Oceanbulk Shipping & Trading SA v TMT Asia Ltd

The without prejudice rule protects communications made in genuine settlement negotiations, including after a settlement has been concluded. The protection is not displaced merely because the communications may reveal background facts relevant to construction of the settlement agreement. A court may examine without-prejudice material to establish whether a settlement was made and its terms, or for recognised exceptions such as rectification, misrepresentation, fraud, undue influence or estoppel. But antecedent negotiations cannot be used as background evidence to interpret an agreement unless the material forms part of the agreement itself. A party cannot circumvent the rule by recasting the same construction argument as estoppel or remoteness of damage.

Oceanbulk Shipping & Trading SA and TMT Asia Ltd entered into forward freight agreements and later concluded a written settlement agreement concerning their outstanding positions. A dispute arose about the meaning of the requirement that the parties co-operate to close out the remaining contracts.

TMT sought to rely on statements made during the without-prejudice negotiations, including alleged representations that Oceanbulk’s transactions with counterparties were sleeved. TMT argued that the statements established background known to both parties and assisted construction. Oceanbulk applied to strike out the pleaded reliance on those communications. Andrew Smith J held that the evidence was admissible: [2009] 1 WLR 2416. The central issue on appeal was whether without-prejudice negotiations could be admitted for that construction purpose.

1. Appeal allowed. The without-prejudice communications could not be admitted at trial to establish background facts arguably relevant to construction of the written settlement agreement. Sub-sub-sub paragraphs 18(1)(i)(3) and (4) of the re-re-amended defence and counterclaim were to be struck out.
2. The underlying policy is to encourage parties to speak freely in genuine attempts to settle disputes. The rule therefore protects negotiations broadly and is not confined to admissions. The court should be very slow to lift the protection unless the case for doing so is plain.
3. The recognised exception for proving a concluded settlement permits the court to examine communications forming, or incorporated in, the agreement in order to identify its terms and meaning. It does not admit other correspondence or oral negotiations merely because they provide relevant background. Admiral Management Services Ltd v Para Protect Europe Ltd [2002] 1 WLR 2722 was explained on that narrower basis.
4. The position is not inconsistent with rectification, since rectification concerns the true terms of the contract rather than background facts used to construe its meaning. Nor could the evidence be admitted through estoppel: the alleged representation was relied on only as a fact relevant to construction, and estoppel could not provide a back-door route around privilege. The same reasoning applied to the proposed remoteness argument, which was in substance another construction argument.
5. The protection continues after the settlement agreement has been reached and applies to later litigation about its meaning. Longmore LJ preferred the approach of Lloyd J in David Instance v Denny Bros [2000] FSR 869 to the contrary reasoning in the unreported Sport International Bussum v Inter-Footwear Ltd. Stanley Burnton LJ agreed. Ward LJ dissented, considering that logic and justice justified lifting the protection between the negotiating parties once the settlement had replaced the earlier dispute.

• Court of Appeal (Civil Division) [2010] EWCA Civ 79: by a majority, allowed Oceanbulk’s appeal and ordered the specified passages of the re-re-amended defence and counterclaim to be struck out.
• High Court, Queen’s Bench Division, Commercial Court: Andrew Smith J held that evidence of the alleged representation could be given; the decision is reported at [2009] 1 WLR 2416.