Offers, Settlement, and Without Prejudice Privilege: A Practical Guide

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Introduction

1. Very few parties commence proceedings with the desire to fight to the bitter end at trial. The Civil Procedure Rules, pre-action protocols and modern case management philosophy all encourage parties to explore opportunities to resolve disputes efficiently and proportionately. This is reflected by the court’s willingness to impose adverse costs consequences on parties who unreasonably refuse to engage in settlement discussions or alternative dispute resolution, even where they ultimately succeed at trial. 
2. Effective settlement requires more than simply making an offer. Consideration must be given to the form of the offer, the protection afforded by the without prejudice (“WP”) rule, the potential costs consequences of rejection and the manner in which any compromise is documented. A misunderstanding of any of these issues can result in the loss of a tactical advantage, unexpected costs exposure or the unintended creation of a binding settlement agreement. 
3. This article provides an overview of the principal forms of settlement offer, the operation of the WP rule and some of the common pitfalls that arise during settlement negotiations.

Why settlement matters

4. There are three key reasons why settlement matters:
   1. Certainty. Settlement gives parties an element of control over the outcome of the dispute rather than leaving it to judicial determination. 
   2. Reduce costs. It is a truth universally acknowledged that litigation is expensive and even a successful party rarely recovers their full legal costs. Furthermore, proceeding to trial carries risks of adverse costs consequences. When formulated properly, settlement can reduce costs and/or offer significant costs protection. 
   3. Confidentiality. Settlement can be achieved privately, without the matter needing to be heard at trial. 

The main types of settlement offer

Part 36 Offers

5. Part 36 is a self-contained procedural code for settlement offers. CPR 36.5 sets out the form and content of a Part 36 offer, and in order for a Part 36 offer to be binding, it must comply with the requirements. The regime is designed to encourage settlement by attaching potentially significant cost consequences to the rejection of a reasonable offer (as per CPR 36.13, 36.14, or 36.17).  
6. The costs risk can place considerable pressure on a party to engage realistically with settlement proposals, whilst providing substantial protection in circumstances where an offer is unreasonably rejected. Accordingly, Part 36 offers operate as a useful mechanism for settlement and a method of managing costs risks. 

Calderbank Offers

7. A Calderbank offer, also known as a “without prejudice save as to costs” (“WPSATC”) offer, does not carry the prescribed procedural consequences under CPR 36. Instead, Calderbank offers can be placed before the Court at the point where costs are considered. 
8. The principal tactical advantage of a Calderbank offer lies in its flexibility, allowing parties to propose bespoke settlement terms, costs arrangements, payment structure or commercial solutions that may fall outside the scope of a Part 36 offer. Whilst the matter of costs remains under the Court’s discretion, a well-judged Calderbank offer can still provide powerful costs arguments whilst giving the offeror considerable freedom in structuring a proposed compromise.

Without Prejudice Offers

9. A purely WP offer forms part of protected settlement negotiations and cannot generally be referred to either on substantive issues in dispute or on the matter of costs, unless both parties consent or a recognised exemption applies (discussed further below). The primary benefit of a WP offer is that it facilities frank negotiation. Parties are often more willing to explore compromises, make concessions, or test settlement positions when they know that such discussions cannot be referred to later down the line throughout the course of litigation. 

Open Offers

10. An open offer carries no privilege and cannot be shown to the Court or relied upon throughout proceedings. Whilst relatively uncommon, a clear advantage of this type of offer is that it may be used by a party wishing to demonstrate the reasonableness of its position from an early stage. The potential disadvantage is that the offer may be placed before the Court during the determination of substantive issues as such, care will need to be taken surrounding admissions as to liability. 

The Without Prejudice rule

General settlement negotiations and the WP rule

11. The WP rule governs the admissibility of evidence and generally excludes all negotiations genuinely aimed at settlement from being given in evidence. That being said, the rule itself is not limited to negotiations aimed at resolving the legal issues and extends to cover those aimed at avoiding or reducing the scope of litigation. The rule is rooted in public policy: parties should be encouraged to negotiate freely and make concessions in pursuit of settlement without fear that those concessions may subsequently be used against them if negotiations fail. 

Does correspondence need to be marked “Without Prejudice”?

12. A common misconception is that the privilege arises simply because the correspondence is marked “WP” however, merely applying the label will not create protection where no dispute exists, or where the correspondence does not form part of a genuine settlement dialogue. Similarly, a communication may be protected, even where it lacks the WP label, if it objectively forms part of a genuine attempt to settle a dispute. The test remains one of substance rather than form (Dixon Stores Group Ltd v Thames Television Plc^[1]).
13. Notwithstanding this, practitioners should exercise care when labelling correspondence. In Sternberg Reed v Harrison^[2], whilst the Court recognised that settlement negotiations were impliedly but not expressly WP and therefore could not be relied upon in relation to the substantive issues in the case, the Court treated them as WPSATC as opposed to completely WP, and therefore they were capable of being considered on the matter of costs. This decision has attracted criticism however, as a matter of good practice, practitioners should ensure that the intended status of any settlement communications is clearly stated at the outset.

