Factual and Procedural Background
In December 1971 the Appellant (Company A) entered into a main building contract with the First Respondent (Entity A) to construct 639 dwellings on an estate in The City. In January 1973 the Appellant engaged the Second Respondent (Company B) as ground-works sub-contractor.
Significant disruption and delay led Company B, between 1976 and 1979, to submit claims for loss and expense to Company A. Company A in turn sought reimbursement from Entity A, but the latter disputed liability. In August 1979 Company A commenced proceedings against both Respondents, seeking (i) an inquiry into Company B’s loss and expense and (ii) a declaration that Entity A was obliged to indemnify it for any amount so found.
Before trial, on 12 October 1981, Company A and Entity A concluded a global “without prejudice” settlement whereby Entity A paid £1.2 million and Company A accepted direct responsibility for all sub-contractors’ claims. The action against Entity A was discontinued. Although the fact of settlement was disclosed to Company B, no breakdown of the sum attributable to its claim was provided.
When the litigation later revived, Company B counter-claimed for £150,582.86. Company A pleaded that the architect had valued the claim at only about £10,000. Believing higher figures had been discussed during settlement negotiations, Company B sought specific discovery of the without-prejudice correspondence between Company A and Entity A.
The Official Referee (Judge Esyr Lewis Q.C.) refused discovery, holding the documents privileged. The Court of Appeal reversed, directing disclosure on the footing that privilege ends once a settlement is reached. The Appellant obtained leave to appeal to the House of Lords, which heard argument in July 1988 and delivered judgment on 3 November 1988.
Legal Issues Presented
- Does the “without prejudice” rule, traditionally barring admission of settlement communications as evidence, also protect those communications from discovery by a non-party to the negotiations who is litigating a related claim?
- If privilege exists, is it lost once the negotiations culminate in a concluded settlement?
Arguments of the Parties
Appellant’s Arguments
- The documents sought came into existence solely for the purpose of settling litigation with Entity A and are therefore protected by the without-prejudice rule.
- Public policy encouraging frank settlement discussions would be undermined if such documents became discoverable to third parties after settlement.
- Existing authority (e.g., Rabin v. Mendoza & Co.) demonstrates that even the negotiating parties themselves cannot be compelled to disclose such material.
Second Respondent’s Arguments
- The correspondence likely contains valuations of Company B’s claim and would provide a realistic starting point for further negotiations, thereby facilitating settlement of the present action.
- Whatever privilege attached to the communications ceased once Company A and Entity A achieved a final settlement.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|
| Cutts v. Head [1984] Ch 290 | Public-policy foundation of the without-prejudice rule | Quoted to emphasise that negotiations should remain protected to encourage settlement. |
| Scott Paper Co. v. Drayton Paper Works Ltd. (1927) 44 R.P.C. 151 | Need for parties to “put their cards on the table” in settlement talks | Illustrated why candid admissions should remain confidential. |
| Walker v. Wilsher (1889) 23 Q.B.D. 335 | Scope of privilege concerning offers and costs | Court rejected the Court of Appeal’s reliance on this case to argue that privilege ends with settlement. |
| Tomlin v. Standard Telephones & Cables Ltd. [1969] 1 W.L.R. 1378 | Admissibility where issue is whether a settlement was achieved | Cited to show accepted exceptions but none applicable here. |
| In re Daintrey, Ex parte Holt [1893] 2 Q.B. 116 | Privilege cannot shield evidence of bankruptcy | Recognised as a limited exception not affecting the present issue. |
| Kitcat v. Sharp (1882) 48 L.T. 64 | Threats within negotiations may be admitted | Same as above—exception acknowledged but distinguished. |
| Waldridge v. Kennison (1794) 1 Esp. 142 | Independent facts admitted in negotiations may be evidence | Described as exceptional and not justifying discovery here. |
| Rabin v. Mendoza & Co. [1954] 1 W.L.R. 271 | Privilege extends to production (discovery), not just admissibility | Treated as strong authority supporting non-disclosure. |
| O’Rourke v. Darbishire [1920] A.C. 581 | Discovery not limited to admissible documents | Cited to show that privilege, not admissibility, controls disclosure. |
| Schetky v. Cochrane [1918] 1 W.W.R. 821 | Canadian decision allowing discovery by third party | Discussed but not followed; treated as conflicting authority. |
| Derco Industries Ltd. v. A. R. Grimwood Ltd. [1985] 2 W.W.R. 137 | Same as Schetky | Referenced as part of Canadian line rejected by the House. |
| I. Waxman & Sons Ltd. v. Texaco Canada Ltd. [1968] 2 O.R. 452 | Canadian authority favouring privilege against third-party discovery | Approved in principle by the House as the preferable view. |
| Compagnie Financière du Pacifique v. Peruvian Guano Co. (1882) 11 Q.B.D. 35 | Test of relevance for discovery | Noted; held subordinate to public-policy privilege. |
| Chocoladefabriken Lindt & Sprungli A.G. v. Nestlé Co. Ltd. [1978] R.P.C. 287 | Documents containing without-prejudice material are privileged from production | Cited as reflecting existing professional understanding. |
Court's Reasoning and Analysis
Delivering the leading speech, Judge Griffiths characterised the without-prejudice rule as an evidentiary rule grounded in public policy: parties must be free to negotiate candidly without fear that admissions will later be used against them. The Court weighed two competing public interests—full discovery versus encouraging settlement—and found the latter paramount in the present context.
The House observed that most authorities address admissibility after negotiations fail, but the same rationale applies once negotiations succeed: exposing admissions made to settle minor disputes could deter parties from settling for fear that statements would resurface in larger, related litigation.
Reviewing past English and Commonwealth case law, the House found no binding authority compelling disclosure to third parties and considered Rabin v. Mendoza persuasive that privilege extends to production. Canadian cases permitting third-party discovery were expressly declined to be followed.
The Court rejected the linguistic argument that the absence of the label “without prejudice” was determinative; privilege depends on the nature and purpose of the communications, not their wording.
Concluding that compelling disclosure would “place a serious fetter on negotiations,” the House held that without-prejudice communications between Company A and Entity A were not discoverable by Company B. Accordingly, the Court of Appeal’s order was erroneous.
Holding and Implications
Appeal Allowed. The order of the Court of Appeal dated 21 December 1987 was set aside; the order of Judge Esyr Lewis Q.C. dated 12 February 1987 refusing discovery was restored. The Respondents were ordered to pay the Appellant’s costs in the Court of Appeal and in the House of Lords. The cause was remitted to the Queen’s Bench Division for further proceedings consistent with this judgment.
Implications: The House of Lords confirmed that the without-prejudice privilege extends beyond mere inadmissibility at trial to protect settlement communications from discovery by other parties in related litigation. The decision reinforces the policy of encouraging settlements and provides authoritative guidance for multi-party disputes, but creates no new cause of action or broader doctrine.