A3/2014/3297
A2/2014/3298
A3/2014/3300

Neutral Citation Number: [2014] EWCA Civ 1436
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(MR JUSTICE DAVID RICHARDS)
Royal Courts of Justice
Strand, London, WC2A 2LL

Friday, 17 October 2014

BEFORE:

LORD JUSTICE LEWISON
LADY JUSTICE SHARP
LORD JUSTICE BURNETT

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BETWEEN:

AVONWICK HOLDINGS LIMITED
Claimant/Respondent
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WEBINVEST LIMITED & ANOR
Defendant/Appellant

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MR S BERRY QC, MR T SMITH QC & MR H PHILLPS (instructed by Dechert LLP) appeared on behalf of the Claimant

MR P MARSHALL QC & MR M MORRISON (instructed by Fladgate) appeared on behalf of the Defendant

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Judgment
1.	LORD JUSTICE LEWISON:  The underlying dispute in this action is a claim for money alleged to be due under a loan agreement and a guarantee.   The money was lent by Avonwick to Webinvest with the intention that it should be lent on to a third party.   The guarantor of the loan, a Mr Shlosberg, who is the moving spirit behind Webinvest says that the arrangement was subject to a collateral oral agreement to the effect that Avonwick will only be entitled to be repaid when Webinvest itself was paid by the third party; but that is hotly disputed.

2.	The subject matter of the appeals are (a) an order made by David Richards J holding that certain correspondence marked, “Without prejudice” is admissible in evidence and (b) an order made by Her Honour Judge Walden-Smith relating to disclosure of documents leading up to the settlement of arbitration proceedings between Webinvest and the third party.   It is accepted that the settlement agreement itself must be disclosed.

3.	The appeals came on with great speed and a judgment is required immediately because the trial is due to start on Monday, which is the next working day after today.  That means that this judgment will not contain a scholarly treatise on the law of “without prejudice” but will simply try to explain why I have reached the conclusions that I have.   

4.	The facts are set out with clarity in the judgment of David Richards J at paragraphs 6 to 7 as follows:

“(6)  Interest payments totalling approximately US$9.63 million were made in the period up to April 2012 but Webinvest did not pay the principal and further accrued interest on 17 May 2012.  In July 2012 Ms Mutieva sent to Avonwick a proposed loan agreement which would reschedule Webinvest's liabilities by capitalising the principal and outstanding interest, extending the maturity date until 17 May 2013 and reducing the interest rate to 15%.  Avonwick was not prepared to accept these terms and required the provision of security.  Offers of security were made in November 2012 and information provided regarding the assets which would be the subject of the security.  No agreement was reached and there were further discussions between the parties from August 2013 and into 2014.  The hiatus in discussions in the first half of 2013 was as a result of Mr Shlosberg's understandable pre-occupation with his son, who was suffering from terminal cancer and died in June 2013.
(7)  On 3 April 2014, Avonwick served demands on Webinvest and Mr Shlosberg in accordance with the written terms of the Loan Agreement and the guarantee.  These were followed by the service of statutory demands under the Insolvency Act 1986 on Webinvest and Mr Shlosberg.  By agreement, the time for compliance with the statutory demands was extended, with the final extension expiring on 30 May 2014.  On that day Webinvest issued an application to restrain Avonwick from presenting a winding-up petition and Mr Shlosberg issued an application to set aside the statutory demand served on him.  These applications were supported by a witness statement of Mr Shlosberg dated 29 May 2014, in which he alleged that it had been agreed between the parties at the time when the loan was made that the obligation of Webinvest to repay it and accrued interest, and hence his own obligations under the guarantee, were conditional on the receipt by Webinvest of repayments of the loan made by it to the sub-borrower.  This has been referred to in the hearing as the “pay when paid” term.”

