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When threats made without prejudice are not without prejudice

16 September 2016

The appellants’ threats, contained in an email during settlement negotiations “unambiguously exceeded what was permissible in settlement of hard fought commercial litigation”. The email therefore was not protected by without prejudice privilege. The Court of Appeal examined the ‘unambiguous impropriety’ exception to without prejudice privilege. Jonathan Ferster v Stuart Ferster & ors [2016] EWCA Civ 717 provides a good reminder of the importance of taking a measured approach even during heated settlement negotiations in order to avoid losing without prejudice privilege. 

Without prejudice” privilege protects statements made (either in writing or orally) in a genuine attempt to settle an existing dispute. Such statements are not admissible evidence against the interest of the party that made them. There are some limited exceptions. In Unilever plc v The Procter & Gamble Co. [2000] 1 WLR 2436, the Court of Appeal stated that without prejudice communications may be allowed in evidence “if the exclusion of the evidence would act as a cloak for perjury, blackmail or other ‘unambiguous impropriety’” . In subsequent cases, the courts have not permitted mere admissions or acknowledgments by parties to come within this exception.

This dispute concerned an email which was sent in the context of settlement negotiations. Interactive Technology Company Ltd. (ITC), the third appellant, is owned jointly by the respondent Jonathan Ferster (Jonathan), and the first and second appellants, Stuart Ferster (Stuart) and Warren Ferster (Warren). At the instigation of Stuart and Warren, ITC sued a number of defendants including Jonathan for, inter alia, breach of fiduciary duty in its management. Jonathan was ordered to disclose his assets. In response, Jonathan filed a petition under s994 (the ‘unfair prejudice’ provision) of the Companies Act 1996 alleging that Stuart and Warren had procured the action against him in order to pressurise him into buying their shares in ITC at an inflated price. Jonathan subsequently sought to refer to the contents of an email that had been sent following mediation (email).

At mediation, Stuart and Warren had offered to sell their shares in ITC to Jonathan for a specified sum of money. No agreement was reached. Subsequently, the mediator sent the email to Jonathan’s lawyers passing on certain messages from Stuart and Warren. In the email Stuart and Warren withdrew their existing offer to sell their shares in ITC to Jonathan and asked for a higher sum of money. The e mail expressly stated that they had increased their offer as they had “become aware of further wrongdoings by Jonathan”. They stated that they had information that Jonathan held additional offshore accounts which he had not disclosed pursuant to the order to disclose his assets. They further stated that if their offer was not accepted within 48 hours, a further higher sum of money would be required to purchase their shares. It was emphasised that Jonathan could face charges of perjury, perverting the court of justice, contempt of court, and potential imprisonment. Similarly, Jonathan’s partner could be investigated and charged. If this were to happen, “Jonathan’s credibility and reputation will be destroyed barring him out of the online gaming business in the future”.

After the email was sent, Jonathan’s lawyers asked the appellants’ lawyers for full details of the allegations. The appellants’ lawyers responded by stating that their client did not intend that committal proceedings would be issued if the offer was not accepted. According to the appellants’ lawyers, no threats had been made as to what would happen if the parties did not reach a settlement agreement.

Jonathan sought to rely on the email to show that Stuart and Warren sought to extort a ransom price from Jonathan for their ITC shares by making improper and unwarranted threats that ITC would bring committal and criminal proceedings against him unless he agreed to purchase their shares at an inflated price.

Improper threats fall within the exception of “unambiguous impropriety”

Lord Justice Floyd stated that the critical question was whether a privileged occasion had been abused. It may be easier to show that there is unambiguous impropriety where there is an improper threat than where there is simply an unambiguous admission of the truth (eg where a party makes an admission during negotiations that is inconsistent with his pleaded case).

In her first instance judgment, Rose J had stated that the email constituted an attempt at blackmail and was therefore admissible. The impropriety, in her opinion, consisted of the threat to pursue contempt proceedings unless Jonathan paid the appellants a higher price. There was no ambiguity in the purpose of the threat which was to pressure Jonathan to pay more for the shares. The increase in price had nothing to do with any increase in the value of shares or ITC’s business but instead it was the price being exacted for Stuart and Warren to not cause ITC to take action to deal with the supposed wrongdoing which they had allegedly uncovered.

The appellants’ counsel argued that the discovery of Jonathan’s additional accounts would increase the value of ITC’s action against him and would therefore have a proportionate impact on the value of the appellants’ shares. Through their offer, Jonathan would buy the appellants’ shares and be in complete control of ITC and could, therefore, discontinue the action against him. Lord Justice Floyd rejected this submission. In the email, the appellants were making it clear that if the offer was not accepted, they would use their control of ITC to take the steps identified. While those steps might be proper for ITC to take if it had a genuine belief in the basis for the action, it was wrong for them to be used as a lever to enable the appellants to get a greater sum of money for their shares.

Lord Justice Floyd pointed to the thinly veiled threats in the email and to the attention drawn to the criminal consequences of giving false evidence and perjury. The impropriety in this case was apparent from the email and arose from the fact that the increase in price was tied to the threats affecting Jonathan’s liberty, family and reputation. The threats did not have to fall within a formal definition of blackmail to be regarded as unambiguously improper (applying Boreh v Republic of Djibouti [2015] EWHC 769 (Comm)). Instead, it needed to be evaluated whether the threats unambiguously exceeded what was permissible in the settlement of hard fought commercial litigation. In Boreh v Djibouti, the court concluded that the threat of terrorist charges against Mr Boreh was improper commercial pressure to settle the litigation (and it was unnecessary to decide whether the threat fell within the definition of blackmail in English criminal law) and therefore, fell within the test of unambiguous impropriety.

Lord Justice Floyd agreed that the threats in this case unambiguously exceeded that threshold for the following reasons:

  • The threats of criminal action were far beyond what was reasonable in the pursuit of civil proceedings.
  • They had serious implications for Jonathan’s family because of his wrongdoings.
  • The threat to publicise the allegations within the short timescale placed pressure on Jonathan.
  • The purpose of the threats was to obtain an immediate financial advantage for Stuart and Warren out of circumstances which (if they were true) benefitted ITC.
  • There was no attempt to make any connection between the alleged wrong and the increased demand.

COMMENT

There have been a number of decisions where the unambiguous impropriety exception has been held not to apply where an admission or acknowledgment has been made by a party during negotiations which could be detrimental to that party in subsequent proceedings.1 However, it is more likely to apply, as this case shows, where there is a threat made by one of the parties, irrespective of whether such threat falls within the formal definition of blackmail under English law. 

During the course of trying to settle or negotiate difficult and contentious matters, it is usual for parties to set out the benefits of their offer to the other side. This case is a reminder of the limits of this approach. Neither the subsequent correspondence by the appellants’ solicitors nor the involvement of a mediator was given any weight in assessing the first email. This emphasises the importance of ensuring that correspondence during negotiations is very carefully considered. 


1 Such as Ofulue v Bossert [2009] UKHL 16, Alan Ramsay v Typhoo Tea [2016] EWHC 486 (Comm) and Rochester Resources v Lebedev [2014] EWHC 2185 (Comm).  

Further information    

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.