Without prejudice communications open to inspection in settlement agreement
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This judgment serves as a reminder that settlement agreements are not covered by the without prejudice rule. Parties should be mindful of this when considering whether to include information which otherwise would not be open to inspection or available as evidence.
The claimant companies (BGC) were inter-dealer brokers. The first defendant (Tradition) was a competitor. The third defendant (the Broker) was a broker at BGC who supplied its confidential information to Tradition.
BGC started proceedings against Tradition and the Broker in relation to this information leak. In an effort to settle the proceedings against him, the Broker told BGC on a without prejudice basis what confidential information he had disclosed to Tradition (the Disclosures).
As a result, a settlement agreement was concluded between BGC and the Broker. Importantly, the settlement agreement:
- appended (or incorporated by reference) the without prejudice communications detailing the Disclosures;
- expressly preserved the without prejudice nature of these communications (save that it could be waived on the Broker’s breach of the agreement); and
- The Broker warranted that the Disclosures were the full extent of the confidential information he had passed on to Tradition.
BGC disclosed a redacted version of this agreement to Tradition with the without prejudice material removed on grounds of without prejudice privilege and/or litigation privilege. Tradition challenged the legitimacy of these redactions.
No without prejudice protection
The without prejudice rule broadly protects communications made in a genuine attempt to compromise a dispute between the parties from being inspected by other parties to that litigation and put before the court as evidence. The public policy justification for this protection is that parties should not be discouraged from settling their disputes for fear that something they say in the course of settlement negotiations could be used against them on the question of liability.
Settlement agreements do not benefit from the without prejudice rule. However, this does not affect the without prejudice status of any prior negotiations that led to a settlement agreement (other than where an accepted without prejudice offer forms part of the settlement agreement).
The question the Court of Appeal had to decide in this case was whether the Broker’s without prejudice communications detailing the Disclosures lost their without prejudice status when situated in the settlement agreement. The Court of Appeal held that they did.
The purpose of the particular communication at issue is what matters for the without prejudice rule. Here the relevant communication was the settlement agreement. The without prejudice communications were included in the settlement agreement not as live negotiations but as part of an integral term of that agreement. They were there to provide BGC with a warranty on which it could sue, if the Disclosures turned out to be inaccurate or incomplete. In the context of the settlement agreement therefore, the communications could not benefit from the without prejudice rule.
No litigation privilege protection
The Court of Appeal then turned to the claimant’s alternative ground for resisting disclosure, namely, that litigation privilege applied.
Litigation privilege applies to communications between a lawyer, client and/or third party made for the dominant purpose of obtaining information or advice in connection with the conduct of adversarial litigation which is in progress or in reasonable contemplation.
No dominant litigation purpose
The Court of Appeal found that there was one glaring problem with BGC’s claim to litigation privilege. The without prejudice communications were not included in the settlement agreement for the dominant purpose of obtaining information or advice in connection with the conduct of litigation. Although the court was prepared to accept that the original purpose of generating these communications might have been to gather evidence, this was not why they were included in the settlement agreement. Here their purpose was as a warranty to BGC. This purpose was distinct from any initial evidence-gathering purpose and could not be subsumed into any overarching dominant litigation purpose. BGC’s claim to litigation privilege was therefore defeated.
Tradition also argued that the claim to litigation privilege must also fail as litigation privilege cannot attach to communications between opposing parties to litigation unless those two parties share a common interest against another party. The court recognised that this involved difficult issues and given its finding on dominant purpose felt that these issues would be better dealt with “in a case where their resolution matters”.
Although this judgment primarily involves settled principles, it is a helpful reminder of the vulnerability of settlement agreements to inspection in multi-party litigation where those agreements are responsive to a disclosure order. Parties should be mindful of this when drafting settlement agreements and avoid including without prejudice material or at the very least should not include it in wholesale form.
For more information please contact Amy Edwards, firstname.lastname@example.org.