5.	The correspondence to which the application relates is again set out in the judgment of David Richards J from paragraphs 10 to 18 as follows:

“(10)  The correspondence to which the present application applies began with an email sent on 3 April 2014 by an assistant manager at Pricewaterhouse Coopers in Cyprus on behalf of Avonwick.  The email was addressed to Ms Mutieva and was headed “Without Prejudice & Subject to Contract”.  Draft heads of terms were attached.  The covering email stated:
“Please find attached, without prejudice, the Heads of Terms, which set out the primary terms, subject to contract, upon which Avonwick Holdings Limited is willing to agree a restructuring of the obligations of Webinvest Limited and Mr Mikhail Shlosberg under the Loan Agreement and the Guarantee and is based on proposals already made by Mr Mikhail Shlosberg in his capacity as guarantor under the Guarantee as well as in his capacity as ultimate beneficial owner of Webinvest Limited.”
(11)  The attached Heads of Terms were also marked “Without Prejudice & Subject to Contract”.  They provided for the provision of security, the repayment of US$40 million by 15 May 2014 to be applied against accrued but unpaid interest, and the extension of the maturity date to 17 May 2015.
(12)  The evidence filed on behalf of Avonwick states that its solicitors, Dechert LLP, were involved in drafting these Heads of Terms and it is clear that they have been professionally drafted.  The reasonable inference is that the rubric “Without Prejudice & Subject to Contract” was included in the draft by Dechert.  Judging by the terms of the covering email, I would think it likely that it too was drafted by Dechert but, whether or not that is so, the use of the same rubric in the email is likely to derive from the draft Heads of Terms provided by Dechert.
(13)  On the same day, Pricewaterhouse Coopers on behalf of Avonwick also sent the demand for repayment of the loan, under cover of an email which was also headed “Without Prejudice & Subject to Contract”.  It is agreed that this was a mistake and that this email is on any basis not without prejudice.  Again it is likely that it was included in the email because that is the phrase which Dechert had used in the draft Heads of Terms.
(14)  The defendants' solicitors, Fladgate LLP, replied on their behalf in a letter dated 7 April 2014 which was also marked “without prejudice and subject to contract”.  They wrote:
“We also acknowledge receipt of your without prejudice and subject to contract proposals.  Our clients are most grateful for your understanding and readiness to consider an amicable restructuring of the position.”
(15)  Dechert replied in a letter dated 10 April 2014 marked “Without prejudice & Subject to contract”.  They wrote:
“If your clients wish to avoid respectively being wound-up and made bankrupt they should now engage with us and our client to determine whether a restructuring of your clients' obligations can be achieved as outlined in the without prejudice heads of terms provided to you on 3 April 2014.”
(16)  The reply to this letter came from Ms Mutieva in a letter dated 13 April 2014 marked “without prejudice and subject to contract”.  The letter began:
“We acknowledge receipt of your letter of 10 April 2014 with enclosed copy Statutory Demands.  Our solicitors Fladgate LLP will be responding separately in open correspondence in respect of those documents from Webinvest Limited and Mr Shlosberg respectively.
We are responding in this letter to the proposed restructuring of arrangements between Avonwick Holdings Limited and Webinvest Limited.  Your letter raises specific questions on which we are answering.
We would like to assure you that we desire to achieve a settlement agreement as soon as possible.  Since the overall structure of any settlement is not likely to differ substantially from your proposals, we would invite you to prepare draft documentation for our consideration.”
(17)  The letter continues by giving details of assets over which security could be given and comments on the draft Heads of Terms.
(18)  There was also during April 2014 an exchange of correspondence between Mr Shlosberg and Mr Gayduk.  This correspondence was not marked without prejudice but it is common ground that it forms part of the correspondence referred to above and, if that correspondence is to be treated as without prejudice and therefore inadmissible, so also is the correspondence directly between the parties.  Mr Shlosberg also sent a more formal request in a letter dated 22 April 2014 marked without prejudice, requesting Mr Gayduk on behalf of Avonwick to extend the term of the statutory demand to 9 May 2014.  Revised draft Heads of Terms were prepared on 9 May 2014.  It is again agreed that these and a few other documents stand or fall with the main correspondence.”

6.	The judge took the view that at the time of that correspondence, there was no dispute about Webinvest’s liability under the loan agreement or Mr Shlosberg’s liability under the guarantee.  The allegation of the collateral agreement came later on 30 May 2014.  Having examined the underlying correspondence, I agree with the judge’s evaluation of the facts.  The question then is whether, as Avonwick submits and the judge held, it is a necessary condition for without prejudice privilege to attach to communications expressly marked, “Without prejudice” that there must be a dispute or issue in existence which the parties are trying to resolve; or whether, as Webinvest submits, parties made by agreement extend the without prejudice privilege even if there is no extant dispute.  

