Shipping Update - Supreme Court Reviews 'Without Prejudice Rule

In a decision relating to a dispute under forward freight agreements, the Supreme Court has recognised a new exception to the 'without prejudice' rule, known as the 'interpretation exception'.

The decision in Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44, is relevant to all parties involved in settlement negotiations and provides important clarification of the meaning of 'without prejudice'.

Background

The 'without prejudice' rule is, of course, well known and widely relied upon. Its purpose is to encourage parties to settle disputes without recourse to litigation by preventing statements or admissions made in the course of negotiation from being referred to in court in subsequent litigation.

The rule is of long standing, and although broad in effect, has a number of exceptions that have developed over the years. However, until now no exception has been recognised that would allow anything written or said in the course of without prejudice negotiations to be used to help interpret any agreement concluded as a result of those negotiations. In this important decision, the Supreme Court has taken the opportunity to extend the list of exceptions to the rule.

The issue

The appellants (TMT Asia Limited) and the respondent (Oceanbulk Shipping & Trading SA) had entered into a number of forward freight agreements ("FFAs") which were affected by the extraordinary volatility of freight markets in 2008.

The FFA contracts were swap agreements in which the parties sought to hedge against market fluctuations by effectively betting on whether the settlement rate (an average of published freight rates) was higher or lower on a given settlement day than the contract rate as defined in the FFA.

When the appellants failed to pay a sum due under those agreements, the parties entered into without prejudice settlement negotiations. The negotiations were successful and resulted in a written settlement agreement in respect of the sums due. However, a dispute subsequently arose concerning the meaning and effect of the settlement agreement. The respondent brought a claim for damages against the appellants alleging breach of a clause of the agreement. In their defence the appellants sought to rely on statements made during the without prejudice negotiations in support of their interpretation of the clause. The respondent argued that reliance on the statements made during negotiation was precluded by the without prejudice rule. The High Court held in...