Oceanbulk Shipping & Trading SA v TMT Asia Limited and others

The without prejudice rule broadly protects genuine settlement negotiations from admission in evidence. It does not, however, exclude objective facts communicated during those negotiations where the facts would otherwise form part of the admissible factual matrix for construing a resulting settlement agreement.

The court must apply the ordinary objective principles of contractual interpretation. The exception does not permit general admission of pre-contractual negotiations or evidence of the parties’ subjective intentions. It is confined to material which is independently admissible as background knowledge bearing on the meaning of the agreement.

Oceanbulk Shipping & Trading SA v TMT Asia Limited and others arose from forward freight agreements and a written settlement concluded after negotiations conducted without prejudice. Oceanbulk alleged that TMT had breached a term requiring the parties to co-operate in closing out part of their open positions. TMT contended that the term contemplated a process involving market counterparties because the underlying trades were understood to have been “sleeved”.

TMT sought to rely on representations allegedly made during the without prejudice negotiations. It said that they were relevant to construction of the settlement agreement and to its pleas of estoppel and remoteness. Andrew Smith J held the evidence admissible. The Court of Appeal, by a majority, allowed Oceanbulk’s appeal and excluded it: [2010] EWCA Civ 79. Ward LJ dissented.

The central issue was whether objective facts communicated during without prejudice negotiations may be admitted as part of the factual matrix for construing the settlement agreement resulting from those negotiations.

1. Disposition. The appeal was allowed unanimously. Lord Clarke delivered the leading judgment, with which Lord Rodger, Lord Walker, Lord Brown, Lord Mance and Sir John Dyson agreed. Lord Phillips agreed with Lord Clarke’s reasoning and conclusion. The majority decision of the Court of Appeal was displaced and the evidence was held admissible in principle.

2. The general rule. The without prejudice rule is a broad rule governing admissibility. It is founded upon both the public policy of encouraging settlement and the parties’ express or implied agreement. It ordinarily protects the whole content of genuine settlement negotiations, rather than merely identifiable admissions. Its boundaries should not be lightly eroded. The rule is nevertheless subject to established exceptions, as explained in Unilever plc v The Procter & Gamble Co [2000] 1 WLR 2436.

3. Contractual interpretation. A contract is construed by asking what a reasonable person possessing the background knowledge available to the parties would understand its language to mean. Relevant context may be considered without first establishing ambiguity. The exclusionary rule governing pre-contractual negotiations continues to exclude subjective statements advanced to prove intended meaning. It does not exclude evidence establishing an objective fact known to both parties.

4. The interpretation exception. Objective facts communicated during without prejudice negotiations are admissible where they would otherwise form part of the factual matrix for construing the resulting settlement agreement. The process of interpretation should be the same whether or not the negotiations were without prejudice. Admitting such facts enables an objective assessment of meaning and is compatible with the policy of promoting settlement.

5. Relationship with other exceptions. Without prejudice communications may already be admitted to determine whether negotiations produced a concluded compromise or whether a written settlement requires rectification. No principled distinction could be drawn between those situations and admitting objective background facts to construe the agreement. Recognition of the interpretation exception was therefore required by justice and by the modern principles of construction.

6. Limits and application. The exception extends only to evidence independently admissible as part of the factual matrix or surrounding circumstances. It does not authorise general admission of pre-contractual negotiations. The alleged representations concerning sleeving were admissible in principle; their probative value and the ultimate construction of the agreement remained matters for trial. It was common ground that the evidence was consequently admissible in principle on the pleaded issues of estoppel and remoteness.

Lord Phillips added that, in his view, the objective-facts principle also applied to any other subsequent contract concluded between the same parties.

1. United Kingdom Supreme Court: Unanimously allowed TMT’s appeal in Oceanbulk Shipping & Trading SA v TMT Asia Limited and others [2010] UKSC 44. It held the disputed evidence admissible in principle.
2. Court of Appeal: By a majority, allowed Oceanbulk’s appeal and held the evidence inadmissible: [2010] EWCA Civ 79. Ward LJ dissented.
3. High Court: Andrew Smith J held that the evidence was admissible notwithstanding the without prejudice rule. A neutral or report citation was not stated.