Michael Axe reports on the English Supreme Court's controversial decision to allow the admission of Without Prejudice communications as evidence in relation to the interpretation of a settlement agreement.

Without Prejudice (WP) privilege covers communications between parties (whether written or verbal) which represent a genuine attempt to settle a dispute. The general rule is that WP communications are not admissible in Court as evidence. This rule has developed as a matter of public policy to ensure that parties can negotiate freely during settlement discussions, without fear that anything they say can later be used against them in Court by the other side.

As with any general rule, there are exceptions, and one of the key exceptions to Without Prejudice privilege is that WP communications can be used as evidence to show that a binding settlement agreement had been concluded. This exception was historically applied very narrowly, and the Courts would only allow WP communications as evidence when a dispute related to the existence of a settlement agreement, not to the interpretation of a settlement agreement.

In October 2010, the Supreme Court unanimously confirmed that a new 'interpretation exception' to the Without Prejudice rule should be recognised. The Supreme Court ruled that objective facts which were passed between the parties via WP communications during settlement negotiations could be admissible as evidence of the 'factual matrix or surrounding circumstances' relating to the correct interpretation of a settlement agreement.

Although the Supreme Court has recognised the existence of a new exception to the Without Prejudice rule, in reality, it is still a very narrow exception which is unlikely to undermine the protection afforded to settlement discussions. In particular, the exception will not allow one party to use another party's WP communications against them in Court proceedings relating to the original dispute.