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The limits of without prejudice protection

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Bianca Vasilache

Associate

London

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24 June 2020

The High Court has allowed disclosure of “without prejudice” communications in two recent cases: one involving threats to remove assets from the jurisdiction in order to frustrate enforcement of a judgment; and the other involving an attempt to uphold a settlement agreement that was challenged on the grounds of fraud and breach of fiduciary duty. These decisions are interesting because the limited exceptions to the WP rule rarely outweigh the strong public interest in protecting open and frank settlement discussions: Motorola Solutions, Inc. & ors v Hytera Communications Corporation Ltd. & ors [2020] EWHC 980 (Comm), Berkeley Square Holdings & ors v Lancer Property Asset Management Ltd & ors [2020] EWHC 1015 (Ch)

Motorola v Hytera: a threat to move assets in order to frustrate enforcement of a judgment

Pending execution of a substantial U.S. judgment in its favour, the claimant applied to the English courts for a freezing order over the defendant’s assets in England and Wales. The claimant sought to prove a risk of dissipation of assets by referring to oral statements, made by the defendant at two settlement meetings, that were privileged by virtue of the WP rule. The claimant alleged that, at these meetings, the defendant had threatened to prevent enforcement of an “unacceptable” U.S. judgment by, among others, moving assets and changing the entities due to receive payments from customers. In support, the claimant submitted: (i) two witness statements from a senior in-house counsel; and (ii) a photograph of the defendant’s flip chart presentation showing that the consequence of an “unacceptable” U.S. judgment was “retreat”. The claimant argued that, while the evidence contained WP communications, it was admissible under the “unambiguous impropriety” exception to the WP rule. The defendant denied that the exception applied and that it had made any threats.

The “unambiguous impropriety” exception applied

Under the “unambiguous impropriety” exception, WP communications are admissible if their exclusion would act as a cloak for perjury, blackmail or other unambiguous impropriety.

The court applied the “unambiguous impropriety” exception and allowed the claimant’s evidence. The court held that:

  • In a threat case such as this, the requirement is that the threat “unambiguously exceeded what was proper” or “permissible in settlement of hard fought commercial litigation”.
  • A threat to move assets in order to frustrate enforcement of a judgment fulfils this requirement at least if the clear implication of the threat is that the removal will be accomplished by “improper means”.
  • While some of the defendant’s threatened actions might fall short of constituting “improper means”, they must be looked at as a whole:
    • “So viewed, they amounted to a threat to move assets away from jurisdictions where enforcement could be accomplished without undue difficulty into countries which were ‘murky’, and to do so with a view to frustrating enforcement.”
    • The judge could not see, for example, how it could be proper for the defendant to change the entities due to receive payments from customers in order to frustrate collection.
  • In the absence of a record of the WP communications, the claimant only has to prove there is a “good arguable case” or a “plausible evidential basis” that the defendant made the alleged statements. The evidence met this threshold.
  • The claimant was thus able to rely on the defendant’s WP statements in order to prove a risk of dissipation of assets and obtain a freezing order over the defendant’s assets in England and Wales.

Berkeley v Lancer: WP exceptions used to uphold settlement agreement

Lancer demanded a number of outstanding payments from Berkeley pursuant to an asset management agreement. During mediation, Lancer mentioned in its written statements that it used some of the money received from Berkeley to make payments to a company owned by Berkeley’s attorney (ie the person appointed by Berkeley under a power of attorney to represent Berkeley’s interests in all matters relating to the asset management agreement). Mediation discussions failed, but the parties entered into a settlement agreement shortly thereafter. A few years later, Berkeley sought to recover its payments to Lancer and set aside the settlement agreement on the basis of fraud and breach of fiduciary duty caused by Lancer’s allegedly undisclosed payments to the company owned by Berkeley’s attorney. In its defence, Lancer argued that the written statements from the mediation proved Berkeley’s knowledge of the side payments and, thus, Berkeley’s claims had no merit. While Lancer agreed that the written statements were WP communications, it submitted that they should be allowed in evidence under one or more of the exceptions to the WP rule. 

The misrepresentation or fraud exception applies as a shield, not just as a sword

Under the misrepresentation or fraud exception, WP communications are admissible if they prove that a settlement agreement should be set aside on the grounds of misrepresentation, fraud or undue influence.

Berkeley argued that the exception did not apply because Lancer sought to uphold the settlement agreement rather than set it aside. The court disagreed and held that Berkeley’s interpretation is contrary to principle: if a party can use WP communications to prove misrepresentation and rescind a settlement agreement, it would be illogical to say that the other party cannot use WP communications to disprove misrepresentation and uphold the settlement agreement. The court allowed the WP communications either under the “properly interpreted” misrepresentation or fraud exception or under a “small and principled” extension to serve the interests of justice.

The matter was only “fairly justiciable” if WP communications admitted

As derived from Muller v Linsley1, WP communications are admissible if the matter is not “fairly justiciable” otherwise (the Muller exception).

