‘Without prejudice’ mediation materials admissible to uphold settlement agreement

Lancer entered into the following agreements with Berkeley (the latter acting through an individual appointed under a power of attorney (the Attorney)):

• an asset management agreement to manage Berkeley’s properties; and
• a side letter increasing Lancer’s fees under the asset management agreement. At the Attorney’s direction, Lancer paid on to the Attorney’s companies a number of the fees received pursuant to the side letter.

A dispute arose between Berkeley and Lancer in relation to the amounts due to Lancer under the side letter. During mediation, in written position papers marked ‘without prejudice’, Lancer referred to the payments to the Attorney’s companies. These papers were shared with Berkeley’s solicitors and the Attorney. Shortly after the mediation, the Attorney (acting on Berkeley’s behalf) and Lancer concluded a settlement agreement.

A few years later, Berkeley terminated the Attorney’s and Lancer’s respective appointments. It then started proceedings against Lancer seeking to, inter alia, set aside the settlement agreement. Berkeley alleged that:

• It had only discovered the payments to the Attorney’s companies after termination.
• The payments were made pursuant to the side letter and the settlement agreement and, thus, these agreements were means by which, in breach of his fiduciary duty, the Attorney defrauded Berkeley. Therefore, the Attorney did not have actual authority to, inter alia, conclude the settlement agreement on Berkeley’s behalf.
• Lancer knew about or suspected that the Attorney was acting in breach of duty by, inter alia, committing Berkeley to the settlement agreement. Therefore, the Attorney did not even have ostensible authority to, inter alia, conclude the settlement agreement on Berkeley’s behalf.

In its defence, Lancer sought to rely on the mediation position papers to show that Berkeley had known about the payments to the Attorney’s companies before the settlement agreement. While Lancer accepted that the statements in the position papers were made ‘without prejudice’ (WP), it argued that they should be allowed in evidence under one or more of the exceptions to the WP rule.

At first instance, the High Court allowed the WP statements under two exceptions to the WP rule. The Court of Appeal only allowed the WP statements under one of those exceptions.

Misrepresentation or fraud exception applies as a shield, not just as a sword

The conventional description of the misrepresentation or fraud exception to the WP rule is that WP communications are admissible if they show that a settlement agreement should be set aside on the grounds of misrepresentation, fraud or undue influence. Berkeley argued that this exception did not apply because Lancer sought to uphold the settlement agreement, not to set it aside.

Agreeing with the first instance decision, the Court of Appeal ruled that the WP statements were admissible under this exception. The court held that the purpose of the exception is to help determine whether a settlement agreement is binding. Therefore, WP communications are admissible if pertinent to issues proving or disproving the binding nature of a settlement agreement.

Muller exception is only about waiver of WP privilege in three-party cases

At first instance, the High Court held that the exception derived from Muller v Linsley^[1] (the Muller exception) applies if the matter is not ‘fairly justiciable’ otherwise and the WP communications do not contain admissions relevant to the settlement agreement. Given that Berkeley relied strongly on its lack of knowledge of the payments to the Attorney’s companies and Lancer’s WP communications were the only evidence to the contrary, the court lifted the WP protection.

The Court of Appeal, obiter, disagreed with the High Court’s interpretation of this exception. It noted that, although the decision in Muller has not been overruled, its reasoning can no longer stand.

It questioned whether the Muller exception could apply to so-called ‘two-party’ cases (ie where the parties to the litigation and the WP settlement discussions are the same). 

• First, Muller was a ‘three-party’ case (ie a party to the WP settlement discussions was not also a party to the litigation) and, therefore, applying it to two-party cases would extend the exception beyond the facts of Muller.
• Second, Muller dealt with the difficulty of waiver in a three-party situation, which is not necessarily an issue in two-party cases. This is because, if a party to WP settlement discussions puts that material in issue in litigation, the other party to those discussions (who is also a party to the litigation) can simply choose to accept that waiver. By contrast, in the three-party scenario, the absence of a corresponding waiver from the third party might need to be overridden by the court.
• As this is a two-party case, the relevant question on the admissibility of the WP statements is whether Berkeley’s reliance on a lack of knowledge of the payments disclosed thereby amounts to a waiver of its right to WP privilege, which Lancer (as the other party to the WP settlement discussions) can simply accept. The issue was not decided because Lancer had made it clear that it did not rely on waiver.

The Court of Appeal observed that the High Court’s ruling developed a potentially new exception to the WP rule, which applies where a matter raised by the party resisting disclosure is not ‘fairly justiciable’ without recourse to WP communications. As the existence of this potentially new exception was not determinative of the appeal, the Court of Appeal declined to consider it further. 

No extension of the estoppel exception

Lancer alleged that the WP communications should be allowed as part of its defence of estoppel by silence: despite being informed of the payments to the Attorney’s companies during the mediation, Berkeley never raised any concerns.

The conventional description of the estoppel exception is that 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 exception should extend to any form of estoppel (including silence).

The Court of Appeal held that any such extension raises difficult issues which need not be determined in a case that does not turn on them.

No new ‘independent fact’ exception

At first instance, the High Court suggested there might be another exception to the WP rule where WP material contains ‘independent fact[s]’ in no way connected with the merits of the settlement discussions. The independent facts in this case would have been Lancer’s payments to the Attorney’s companies, because they were disclosed in the context of settlement discussions about the amounts due to Lancer. However, as Lancer had not advanced its case on this basis, the High Court left the point open and simply noted that such an exception might have applied. The Court of Appeal agreed that the issue need not be decided, but expressed doubts that it would have applied anyway.

Comment

The Court of Appeal decision in Berkeley v Lancer is a rare example of WP communications being admissible in evidence. Cases applying any of the limited exceptions to the WP rule are few and far in-between due to the courts’ regard for the strong public interest in protecting open and frank settlement discussions.

The Court of Appeal looked at the purpose rather than the formal wording of the misrepresentation or fraud exception and applied it to circumstances in which a settlement agreement is sought to be upheld rather than set aside. The court’s obiter remarks on the Muller exception suggest that it is limited to the question of waiver in three-party situations and, thus, not applicable in a two-party case such as this one.

The Court of Appeal declined to definitively rule on further potential exceptions to the WP rule, such as: (i) any form of estoppel (including silence); (ii) if matters are not ‘fairly justiciable’ without recourse to WP communications; or (iii) for ‘independent fact[s]’ in no way connected with the merits of the settlement discussions. Instead, the court commented that such issues should only be decided in cases that turn on them.

^{[1] [1994] EWCA Civ 39, 30 November 1994.}