Interpreting Terms Of Settlement Agreements: New Exception To The 'Without Prejudice Rule'

We previously reported on the English Court of Appeal decision in Oceanbulk Shipping & Trading SA v TMT Asia Limited [2010] EWCA Civ 79,1 which considered the important issue of whether established exceptions to the "without prejudice rule" should be extended to cover precontractual negotiations for the purpose of interpreting the terms of a settlement agreement.

Generally speaking, written and oral communications between parties during negotiations genuinely aimed at settling a dispute so as to avoid litigation or arbitration cannot be put into evidence if those negotiations subsequently fail and the parties continue litigating or arbitrating their dispute. The rule is based upon the public policy of encouraging parties to settle disputes rather than becoming embroiled in court or arbitration proceedings. The rule achieves this purpose by protecting either or both parties from being embarrassed or prejudiced in court or in arbitration proceedings because of admissions that may have been made by them during the negotiations.

Despite the decision of the Court of Appeal refusing to extend the exceptions to the without prejudice rule to precontractual negotiations, the issue remained uncertain due to a strong dissenting judgment given by Lord Justice Ward. The issue has now been laid to rest by appeal to the Supreme Court,2 where it was unanimously held that precontractual settlement negotiations are admissible to "ascertain the true construction of the agreement as part of its factual matrix or surrounding circumstances."

The High Court and Court of Appeal Decisions

The dispute over this matter began in 2009 when Oceanbulk claimed against TMT for noncompliance of a settlement agreement that they entered into to settle outstanding payments due from TMT to Oceanbulk. During the hearing, TMT, in its defense, sought to rely on the without prejudice negotiations leading up to the settlement agreement to interpret the meaning of terms of the agreement.

The High Court handed down a judgment in July 2009 holding that the exceptions to the without prejudice rule extended to precontractual negotiations if they would assist the court in properly construing the meaning of the terms of a settlement agreement. However, the decision was subsequently overturned by a 2–1 majority in the Court of Appeal. The majority held that the policy of protecting without prejudice communications to encourage and facilitate parties to settle their differences was stronger...