7.	We have been referred to a number of authorities.  The first one to which I refer is Cutts v Head [1984] 1 Ch 290.  Oliver LJ said at 307B:

“Once, however, the trial of the issues in the action is at an end and the matter of costs comes to be argued, this can have no further application for there are no further issues of fact to be determined upon which admissions could be relevant.  One is, therefore, compelled to seek some additional basis for the decision in Walker v. Wilsher and it is, as it seems to me, to be found in an implied agreement imported from the marking of a letter "without prejudice" that it shall not be referred to at all.”

Fox LJ said at 314:

“Second, whilst the ordinary meaning of “Without prejudice” is without prejudice to the position of the offeror if his offer is refused, it is not competent to one party to impose such terms on the other in respect of a document which, by its nature, is capable of being used to the disadvantage of that other.  The expression must be read as creating a situation of mutuality which enables both sides to take advantage of the “Without prejudice” protection.  The juridical basis of that must, I think, in part derive from an implied agreement between the parties and in part from public policy.” 

8.	In Unilever Plc -v- Proctor & Gamble Co [2001] WLR 2436 Robert Walker LJ said at 2443:

“Without in any way underestimating the need for proper analysis of the law, I have no doubt that busy practitioners are acting prudently in making the general working assumption that the rule, if not sacred, has a wide and compelling effect.  That is particularly true where the without prejudice communications in question consist not of letters or other written communications but of wide-ranging, unscripted discussions during a meeting which may have lasted several hours.”

9.	The Lord Justice then went on to discuss the without prejudice rule and gave a number of examples of exceptions to the inadmissibility or otherwise of the documents or communications.  At page 2445, sub-paragraph 7 he said:

“The exception or apparent exception for an offer expressly made without prejudice except as to costs was clearly recognised by this court in Cutts v Head and by The House of Lords in Rush & Tomkins Limited v Greater London Council as based on an express or implied agreement between the parties.  It stands apart from the principle of public policy, a point emphasised by the importance which the new Civil Procedure Rules, Part 44.3(4) attach to the conduct of the parties in deciding question of costs.  There seems to be no reason in principle why parties to without prejudice negotiations should not expressly or impliedly agree to vary the application of the public policy ruling in other respects, either by extending or by limiting its reach.”

He added at page 2448 that a particular passage:

“… spells out the uncontroversial point that without prejudice is not a label which can be used indiscriminately so as to immunise and act from its normal legal consequences where there is no genuine dispute for negotiation.”

10.	Bradford & Bingley plc v Rashid [2006] 1 WLR 2066 was a case concerning correspondence between debtor and creditor, none of which was marked, ‘Without prejudice’.  There was no dispute the existence about either the liability or the quantum of the debt.  The debtor was simply asking for time to pay.  The House of Lords held that the correspondence were admissible in order to bar a claim of limitation and that the without prejudice privilege did not attach.  It follows therefore that anything said on the subject of communications expressed marked, ‘Without prejudice’ was obiter.  Lord Hoffman gave the first speech in which he proposed a solution which ultimately did not find favour but it is worth noting that in paragraph 16 of his speech he began his proposal by saying:

“(16)  The solution which I would therefore favour, and which I think is in accordance with principle, is that the without prejudice rule, so far as it is based upon general public policy and not upon some agreement of the parties, does not apply at all to the use of a statement as an acknowledgement for the purposes of section 29(5).”

11.	Lord Walker at page 2881, paragraph 43 expressed his general agreement with Lord Brown .  Lord Brown at page 2086 at paragraph 63 said:

“In both Cutts v Head and Rush & Tompkins itself the communications in question had been expressly made "without prejudice" and, generally speaking, such communications will attract the privilege even without the public policy justification of encouraging parties to negotiate and settle their disputes out of court.”

