REUTERS | Clodagh Kilcoyne

Discussing settlement options: minding the gap between litigation privilege and the without prejudice rule

In WH Holding Ltd v E20 Stadium LLP, the Court of Appeal rejected a claim to litigation privilege in respect of emails between a company’s board members discussing a commercial proposal for the settlement of a dispute.

The decision exposes an awkward gap in the protection afforded to documents prepared for the purpose of settling a dispute, which threatens to undermine the public policy underlying the without prejudice (WP) rule; namely, to encourage parties to settle their disputes rather than litigating them to a finish. And the difficulties don’t end there. Given the court’s narrow application of the dominant purpose test for litigation privilege, there may be many other sorts of documents that parties would have assumed would be covered by the principle but which are not, in fact, privileged.

Unfortunately, the Supreme Court will not have the opportunity to consider these issues, at least in this case, as the broader dispute was settled before trial.

The dominant purpose test

For a communication or document to be covered by litigation privilege, it must have been created for the dominant purpose of litigation which is reasonably in prospect. That much has long been clear.

What has been less clear is the precise nature of the required purpose. Lord Carswell summarised the position in Three Rivers No. 6, saying that litigation privilege applies to communications for the purpose of “obtaining information or advice in connection with existing or contemplated litigation”, but only when made for the sole or dominant purpose of “conducting” that litigation. So did that mean a strict test of obtaining advice or information, or a broader test of conducting the litigation?

In WH Holding, the Court of Appeal held that the strict test applies, overturning the decision of Norris J at first instance. In the Court of Appeal’s judgment, to fall within litigation privilege, a communication must be prepared for the dominant purpose of obtaining advice or information in relation to the conduct of litigation. It is not sufficient that it is for the dominant purpose of conducting litigation, in a broader sense.

The court commented that it was not shown any authority which would extend the scope of litigation privilege to purely commercial discussions. However, in Single Buoy Moorings Inc v Aspen Insurance UK Ltd, Teare J held that litigation privilege applied to internal discussion of proposals to settle which involved the assessment of those proposals in commercial terms. There is no indication that this decision was cited in WH Holding.

Settling litigation

At first instance in WH Holding, Norris J found that a narrow formulation of the dominant purpose test was inconsistent with SFO v ENRC, in which the Court of Appeal held that the purpose of avoiding or settling a dispute was as much protected by litigation privilege as defending a dispute.

However, the Court of Appeal disagreed. It accepted that SFO v ENRC had confirmed that the conduct of litigation includes its avoidance or compromise, but said the judge was wrong in thinking the decision had gone any further. In particular, it did not remove the further requirement that the communication in question was prepared for the dominant purpose of obtaining advice or information relating to the conduct of the litigation (including its settlement).

Interaction with WP rule

As is well known, the WP rule protects negotiations genuinely aimed at settling a dispute, with the effect that they are inadmissible in any current or subsequent legal proceedings.

At first instance in WH Holding, Norris J commented that the consequence of a narrow formulation of the test for litigation privilege would be that, while a WP settlement offer would not itself be before the court because it was protected by the WP rule, an internal document recording the terms of the offer, or recording discussion of the offer, or authorising the terms and putting of the offer would be open to inspection and inclusion in the trial bundle. He described that as “odd”, concluding that such documents would be protected by litigation privilege.

The Court of Appeal did not comment specifically on this aspect of the judge’s reasoning but, in fact, it does not follow that a denial of litigation privilege to such documents means that they will necessarily be before the court. The WP rule prevents the admission of any evidence of the content of (written or oral) WP negotiations, such as offers put forward or statements made in the negotiations. So an internal document recording the terms of an offer, or discussing an offer, would itself be protected to the extent that it revealed the content of the negotiations.

The difficulty, therefore, is not with documents that reveal the negotiations themselves, but with internal discussions regarding the strategy behind the negotiations, or (perhaps) considering various options a party might put forward as settlement proposals. It is these communications which may fall into a gap between litigation privilege and WP protection.

So what is covered by privilege?

Following WH Holding, discussions of settlement options or strategy will not be protected by litigation privilege unless they are for the dominant purpose of obtaining advice or information in order to conduct (including to settle) the litigation.

So, emails between board members debating what settlement offer to put forward to an opponent will not, it seems, be privileged, assuming these are not for the dominant purpose of obtaining advice or information. In contrast, litigation privilege may attach to:

  • Emails debating what questions to ask the company’s (in-house or external) lawyers in order to obtain their advice on settlement, even though such emails may contain a very similar debate as to the appropriate level at which to pitch any settlement.
  • Emails or other communications seeking information to inform any settlement offer.

Litigation privilege will also apply, as the Court of Appeal accepted in WH Holding, if advice or information obtained for the purpose of conducting (including settling) the litigation cannot be disentangled from a document, or the document would otherwise reveal the nature of such advice or information.

And of course litigation privilege is not the only form of privilege. Legal advice privilege will apply to emails between board members (or others within the organisation) and the company’s lawyers seeking or obtaining their advice on settlement, including specific settlement proposals, so long as those sending/receiving the emails fall within the narrow Three Rivers No. 5 definition of “client” for the purposes of legal advice privilege, in that they are tasked with seeking and obtaining the advice on behalf of the company.

Internal corporate communications?

There is also an unhelpful suggestion in WH Holding that litigation privilege may be restricted to communications between parties or their lawyers and third parties, so that it does not apply to internal corporate communications even where these are prepared for the dominant purpose of obtaining advice or information in order to conduct litigation.

This aspect of the decision is not however clear, and it is difficult (to say the least) to see any justification for limiting the application of litigation privilege in this way. It may be that, in this part of the decision, the Court of Appeal was merely dismissing an argument that litigation privilege applies to all internal corporate communications relating to litigation, even if they fall outside the required purpose.

If the court did indeed intend to restrict litigation privilege to third party communications, this would represent a dramatic inroad into the protection afforded by the principle. At the very least, if such a restriction were to be imposed, the concept of a third party should be interpreted broadly, as it is for legal advice privilege. In other words, it should include all those within an organisation who are not part of the “client” for the purposes of legal advice privilege. Otherwise, where the client obtained information from such individuals for the purpose of obtaining legal advice or evidence in relation to the litigation it would not be privileged. That cannot be right.

What steps can parties take?

A key priority should be to raise awareness of this issue within the organisation. The message should be spread that internal communications prepared to discuss options for settlement may not be protected and may have to be disclosed (assuming they are not for the dominant purpose of obtaining advice or information relating to settlement, and cannot be said to evidence the settlement negotiations themselves).

The same applies to other aspects of litigation, such as discussing litigation strategy, or reputation management relating to the litigation, or the funding of the litigation. Such communications will not be privileged unless they are for the dominant purpose of obtaining advice or information relating to the conduct of the litigation. Even then, any internal communications in this category will be vulnerable if litigation privilege is restricted to third party communications.

Where possible, such documents should be prepared as lawyer/client communications seeking or obtaining legal advice, so that they may benefit from the protection of legal advice privilege. This has the added benefit that they will be protected even if litigation privilege is denied to internal corporate communications.

Alternatively, privilege may be available to the extent that advice or information obtained for the conduct (including the settlement) of litigation cannot be disentangled from the documents or they otherwise reveal such advice or information. But parties should exercise caution. There may be a fine line between documents from which such advice or information cannot be disentangled, and those where a court might consider that redaction is appropriate.

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