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Without prejudice – how protected are your settlement negotiations?

In a recent case the UK Supreme Court widened the exceptions to the long established principle that ‘without prejudice’ communications are not admissible in evidence. When construing a settlement agreement it is now permissible to refer to written or oral communications made in the course of without prejudice negotiations as an aid to the interpretation of the settlement agreement.

This case serves as a reminder that there are limited exceptions to the without prejudice rule and simply marking documents ‘without prejudice’ or conducting discussions on a ‘without prejudice’ basis does not automatically make everything inadmissible.

The same diligence should be given to the drafting of settlement agreements as to any other contract. The terms of any settlement agreement should be clearly drafted and free of ambiguity.

What is the impact on the without prejudice rule?

The without prejudice rule is designed to encourage parties to speak frankly during negotiations. In the knowledge that, if negotiations fail and the dispute proceeds, nothing said during negotiations could subsequently be relied upon, the parties will be more likely to settle their dispute.

Lord Clarke stressed that nothing in the judgment was intended to underplay the importance of the without prejudice rule or to encourage the admission of evidence of pre-contractual negotiations beyond that which is admissible in order to explain the factual matrix or surrounding circumstances.

The judgment has widened the limited exceptions to the without prejudice rule.

The underlying principle to encourage free discussion during settlement negotiations remains.

What does this mean for those entering into settlement agreements?

The interpretation exception is concerned with contractual construction. This judgment follows a previous ruling that found that objective facts which emerge during negotiations are admissible as part of the factual matrix in order to assist courts to interpret an agreement in accordance with the parties' true intentions.

This case serves as a reminder that there are limited exceptions to the without prejudice rule and simply marking documents 'without prejudice' or conducting discussions on a 'without prejudice' basis does not automatically make everything inadmissible.

Parties disputing a settlement agreement should be aware that the negotiations (including without prejudice negotiations) are now admissible to aid interpretation of these agreements, to the extent that they would be admissible under the general law of contract. As a result, parties may be less open during settlement negotiations.

The importance of clear drafting

Settlement agreements are often concluded after protracted negotiations and once agreement is reached in principle parties can be eager to 'get the deal done' and sign the paper work. This case highlights that the same diligence should be given to the drafting of settlement agreements as to any other contract. The terms of any settlement agreement should be clearly drafted and free of ambiguity.

This article was first written by Bond Dickinson and has been reproduced with their permission. Bond Dickinson are a leading UK business law firm, to find out more go to www.bonddickinson.com.

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