12.	Lord Mance disagreed with that statement and at paragraphs 81 to 87 he discussed rationales for the rules.  Among the points that he made were that neither a dispute nor a concession or offer to compromise can be conjured out of new words;  that the potential significance of a phrase, “Without prejudice” in context where there is no dispute differs from the meaning of those words in a context where there is a dispute; and that sometimes the phrase may also be used unthinkingly or superfluously in which case it falls simply to be ignored.  He thus said that he was unable to agree with Lord Brown’s statement that generally speaking, communications marked, “Without prejudice” would attract privilege.  He concluded:

“It is not open to a party or parties to extend at will the reach of the "without prejudice" rule or of the "privilege" it affords as regards admissibility or disclosure.”

13.	In Ofulue v Bossert the House of Lords were considering a letter expressly marked, “Without prejudice” offering to buy a freehold in the course of possession proceedings.  Those proceeds were struck out and many years later fresh proceedings were begun.  The defendant in those fresh proceedings claimed  to have acquired title by adverse possession and the question was whether the without prejudice offer to buy the freehold in earlier proceedings could be relied on as an acknowledgement of title in the subsequent proceedings.  Lord Hope said at paragraph 2 that:

“But where the letters are not headed “without prejudice” unnecessarily or meaninglessly, as he went on to say at p 1385, the court should be very slow to lift the umbrella unless the case for doing so is absolutely plain.”

However, he formulated the general rule in the same paragraph as follows:

“Where a letter is written “without prejudice” during negotiations with a view to a compromise, the protection that these words claim will be given to it unless the other party can show that there is a good reason for not doing so.”
 “
14.	Lord Rodger at paragraph 37 discussed the case of Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 and said between D and E:

“This in turn shows that, while part of the justification for excluding reference to what was said is to be found in the understanding of the parties to the relevant correspondence or negotiations, the rule is actually a privilege which forms part of the general law of evidence and is based on public policy.  So, unless the parties make some agreement to narrow or broaden its effect, the scope of the privilege is a matter of general law and is not based on the supposed boundaries of a notional agreement between the parties.”

15.	Lord Walker at paragraph 55 also recognised that the without prejudice rule depended partly on the agreement of the parties as well as on policy considerations and added that there was nothing in the Limitation Act to outlaw an agreement varying this effect.  He pointed out that standstill agreements are common although they operate to suspend the running of time.  He added:  

“Similarly there is no reason why the parties should not, by agreeing to engage in without prejudice negotiations, keep time running despite something that would otherwise count as an acknowledgment.”

He added at paragraph 57 that:

“As a matter of principle I would not restrict the without prejudice rule unless justice clearly demands it.”

16.	Finally, I note that Lord Neuberger at paragraph 95 referred again to the contractual reason underlying the without prejudice rule as well as the public policy reason.  There are two cases in particular upon which Mr Marshall relied.  The first was Compagnie Noga D’Importation Et D’exportation v Australia & New Zealand Banking Group Ltd [2007] EWHC 85 (Comm).  The court in that case did not find it necessary to resolve the question whether there had to be an extant dispute before the without prejudice privilege came into play.  That, as I read the judgment, was because there was an express agreement that the without prejudice privilege should retrospectively attach to a particular letter.  The second of the two cases was that of Standrin v Yenton Minster Homes Limited.  The decision is not entirely easy to follow because the relevant part concerns documents called, “Documents 1 to 8” whose contents are not revealed by the transcript.  Nonetheless, Lloyd LJ said at page 9 of the transcript:

“The principle to be derived from these authorities, if it can be called principle, is that the opening shot of negotiations may well be the subject of privilege where, for example, a person puts forward a claim and in the same breathe offers to take something less in settlement.  Or to take Parker LJ’s example in South Shropshire District Council v Amos where a person offers to accept a sum in settlement of as unquantified claim.  Where the opening shot is an assertion of a person’s claim and nothing more than that, then prima facie it is not protected.”

17.	My conclusions are these.  There are two bases for the operation of the without prejudice rule.  The first rests on public policy and that policy is to encourage people to settle their differences.  However, in order for that head of public policy to be engaged there must be a dispute.  The concept of dispute is given a wide scope so that an opening shot of negotiations may fall within the policy even though the other party has not rejected the offer.  That is the explanation for Standrin.  In order to decide whether this head of public policy is engaged, the court must determine on an objective basis whether there was in fact a dispute or issue to be resolved.  If there was not then this head of public policy is not engaged.  On facts of this case, in my judgment the judge was right to say there was no dispute at the time the communications took place.  The other basis for the rule is contractual, that is by contract the parties may extend the usual ambit of the without prejudice rule.  In Cutts v Head the dispute was over so the justification was purely in terms of contract.  In Unilever the possibility of extending the scope of the rules expressly envisaged and the decision in Unilever is treated as an authoritative exposition.  

