The Court of Appeal has resisted the temptation to provide clarity on the scope and application of the Muller(1) exception to the without prejudice rule. In Berkeley Square Holdings Limited v Lancer Property Asset Management Limited,(2) the court indicated that recent first-instance decisions have strayed beyond the facts in Muller, a development that might widen the scope of the exception unjustifiably.
The without prejudice rule protects statements made in the context of a without prejudice discussion or negotiation from being relied upon in later legal proceedings. The principle facilitates the settlement of disputes by encouraging the parties to speak freely and frankly without fear that statements made in the course of a without prejudice situation might later be used against them. The rule is grounded in public policy and the protection that it offers is not easily overridden.
Unless all of the parties to the without prejudice situation agree to waive without prejudice privilege, what is said or stated remains protected unless one of the well-established exceptions to the without prejudice rule set out in Unilever plc v The Proctor & Gamble Co(3) applies. In this context, it makes no difference whether a party is seeking to rely on a statement that it made in the without privilege situation or whether the statement was made by the other party.
The court in Unilever set out six established exceptions to the without prejudice rule. While these are not exhaustive, it is generally accepted that any extensions or additions to them should be narrowly drawn to maintain the policy objective of facilitating amicable dispute settlement.
Without prejudice communications are admissible in the following circumstances:
- settlement – to determine whether the communications have resulted in a concluded compromise agreement and, if so, the terms of that agreement;
- fraud, misrepresentation or undue influence – to show that an agreement apparently concluded between the parties during the negotiations should be set aside on these grounds;
- giving rise to an estoppel – to give evidence of a clear statement made by one party to the negotiations on which the other party is intended to and does in fact act;
- impropriety – to provide evidence of what the other party said or wrote in a without prejudice context if the exclusion would act as a cloak for perjury, blackmail or other unambiguous impropriety;
- delay – to explain delay or apparent acquiescence; and
- the Muller exception.
Berkeley Square Holdings Limited consisted of 24 companies incorporated in the British Virgin Islands. The companies collectively owned a substantial property portfolio in Central London for which Berkeley Square Holdings Limited was the legal owner. The portfolio was asset managed by the first defendant (Lancer) from 2005 to 2017 and Dr Al Ahbabi was appointed as the claimants' representative in respect of the portfolio. Lancer made substantial payments to Becker Services Limited, which was beneficially owned by Al Ahbabi.
In 2015 Al Ahbabi was removed from his post and in 2017 Lancer's mandate to asset manage the portfolio was terminated. In September 2018 the current proceedings were issued, within which the claimants alleged that the payments by Lancer to Al Ahbabi were a fraud on the claimants and that it had not learn of them until 2017. In its defence, Lancer relied on statements made in mediation position papers relating to a separate dispute between the same parties in 2012, in which reference was made to Lancer's payments to Becker. Berkeley Square applied to have references in the defence to the mediation position papers struck out on the basis that they were protected by without prejudice privilege.
At first instance, Lancer relied on three Unilever exceptions:
- fraud;
- estoppel; and
- the Muller exception.
Mr Justice Roth found that the fraud and Muller exceptions were applicable but not the estoppel exception. The claimants appealed.
The Court of Appeal agreed that the fraud exception applied to the mediation statements on which Lancer wished to rely; if Lancer had misled the claimants by misrepresenting the position concerning Becker at the mediation, the claimants would have been entitled to refer to the statements made at the mediation to impugn the validity of the settlement agreements reached as a result. Here, Lancer wanted to do the opposite: it wished to rely on the mediation statements to establish what Berkeley Square knew about Becker (and therefore to rebut a case that the claimants had been deceived and that Al Ahbabi accordingly had no authority to bind the claimants to the settlement). Lancer's argument was that these were two sides of the same coin. If it is permissible to allow reference to without prejudice material to set aside an agreement, it would be illogical to treat references intended to uphold an agreement as impermissible.
Berkeley Square argued that this interpretation of the fraud exception was an extension of that exception, as stated in Unilever, and that extensions should be principled, incremental and analogous to the existing exceptions. While the Court of Appeal agreed that extensions should be principled, as in this case, it did not agree that extensions to an exception could only be incremental or analogous to already existing exceptions. This would create an inappropriate fetter on the law's ability to react to new facts or circumstances that do not fit neatly into the already established exceptions. Accordingly, the Court of Appeal upheld Mr Justice Roth's decision on the fraud exception and this was sufficient to dispose of the appeal.
In light of that decision, the court did not need to determine the other two exceptions relied on; the question as to whether the estoppel exception should be extended to any type of estoppel should be explored in a case that turns on that particular issue.
Muller exception While the decision in Muller has not been overruled, the reasons given for the decision cannot now stand. This makes the exception difficult to apply to anything but identical facts to those in Muller. In Muller, the court ordered disclosure of the claimants' settlement negotiations with a software company in circumstances where the claimants had relied on the settlement as reasonable mitigation of the loss that it claimed from the defendants, its former solicitors.
Recent first-instance decisions, including Berkeley Square, have attempted to apply the decision to factual scenarios far removed from the facts in Muller. While the court in Berkeley Square did not overturn those decisions, it certainly raised doubts about them.
The court in Berkeley Square also questioned whether the Muller exception could apply to a two-party case when Muller was a three-party case; a two-party scenario is quite different and thus deviates from the factual matrix in Muller. Also, in a two-party case, the Muller exception is arguably unnecessary because the parties to the proceedings are the same as the parties to the without prejudice situation and they can therefore agree to waive privilege in the without prejudice communications. That is not an option where the parties to the proceedings are distinct to the parties to the without prejudice situation. This analysis is supported by another distinction – namely, the fact that, in Muller, it was the without prejudice negotiations themselves that were in issue, whereas in subsequent cases, it was statements made at the without prejudice negotiations that were in issue.
The court also considered where a party puts in issue a point that is not fairly justiciable without reference to without prejudice material. Was this a standalone aspect of the Muller exception or one of the strands or factors that were considered in the round? An exception framed by reference to what was fairly justiciable might be viewed as shorthand for 'what justice requires', and that in turn might be so wide as to encroach on the public policy principle of protecting without prejudice communications from disclosure so as to facilitate amicable settlement. As it was not necessary to determine this point, the court decided not address this question.
Although the estoppel and Muller exceptions were fully argued and raised difficult points which were ripe for determination, the Court of Appeal declined to do so given its decision on the fraud exception. In effect, this left the possibility of further argument on the scope and application of each of those exceptions open, when the ambit of the Muller exception, in particular, has been far from clear for some time. The court did express concern at what it viewed as attempts to widen the ambit of the established exceptions to the without prejudice rule. However, it is regrettable that the court declined the opportunity to provide much-needed clarity on this difficult area of law.
Endnotes
