High Court confirms 'without prejudice' correspondence not admissible when considering costs issues

Practitioners are warned that they should give careful consideration to their communications when negotiating with other parties, ensuring that if they wish to reserve the right to refer to 'without prejudice' correspondence on the question of costs they must make this clear by marking their correspondence "without prejudice save as to costs" or making it clear in the body of the communication that it is intended that it may be brought to the court’s attention on the issue of costs.

The recent Chancery Division judgment of Vestergaard v Bestnet confirmed the established principle that 'without prejudice' correspondence is not admissible when considering costs issues, upholding an  application to strike out parts of a witness statement filed in support of costs proceedings, which referred to ‘without prejudice’ communications, on the grounds that the communications were protected by ‘without prejudice’ privilege which had not been waived.

Privilege attaches to response as well as offer

The judgment also confirms that, once a party has made a 'without prejudice' offer, the privilege will attach not only to the offer, but to the response, whatever this may be; whether it includes a counter-offer or not, is a mere request for information, or simply an outright rejection without any further attempt to settle.

If you are responding to an offer marked as being 'without prejudice' but wish to be able to bring your communication to the court's attention on the question of costs, you must therefore remember to mark your correspondence accordingly and/or make it clear that this is what you intend.

If it is likely that there will be separate costs hearings dealing with, say, the costs of a liability trial and the costs of a quantum trial, ensure that any correspondence which is marked "without prejudice save as to costs" is clear as to which of those costs it is referring to.

Facts

The claimants applied to strike out various paragraphs in a witness statement filed by the defendants on the grounds that they referred to 'without prejudice' communications. The defendants disputed that the communications in issue were covered by 'without prejudice' privilege; alternatively that privilege had been waived.

In the trial of the substantive action the defendants were found liable for misusing confidential information in their development of a mosquito net. Following an inquiry as to damages the claimants were awarded $600,000 (around £385,000). The question of the costs of the inquiry was to be resolved at a hearing and large amounts were at stake (the claimants' costs were £3.2M and the defendants' were £1.4M).

The defendants had made close but unsuccessful Part 36 offers in the course of the proceedings on the inquiry (to which the claimants had not responded or made counter offers) and, at the upcoming costs hearing, wished to criticise the claimants' conduct in the inquiry with reference to an exchange of letters between the solicitors for the parties which were marked 'without prejudice'. Some of them were in fact marked 'without prejudice save as to the costs of the detailed assessment' but this was a reference to the costs of the liability trial and it was common ground that this made no difference to their status so far as concerned the costs of the inquiry.

Following the liability trial the parties had entered into negotiations to resolve the damages and costs, involving a number of without prejudice letters and telephone conversations. The defendants made two without prejudice offers; the first to pay a total of £3M immediately (£2.9M for costs and £100,000 for damages) and the second to pay just the £2.9M in respect of costs with payment to be made in installments. The second offer was later withdrawn.

The defendants purported to put all the 'without prejudice' letters in evidence in relation to the hearing for the costs of the inquiry to support their overall contention that the claimants failed to engage in a negotiating process which might have arrived at a settlement of the inquiry.

The judgment

The judge stated, citing Multiplex, that it was clear that the court could take into account a winning party's failure to make counter-proposals to a settlement proposal made by the losing party, even if that settlement proposal was for slightly less money than the amount ultimately awarded, and the defendants could take advantage of this argument based on their without prejudice offers and close Part 36 offer, to which the claimants had not responded.

However, the defendants wanted to bolster their case on costs by referring to the without prejudice correspondence as evidence of the claimants' unwillingness to discuss damages as part of a global settlement, which, the defendants contended, prevented any chance of a settlement being reached. The defendants wished for this to be taken into account on 'conduct' as justifying a reduction in the costs which should be awarded in the inquiry.

The judge confirmed by reference to a number of cases (including Cutts, Walker and Reed Executive) that it was established law that 'without prejudice' correspondence is not admissible when considering costs. This is of course unless the parties clearly state it as such by marking their correspondence "without prejudice save as to costs".

Having confirmed the legal position, the judge turned to the defendants' two arguments as to why the claimants were not entitled to claim 'without prejudice' privilege.

Application of without prejudice privilege to responses to offers

In rejecting the first argument, the judge held that the privilege did not only apply to the defendants' correspondence which contained the settlement offers, but also applied to the claimants' response, whether this included a counter offer or not. He stated that once a party has made a without prejudice offer, the recipient of the offer is plainly free to make a without prejudice response which may include a counter-offer, may be a request for more information, or may be simply to reject the offer outright; all these responses would be protected by the privilege. It was plain from first principles that a rejection of a without prejudice offer (without making a counter-offer) was not admissible in evidence, but if authority were needed it could be found in Cutts, Walker and Reed Executive. Further, no such rejection of an offer could be given in evidence in isolation, without also providing the initial offer as well (and indeed the entire chain of correspondence). So the defendants could not put in evidence the claimants' letters without also putting in evidence their own letters, the latter of which were plainly privileged under the 'without prejudice' rule, a privilege could not be waived without the consent of both parties. It logically followed that it could never be open to one party who has made a genuinely 'without prejudice' offer to disclose the response to that offer without the consent of the offeree.

In dealing with the defendants' first argument, the judge also rejected the defendants' novel suggestion that an initial 'without prejudice' offer was not in fact subject to joint privilege at all, but rather to a unilateral privilege belonging to the offeror, with the joint privilege only crystallising once a positive response making a genuine counter-offer had been received. This suggestion was not supported by any authority and was contrary to dicta inCutts and Walker.

Waiver of without prejudice privilege

The judge also rejected the defendants' second argument that the claimants had impliedly waived the privilege which would otherwise attach to the correspondence by making a claim to indemnity costs in the proceedings (which necessarily opened up the conduct of the parties) and asserting in their skeleton argument on costs that their own conduct was not to be criticised.

The judge noted that claimants' claim to indemnity costs must be based on an allegation that the defendants' conduct in the litigation was worthy of criticism in some way and this could not be said to be inconsistent with the claimants' assertion of privilege in 'without prejudice' communications. The position would obviously be different if the claimants were seeking to rely on some aspect of the defendants' conduct in the without prejudice discussions, but they were not.

Regarding the claimants' statement that their own conduct was not to be criticised, this was simply counsel's summary of the finding he would like the court to make based on the evidence it had heard and seen. Since the court had heard and seen no evidence about the 'without prejudice' negotiations, this statement therefore could not be taken as making any assertion about the claimants' conduct in the negotiations. It was therefore impossible to see how the claimants could have implicitly waived the privilege attaching to those negotiations.

Court details

Court: High Court of Justice, Chancery Division
Judge: Iain Purvis QC (Sitting as a Deputy Judge of the Chancery Division)
Date of judgment: 15 December 2014

Further guidance

For more information on without prejudice communications, subscribers to LexisPSL Dispute Resolution can see Practice Note:  Without prejudice communications. Click here for a free trial.

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