Without prejudice communications should be disclosed to a third party because two exceptions to the without prejudice rule applied (the “concluded settlement agreement” and “reasonableness of mitigation” exceptions). Previous case law in this area involved one of the parties to the without prejudice communications (rather than a third party) relying on these exceptions. The court drew a distinction between the waiver of without prejudice privilege (which must be done jointly) and merely “showing” a without prejudice communication to a third party (which, the court said, can be done unilaterally): EMW Law LLP v Halborg [2017] EWHC 1014 (Ch).

Mr Halborg, a solicitor, was instructed by his parents and a family company (the Halborg Claimants) in relation to a dispute they were having with a firm of architects (the Architects).  With the agreement of the Halborg Claimants, Mr Halborg instructed another legal firm, EMW Law LLP (EMW) to assist him in the conduct of the case.  EMW was retained on the basis of a conditional fee agreement (the Agency CFA) which provided that it would only be paid once Mr Halborg had recovered EMW's costs from the Architects.

The Halborg Claimants issued proceedings against the Architects. These proceedings were settled by a GBP 350,000 Part 36 offer from the Architects. As a result, the Architects became liable to pay the Halborg Claimants’ costs. Mr Halborg entered into without prejudice negotiations with the Architect’s solicitors to settle these costs, in relation to which a bill of cost was served which sought just over GBP 1.3 million (including GBP 123,590 for EMW’s “agency charges”).

No amount was paid to EMW. It therefore started these proceedings against Mr Halborg for breach of various implied terms in the Agency CFA which it claimed resulted in EMW not being paid.

Without prejudice negotiations sought by EMW

On disclosure, Mr Halborg withheld his communications with the Architect’s solicitors on the recovery of costs on the basis they were protected by without prejudice privilege.  EMW argued that the normal without prejudice rule did not apply as what was at issue was whether a settlement agreement had been reached and/or the mitigating steps taken by Mr Halborg in relation to settlement. 

The matter came before Newey J in the High Court on appeal.

Without prejudice reminder

The court noted that the without prejudice rule operates to protect negotiations genuinely aimed at settlement from being given in evidence. This means that such negotiations are immune from disclosure.

The rule can continue to apply even after a compromise has been reached and its implications are capable of extending beyond the parties to the relevant negotiations. The privilege is a joint one and can therefore only be waived jointly.  It is not open to one of the parties to the negotiations to waive the privilege unilaterally.

There are, however, settled exceptions to the without prejudice rule. These include that without prejudice communications are admissible (and discloseable):

• for the purpose of determining whether a settlement agreement has been concluded (the concluded settlement agreement exception); and

• where there is an issue as to whether a party has acted reasonably in mitigating its loss by virtue of its settlement negotiations and conduct (the reasonableness of mitigation exception).¹

Both exceptions apply

The court held that both the concluded settlement agreement exception and the reasonableness of mitigation exception (“or, another comparable exception”) applied.

Concluded settlement agreement exception

The concluded settlement agreement exception applied as there was, in fact, a dispute as to whether a settlement agreement had been reached. It dismissed Mr Halborg’s concerns that allowing a third party to rely on this exception would mean that a stranger to without prejudice negotiations could obtain communications which the parties themselves were entitled to assume enjoyed the protection of privilege. The Court noted that “while a party to without prejudice negotiations is generally entitled to assume that the negotiations will not generally be capable of being deployed in Court proceedings without his consent he has no absolute assurance of that” given that there are exceptions to the rule. The risk of the concluded settlement agreement exception applying is not "significantly increased if it is understood as allowing not merely a party to the negotiations, but someone else with a legitimate interest in their outcome, to rely on it”.

Reasonableness of mitigation exception

The Court also held that the reasonableness of the mitigation exclusion applied.

He said that “justice clearly demands” that there is an exception (whether that is on the basis of “the facts of the Muller case or another comparable exception)  because:

• it would be difficult for EMW’s claim to be justiciable without disclosure of the without prejudice communications;

• Mr Halborg made reference to his without prejudice negotiations in his defence (when he explained to EMW that the Architects’ solicitors “ascribed no value at all to [EMW’s] work”);

• there was "no likelihood" that recognising that an exception should apply here would deter parties from seeking to settle as they will, if well informed, be aware of the two exceptions to the without prejudice rule relevant to this case;

• there is a persuasive argument that if a client (like the Halborg Claimants) authorises his solicitor to employ an agent on the basis that the agent’s remuneration depends on what agreement as to costs is reached with the other side, “the client can hardly complain if his negotiations with the opposing party are susceptible to being revealed to and relied on by the solicitor-agent”;

• where there is a need the Court could make an order to restrict the use of a disclosed document, even where read out in open court.

Waiver v “showing” distinction

There was some debate as to whether a party to without prejudice communications could “show” documents to a third party without obtaining the consent of the counterparty to that communication. The Court noted that it was accepted that the waiver of without prejudice privilege can only be done with the consent of both parties, which protects the negotiations from unilateral disclosure. However, the court tentatively considered (“[t]he answer, I think, must be…”) that a party to without prejudice negotiations is free to “show” them to someone else if he so chooses, “at least if there is a legitimate reason for doing so”. Unfortunately, the judgment does not go on to address how this conclusion fits with the private law duty of confidentiality parties to such negotiations generally owe each other (although that duty is, of course, subject to qualifications which would allow some “showing”).

Comment

This case is interesting in that it has allowed a third party to make use of the concluded settlement agreement and reasonableness of mitigation exceptions, despite no party to the negotiations seeking to rely on the without prejudice material.  Although the judge in this case came to the view that allowing a third party with a legitimate interest in negotiations to rely on these exceptions will not deter parties from settling, there may be cases where that risk needs to be given serious consideration and may affect what is said in negotiations.  Its effect may, of course, be tempered by obtaining a court order to prevent the collateral use of the material, but it may be far from ideal to allow third parties access to quite sensitive negotiations.  We understand that a permission to appeal application has been filed in relation to this judgment.

The judge’s distinction between waiver of without prejudice and merely "showing" a communication to a third party should also be given consideration.  Despite parties to without prejudice negotiations generally owing each other a private law duty of confidentiality, in certain circumstances, it may be worth the parties expressly agreeing that their negotiations cannot be unilaterally shown to a third party.

Footnote:

1 This exception encompasses the facts of Muller v Linsley Mortimer [1996] 1 PNLR 74.