18.	Mr Berry submitted that although the parties could by agreement extend the ambit of a without prejudice rule, they could only do so in circumstances in which there was a dispute either existing or imminent.  If that is the case, then it seems to me to be hard to see what it adds to the public policy justification.  Freedom of contract is a basic principle of English law.  If A and B agree for valuable consideration that their communications will not be used in civil proceedings in court, I find it difficult to see why, as a matter of principle, the court should not uphold their agreement.  Confidentiality clauses are the stuff of commercial life.  Moreover, it is often open to two parties by agreement to immunise their acts from what would otherwise be their legal consequences.  A non-reliance clause in a contract would immunise what would otherwise be a misrepresentation and an entire agreement clause would immunise what would otherwise be a collateral warranty.  This must however be done by agreement.  One person cannot unilaterally impose a rule on another.  That, in my view, is the better explanation for cases such as Daintrey.

19.	Mr Berry submits that these kinds of agreements do not preclude evidence being led before a court, they merely deal with the legal consequences of such evidence.  That is an over-subtle distinction to my mind and in any event, where there is an estoppel that is a rule of law that precludes evidence from being led, likewise where a contract contains a conclusive evidence clause.  The question boils down to this; was there a contract in this case?  It is not a good start that  the communications are headed, “Subject to contract” which is generally taken to mean that no legal consequences are to flow from the communications.  Mr Marshall argued that the subject to contract heading applied only to the heads of terms, but since they were separately headed “Subject to contract”, that does not seem to me to be a strong argument.  Mr Berry has pointed to many usages of the phrase, “Without prejudice” apart from the settlement of extant or contemplated disputes.  One such usage is that the user of a statement does not mean to give up any right that he may have.  In my judgment, that is the way in which the phrase is used in this case.  

20.	It follows, in my judgment, that there was no contract in this case to the effect that communications would not be used in civil proceedings in court.  Accordingly, I would dismiss the appeal against the order of David Richards J.

21.	We gave permission to appeal on one ground against the order of Her Honour Judge Warden Smith.  That relates to the without prejudice negotiations that led to the settlement of the arbitration between Webinvest and the third party.  The judge held that Mr Shlosberg had waived any privilege relating to those negotiations.  I disagree.  All he said in his evidence was that he told Mr Gayduk that an offer had been made and that his lawyers thought it was a good one.  Even if he had purported to waive privilege it was not his to waive.  The privilege is a joint privilege to which the third party is also entitled and there is no evidence that the third party has consented to waiver.  If the without prejudice privilege has not been waived, on what basis is Avonwick entitled to disclosure?  Mr Berry says that he is not seeking to rely on admissions made in the course of negotiations and that if he is not seeking to rely on admissions, then the decision in Muller v Linsley & Mortimer [1996] 1 PNLR requires disclosure.  

22.	That was a case in which the plaintiff asserted that a settlement that he had made was a reasonable settlement and the defendant asserted that it was not.  The reasonableness of the settlement was therefore directly in issue and it was the plaintiff who had put it in issue.  It is hardly surprising that in those circumstances the court ordered disclosure of the negotiations leading to the settlement.  The general rule however is still that stated in Rush & Tompkins Ltd v Greater London Council & Another [1989] AP 1280, namely that without prejudice negotiations once privileged remain privileged even after settlement.  Moreover, Hoffman LJ’s reasoning in Muller which distinguished between an admission and other statements was disapproved by The House of Lords in Ofulue (see Lord Neuberger at paragraph 95 with whom the other Lords agreed).  In this respect and in this respect only, I consider that her Honour Judge Walden Smith erred. I would allow the appeal against her order to that limited extent.

LADY JUSTICE SHARP
23.	I agree.

LORD JUSTICE BURNETT
24.	I also agree.