"Without prejudice" privilege: traps for young (and old) players

The phrase "without prejudice" appears on a startling array of legal correspondence. In some disputes, every email and letter received from a party or its legal advisers is emblazoned with the words. Perhaps such use is not surprising. In contrast to legal professional privilege, the privilege governing settlement negotiations - in which context the term "without prejudice" arises - is not widely discussed and understood. This article thus provides a refresher on the privilege and examines four common misconceptions.

Privilege in relation to settlement negotiations

At common law, evidence of admissions by words or conduct made by parties in the course of genuine negotiations to settle an existing dispute is privileged, unless all parties to the negotiations agree to the contrary.

The rationale for the privilege is that parties should be free to explore settlement of disputes, and make admissions in the course of those discussions, safe in the knowledge that if the negotiations break down, any admissions made will not be tendered against them later in court.

In most jurisdictions, the common law is supplemented by legislation. For example, in New South Wales, the Australian Capital Territory and the Federal courts, section 131(1) of the Evidence Act 1995 (NSW and Cth) says:

"Evidence is not to be adduced of:

(a)  a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or

(b)  a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute."

This provision only applies to the adducing of evidence, whether at an interlocutory hearing or trial. The common law continues to operate in relation to evidence gathering (but not adducing) processes, such as discovery, notices to produce and subpoenas.

The use of the words "without prejudice" is neither necessary nor sufficient to attract the privilege

Many people, including solicitors, believe that the use of the words "without prejudice" will make a communication privileged. Justice Wells vividly described this view in Davies v Nyland (1975) 10 SASR 76 at 89:

"[I]n some quarters of the community there is a belief, amounting almost to a superstitious obsession, that the expression "without prejudice" is possessed of virtually magical qualities, and that anything done or said under its supposed aegis is everlastingly hidden from the prying eyes of a Court."

Of course, this belief is incorrect. Whether communications are covered by the privilege depends not on whether the words "without prejudice" have been used, but upon the parties' intentions which are to be ascertained from the nature of the communications. While the words are a relevant factor in determining the relevant intention, it is the situation of settlement negotiation that is critical to the operation of the privilege.

A mere reference to settlement negotiations does not attract the privilege

The common law privilege applies only to "admissions" by words or conduct. In contrast, section 131(1) of the Evidence Act prevents the adducing of evidence of any communication in connection with an attempt to negotiate a settlement of the dispute. The words "in connection with" are capable of extending wider than the common law. Do they mean that any document that refers to settlement negotiations cannot be adduced?

The answer is no, at least according to the recent decision of CJ Redman Constructions Pty Ltd v Tarnap Pty Ltd [2006] NSWSC 173. Justice Campbell held that the expression "in connection with" does not always refer to a connection of any kind between two subject matters. In the particular context of section 131(1) of the Evidence Act, he found that the words require a sufficient nexus between the correspondence and a genuine attempt to negotiate a settlement of a dispute.

The privilege can only be waived with the consent of all parties

It is sometimes asserted that the privilege can be waived by the party to whom it applies. For example, if this view was correct, "John" - who had previously made a "without prejudice" settlement offer to "Helen" - could waive the privilege covering the offer. This would then enable him to argue that if Helen had accepted the offer, her losses in the form of interest by way of damages (ie. Hungerfords damages) would have been less than the total amount claimed in respect of this head of damage as at the date of trial.

Unfortunately for John, the weight of authority suggests that all associated parties must consent to waive the privilege in relation to settlement negotiations (this is in stark contrast to legal professional privilege, which can be waived by a person who would otherwise be entitled to the benefit of the privilege). There is no requirement that all parties give their consent at the same time. If one party consents to waive the privilege before trial, the other party may rely upon that consent at a later date, even if the first party resists such use at that time.

The privilege is not absolute and does not apply for certain purposes

There are various exceptions to the applicability of the privilege.

At common law, the privilege does not prevent communications from being admitted to show that a settlement agreement was actually reached or to establish the terms of such an agreement. Reference may also be made to privileged communications to rebut allegations of delay, laches, acquiescence, want of prosecution or lack of diligence. Further, the privilege cannot be used to circumvent section 52(1) of the Trade Practices Act 1974 (Cth) and evidence can be tendered of misleading or deceptive conduct that occurred in the context of settlement negotiations.

Section 131(2) of the Evidence Act has codified many of the common law exceptions, plus introduced other exclusions. For example, the privilege will not prevent the adducing of communications or documents:

• to contradict or qualify evidence that is likely to mislead the court (section 131(2)(g));
• relevant to determining liability for costs (section 131(2)(h));
• affecting a right of a person (section 131(2)(i)); or
• made or prepared in furtherance of the commission of a fraud or an offence (section 131(2)(j)) or a deliberate abuse of power (section 131(2)(k)).

The exception in relation to costs is particularly interesting. In the decision of Silver Fox Co Pty Ltd v Lenard's Pty Ltd (No 3) (2004) 214 ALR 621, Justice Mansfield held that the effect of section 131(2)(h) is to expose genuine settlement negotiations when costs issues are to be resolved. He considered that "[t]here is no apparent public interest in permitting a party to avoid such exposure by imposing terms upon the communication, whether by the use of the expression "without prejudice" or by a mediation agreement". Accordingly, even if a settlement offer is expressed to be "without prejudice" instead of "without prejudice save as to costs" (ie. the usual basis of a Calderbank offer), such an offer may still be admissible on the question of costs. Similarly, even if the terms of a mediation agreement do not permit evidence to be adduced of offers made in the course of the mediation, such offers can - notwithstanding the parties' agreement - be adduced in determining liability for costs.