Given that Berkeley relied strongly on its lack of knowledge of Lancer’s side payments, the matter was only “fairly justiciable” if Lancer could put forward the only evidence that proved Berkeley’s knowledge: the WP communications. Therefore, the court allowed the WP communications under the Muller exception too.

Notably, the court distinguished Fincken2, a Court of Appeal decision in which WP communications were not allowed even though they proved that a party had lied in a sworn document. First, the parties in Fincken argued for the “unambiguous impropriety” exception, not the Muller exception. Second, the WP communications in Fincken were an admission of fact relevant to the settlement agreement which, as a matter of public policy, should be protected in order to encourage open and frank settlement discussions. Unlike Fincken, the WP communications in this case: (i) were Lancer’s own statements rather than an admission by Berkeley; and (ii) were background information and largely irrelevant to the settlement agreement.

The estoppel exception did not apply

Under the estoppel exception, WP communications are admissible if they consist of clear and unambiguous statements made by a party with the intention that the other party should rely on them and the other party does rely on them to its detriment.

Lancer argued that the WP communications should be allowed as part of its defence of estoppel by silence or convention because: (i) during the mediation, Berkeley was made aware of the side payments and did not dispute them in any way; (ii) consequently, Lancer assumed that the side payments were in order; and (iii) as Lancer had reasonably relied on Berkeley’s silence to its detriment, Berkeley was estopped from claiming that the side payments were not actually in order. Berkeley disagreed and contended that the estoppel exception only covers promissory estoppel. The court acknowledged that the law is unclear as to the type of estoppel covered by the exception, but concluded that the point need not be decided. The exception did not apply because Berkeley’s silence was a “very far cry” from the required clear and unambiguous statement.

A new “independent fact” exception?

Reviewing comments from a number of cases, the court suggested a new exception allowing WP communications which contain “independent fact[s]” in no way connected with the merits of the settlement discussions.

As Lancer had not advanced its case on the basis of an “independent fact” exception and Berkeley denied the existence of such an exception, the court left the point open. However, it noted that at least some of Lancer’s WP communications would be admissible under an “independent fact” exception (if one existed) because they were background information and largely irrelevant to the settlement agreement.

Comment

These two High Court decisions are rare examples of WP communications being admissible in evidence. 

Motorola v Hytera confirms that a threat to remove assets from the jurisdiction through “improper means” in order to frustrate enforcement of a judgment falls under the “unambiguous impropriety” exception. However, it is still unclear what constitutes “improper means” and whether a removal through proper means might still fall under the “unambiguous impropriety” exception because of the reprehensible intention to frustrate enforcement of a judgment. As the court put it:

“The court’s jurisdiction to grant freezing orders, which have been equated in the litigation context to nuclear weapons, reflects the seriousness with which the court views the unjustified removal of assets in order to frustrate judgments. It would therefore be surprising if the court were to regard threats to do so as falling within the bounds of what is permissible, even in hard-fought commercial litigation.” (emphasis added)

Other examples of threats that crossed the fine line between hard-fought litigation tactics and impropriety are the threats of criminal action, not limited to contempt proceedings, and immediate publicity of extremely serious allegations in Ferster v Ferster3 and the threats of terrorist charges in Boreh v Djibouti4.

Additionally, Motorola v Hytera confirms that, in the absence of a record of the WP communications, the party seeking to lift privilege only needs a “good arguable case” or a “plausible evidential basis” for its version of events. In this case, the evidence from a senior in-house counsel and a copy of a presentation were sufficient.

The court in Berkeley v Lancer remarked that this seems to be the first reported English case that applied the misrepresentation or fraud exception. In fact, the court appears to go even further and expand the exception to circumstances in which the settlement agreement is sought to be upheld rather than set aside. This approach is consistent with two other exceptions to the WP rule: (i) the rectification exception, which allows WP communications in order to establish the true settlement terms agreed between the parties; and (ii) the interpretation exception, which allows WP communications in order to determine what facts the parties were aware of at the time of the settlement agreement.

The decision also clarifies that, despite its problematic history, the Muller exception applies only when a matter is not “fairly justiciable” without allowing the WP communications and such WP communications do not contain admissions relevant to the settlement agreement. This is a high threshold and, if an argument can be reasonably supported by other evidence, the court is unlikely to lift privilege.

Finally, Berkeley v Lancer leaves open the question as to the type of estoppel covered by the estoppel exception as well as the possibility of a new “independent fact” exception, similar to the one developed in Scotland. Regarding the latter, courts should heed the observation of the House of Lords in Ofulue v Bossert5: an exception that allows cherry-picking certain sentences from WP communications could cause confusion and uncertainty, potentially hindering open and frank settlement discussions. 

 

Footnotes:

1 [1994] EWCA Civ 39, 30 November 1994.

2 [2003] EWCA Civ 1630, 14 November 2003.

3 [2016] EWCA Civ 717, 12 July 2016.

4 [2015] EWHC 769 (Comm), 23 March 2015.

5 [2009] UKHL 16, 11 March 2009.

 

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.