Without prejudice and subject to contract: do you really mean what you say?
This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
The labels "without prejudice" and "subject to contract" have been in the spotlight recently after two cases were in the courts at the end of last year.
By way of a reminder, "without prejudice" privilege prevents statements made, either orally or in writing, in a genuine attempt to settle a dispute from being put before the court as evidence of admissions against the party making them.
"Subject to contract" is used when the parties do not intend any legal consequences to flow from the communications. It is often used during contract negotiations, such as when negotiating heads of terms, to ensure no legally binding contract is created inadvertently.
The first case was a Court of Appeal decision in Avonwick Holdings Limited v Webinvest Limited. Webinvest proposed a re-scheduling of a loan, which Avonwick refused. Webinvest defaulted and issued proceedings to prevent Avonwick issuing a winding‑up petition against it and alleged that there was a collateral oral agreement making Webinvest's obligation to pay conditional on it being paid in full by a third party. Correspondence relating to the unsuccessful rescheduling of the loan had been marked "without prejudice and subject to contract" and the question was whether this evidence was admissible before the court.
The Court of Appeal upheld the decision of the High Court that the correspondence was admissible because at the relevant time (i.e. the time the correspondence took place) there was no dispute and "without prejudice" privilege therefore did not apply.
Although the Court recognised that the parties had the freedom to agree to extend the "without prejudice" privilege by contract, it was held that no such agreement had been reached. The parties had marked the documents "subject to contract", which prevented the extension of the "without prejudice" privilege, as the parties could not have intended to create a binding contract to extend the "without prejudice" privilege.
The Court of Appeal also had to consider whether the "without prejudice" privilege had been waived by one of the parties. However, and whilst upholding the long established legal principle that "without prejudice" privilege cannot be waived unilaterally, the Court saw no reason to depart from this and held that without prejudice privilege remained even after settlement.
In the second case of Bieber v Teathers Ltd (in liquidation), the High Court had to consider whether an agreement had been reached to create a binding legal contract between the parties during an exchange of emails marked "without prejudice". The court reviewed the "without prejudice" correspondence and held that a settlement agreement had been created out of the email correspondence even though it was contemplated between the parties that they would enter into a separate consent order. The terms of the agreement were clear and one party could not try to insert additional terms into the agreement at a later date. The offer accepted did not state that the acceptance was "subject to contract" and accordingly the defendant was bound by its original offer.
Both cases demonstrate the need to correctly use the labels "without prejudice" and "subject to contract" to avoid unintended consequences arising for the parties involved. In the first case, the use of "subject to contract" meant that the parties could not have agreed to extend without-prejudice privilege to the correspondence prior to a dispute having arisen. Whilst in contrast, the failure to use "subject to contract" in the second case meant that "without prejudice" negotiations had created a binding agreement between the parties.
