Two recent cases highlight how reliance on standard expressions in without prejudice negotiations, and positive averments in a statement of case, might cause the court to hold either that the without prejudice rule is not engaged, or that it has been lost.
The first case is the Court of Appeal decision of Avonwick Holdings Limited v Webinvest Limited, in which the High Court decision was upheld. In that case, Avonwick had made a loan of $100million to Webinvest for the purpose of enabling it to make a loan to a third party. Webinvest defaulted on its repayment obligations. Subsequently, without prejudice and subject to contract correspondence passed between the parties, in which a proposed restructuring of Webinvest’s obligations was considered. Webinvest did not dispute its liability to Avonwick at that stage. However, in proceedings brought by Avonwick for recovery of the loan and interest, Webinvest later claimed that at the time of the loan there had been a collateral agreement between the parties that Webinvest’s obligations to repay were conditional on it’s receipt of repayments from the third party. During the course of the proceedings, Avonwick sought disclosure of the “without prejudice & subject to contract” correspondence. Webinvest objected to disclosure on the grounds that the correspondence was protected by the without prejudice rule. The judge at first instance ordered disclosure.
On appeal, the Court of Appeal held that there were two bases for the operation of the “without prejudice” rule. The first rests on the public policy of encouraging people to settle their differences. However, for that policy to be engaged, there must be a dispute between the parties. The second basis is a contractual one, as the parties may extend the usual ambit of the without prejudice rule by contract. So, if there is no dispute between the parties, the parties may contractually agree that correspondence passing between them with a view to reaching an “accommodation” should have the protection of the without prejudice rule.
In this case, the Court of Appeal held that there was no dispute between the parties and, therefore, the without prejudice rule based on public policy considerations was not engaged. The Court of Appeal then considered whether the heading on the correspondence, “Without Prejudice & Subject to Contract” (which was also how the Heads of Terms were headed) amounted to an agreement that the negotiations between the parties should be privileged from disclosure. It held that it did not create any such agreement for the following reasons: (i) first, the reference to “Subject to Contract” usually means that it was not intended to create any contract. Webinvest’s argument that this heading was only intended to apply to the draft Heads of Terms was rejected on the grounds that the Heads of Terms were separately headed “Subject to Contract”; (ii) secondly, the Court of Appeal interpreted the phrase “without prejudice” as meaning that the user of the statement did not mean to give up any right that he might have.
The moral of this case is that if a party does not dispute a debt, but wishes to restructure his repayment obligations on the basis that the negotiations are not disclosed in any proceedings, he should ensure that any correspondence is not headed “subject to contract” (although any proposed terms may be so headed) and that in his correspondence, he makes it clear in what sense he is seeking to use the term “without prejudice”. In such circumstances, provided that the banner is taken up by the other side and there is consideration, an agreement might be inferred. Of course, an express contractual agreement would be even better, although there may be little incentive for a creditor in these circumstances to agree to one.
The second case is that of Property Alliance Group v Royal Bank of Scotland. In this case, PAG entered into four interest rate swap agreements with RBS, using GBP LIBOR as a reference rate. RBS had been investigated by several regulators, including the Financial Conduct Authority, for misconduct relating to alleged manipulation of the LIBOR rate. In its Final Notice issued on 6 February 2013, the FCA made findings of misconduct against RBS relating to CHF and JPY LIBOR, but not GBP LIBOR. Prior to issuing the Final Notice, without prejudice negotiations took place between RBS and the FCA. One of the issues that the court had to decide was whether these communications were privileged from disclosure.
The primary argument of PAG was that negotiations with a regulator in the context of a regulatory investigation that results in a finding of misconduct and the imposition of a penalty can never be within the without prejudice rule. This argument was rejected by the judge. Despite this finding, however, the judge proceeded to order disclosure of the without prejudice communications. This was because, in support of its case that it had not manipulated GBP LIBOR, RBS had made a positive case in its pleading that there had been no regulatory findings of misconduct by it in respect of GBP LIBOR. The judge held that, as RBS had itself put in issue the basis on which the regulatory findings were made, the “without prejudice” documents were disclosable.
The moral of this case is, whilst it might be tempting, although not necessary, to plead something which you believe supports your client’s case, before you do so, think about whether there would be any negative consequences. In particular, think about whether you are putting something in issue and exposing your client to disclosing documents which otherwise might not have been disclosable and which might damage your client’s case.
