight agreements, and the wagers under which the parties made – or lost – substantial fortunes. They entered into without prejudice negotiations to resolve that dispute. These negotiations were successful. They reached a settlement agreement which was reduced to writing and signed by them. Now there is a dispute about the meaning of that agreement. The respondent wishes to adduce evidence "of what had been said or done during the course of negotiating that agreement" for the purpose of establishing "a fact which may be relevant as background known to the parties" and thus serve as an aid to construction in accordance with Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 at paragraph 42. It matters not for the purpose of this appeal what those background facts are and whether or not they will triumphantly carry the day or, as is suggested, simply obfuscate the issue. It matters not because this appeal gives rise to a pure point of principle, namely whether the veil of privilege can be lifted to admit evidence of without prejudice negotiations to establish background facts known to the parties as an aid to the construction of the settlement agreement reached in the course of those without prejudice negotiations.
37. In Unilever Plc v Proctor and Gamble Co. Ltd [2000] 1 WLR 2436, 2444 Robert Walker L.J. set out instances when the without prejudice rule does not prevent the admission into evidence of what one or both of the parties said or wrote. His non-exhaustive list included the without prejudice communications which result in a concluded compromise agreement, the negotiations which showed that an agreement apparently concluded between the parties during the negotiations should be set aside on the ground of misrepresentation, fraud or undue influence; and also, even if there is no concluded compromise, a clear statement which is made by one party to negotiations and on which the other party is intended to act and does in fact act so as to give rise to an estoppel. It is common ground that one can add rectification to that list. So, if you can use the antecedent negotiations to prove the agreement, to rescind it, or to rectify it, why on earth can you not use the negotiations to establish the truth of the what the concluded contract means? Not to do so would strike my mother as "barmy". Perhaps I should simply say it strikes me as illogical.
38. Lord Griffiths told us in Rush and Tompkins v Greater London Council [1989] AC 1280, 1300 that "The rule is not absolute and resort may be had to the "without prejudice" material for a variety of reasons when the justice of the case requires it." Surely justice demands that truth prevail. What is the justice of a self-imposed rule that one is not allowed to look at the facts which will establish what the parties truly meant by their compromise?
39. I am not for a moment suggesting that "relevance alone displaces privilege": see [35] above. That would be obviously wrong. It was rejected in Ofulue v Bossert [2009] 1 AC 990 where the offer to purchase was clearly relevant but properly held inadmissible because it was a statement in the course of negotiations which did not result in agreement. If the very purpose of clothing the negotiations with privilege is to facilitate, in the public interest, the settling of disputes by compromise, then once that purpose has been served there seems to me to be no justification for continuing to wrap the negotiations in this cloak of secrecy. Again I do not wish to take this too far. That I would be prepared to lift the cloak as between the parties to the negotiation is no justification for the peeping Toms outside the negotiations, like the sub-contractors in Rush & Tompkins, to sneak a look at what was happening beneath the cloak. But if one is allowed to lift it at all, it should be lifted high enough to see in all its raw detail the truth of what previously was remain unseen. That seems consistent with the rationale for this privilege. I take that from Lindley L.J.'s judgment in Walker v Wilsher (1889) 23 QBD 335, 337:

"What is the meaning of the words 'without prejudice'? I think they mean without prejudice to the position of the writer of the letter if the terms he proposes are not accepted. If the terms proposed in the letter are accepted, a complete contract is established, and the letter, although written without prejudice, operates to alter the old state of things and to establish a new one. A contract is constituted in respect of which relief by way of damages or specific performance would be given."

I repeat the limitation I impose on that rule: it applies only where a new order between the negotiating parties has replaced the old. Where compromise has been reached, the purpose has been served and the inhibitions fall away.

40. In Ofulue Lord Hope of Craighead restated the basis for the rule in these terms at [2]:

"Where a letter is written "without prejudice" during negotiations with a view to a compromise, the protection that these words claim will be given to it unless the other party can show that there is a good reason for not doing so."

Logic and justice seem to me to be good enough reasons to remove the protection.

41. There is little point in expanding upon these reasons for I am outnumbered, nay outgunned, by the commercial colossi seated either side of me. I prefer the instincts of the youthful Stanley Burnton J. before he became corrupted by the arid atmosphere of this Court. It goes to prove what every good old-fashioned county court judge knows: the higher you go, the less the essential oxygen of common sense is available to you. So I am unrepentant. With, of course, great respect to my Lords, I dissent. In my judgment Andrew Smith J. was absolutely correct for the reasons he gave. I would dismiss the appeal.