Exceptions to the Without Prejudice rule

14. The protection of WP privilege is broad but not absolute. The following (non-exhaustive) list outlines the principal exceptions to the WP rule (as set out in Unilever plc v The Procter & Gamble Co^[3], and since confirmed in Oceanbulk Shipping and Trading SA v TMT Asia Ltd and others^[4]) :
    1. Whether WP communications have resulted in a concluded settlement agreement. WP communications may be examined to determine whether the parties actually reached a binding settlement and, if so, on what terms. 
    2. As evidence of misrepresentation, fraud, or undue influence. The Court may examine negotiations where a party alleges that a settlement should be set aside due to fraud, misrepresentation, duress or undue influence.
    3. Where a statement may have given rise to an estoppel.
    4. As evidence of perjury, blackmail, or other unambiguous impropriety. NB: The threshold for unambiguous impropriety is particularly high, and usual commercial pressure and robust negotiations, without more, are likely to fall short of this.
    5. To explain delay.
    6. As evidence of the reasonableness of a settlement. In Muller and another v Linsley and another^[5], WP negotiations relating to a previous settlement were admissible as they were considered to be relevant to the Claimant’s mitigation of loss (as opposed to being used as evidence of admissions). This decision has been subject to serious scrutiny surrounding the practical difficulties of separating out inadmissible aspects negotiations from admissible aspects of negotiations 
    7. On the questions of costs (where parties have made WPSATC offers).
    8. Where communications are received in confidence with a view to matrimonial conciliation. 

15. A further exception, known as the interpretation exception, also permits WP communications where necessary to assist the Court in interpreting the meaning of a settlement agreement.

Waiver of WP privilege

16. The WP privilege belongs to both parties and therefore WP communications cannot be shown to the Court without the consent of both parties. However, difficulty arises where one party seeks to rely upon part of WP material in support of its case. The Courts have repeatedly emphasised that a party will not be permitted to “cherry-pick” favourable aspects of WP negotiations alongside withholding the remainder of the relevant context, given the practical difficulties with “salami slicing” WP material into admissible and inadmissible parts. However, if one party seeks to gain an advantage by relying on WP material, fairness may require the court to permit the opposing party to refer to related communications forming part of the same negotiating process (Somatra Ltd v Sinclair Roche & Temperley^[6]).  
17. Practitioners should therefore exercise caution before referring to settlement negotiations in witness statements, applications or submissions. Equally, it is open to a party to object to the intended reliance on WP material, should they become aware of the other party intending to do so. Consideration should be given to objective at the earliest opportunity and requiring a party seeking to rely on material to justify its admission.  
18. Where admissibility is disputed, it is preferable for the issue to be resolved before the judge is exposed to the material. In AZ v BY^[7], an award was set aside as a result of the adjudicator having seen WP material. 

Unintended acceptance and binding settlements

19. One of the most significant risks during settlement negotiations is the accidental creation of a binding agreement. A settlement agreement is simply a contract. Accordingly, the usual principles of offer, acceptance, consideration and intention to create legal relations apply. Where the parties have agreed all essential terms, the court may conclude that a binding settlement has been reached notwithstanding that one or both parties anticipated that a more formal document would later be prepared. The importance of this is illustrated by Bieber and others v Teathers Limited (in liquidation)^[8], where the Court held that an exchange of emails gave rise to a binding settlement notwithstanding that the parties anticipated the preparation of a more detailed formal agreement. Importantly, the Court was concerned with the objective effect of the communications rather than the parties’ uncommunicated intentions. 
20. Practitioners should also be wary of “subject to contract”. Whilst commonly used to indicate that no binding contract has been entered into, the case law suggests that a mixed approach has been taken as to whether the “subject to contract” restriction acts as a complete shield to a binding agreement being entered into (Jirehouse Capital and others v Beller and another^[9] – where the restriction of “subject to contract” was lifted with reference to the parties’ conduct, compared to Joanne Properties Ltd v Moneything Capital Ltd and another^[10] – where the Court found there could be no binding contract agreement until a formal contract was made). Clearly consistency in wording and conduct throughout negotiations remains critical.

Practical points

21. Settlement opportunities should be considered from the outset of every dispute and revisited throughout proceedings. In many conventional civil disputes, Part 36 remains the most effective settlement mechanism because of the certainty of the associated costs consequences. However, where a more bespoke solution is required, consideration should be given to a Calderbank offer.  
22. Careful attention should also be paid to labelling correspondence correctly; the absence of the “WP” label may give rise to unnecessary arguments regarding admissibility. Conversely, applying the label to correspondence which simply advances a party’s case, without any genuine attempt to compromise the dispute, will not necessarily attract protection.  
23. Particular care should be exercised when negotiations are taking place by email. Practitioners should consider expressly stating whether communications are open, WP, WPSATC, or subject to contract. Ambiguity in this area frequently generates costly satellite disputes.
24. Finally, where settlement has been reached, practitioners should ensure that the agreement is properly documented. Consideration should be given to:
    1. Whether the agreement should be embodied in a consent order or Tomlin order.
    2. How costs are to be dealt with.
    3. Whether confidentiality provisions are required.
    4. The timing and method of payment.
    5. Whether there are any continuing obligations on either party.
    6. A carefully documented settlement will usually avoid the need for further litigation concerning the interpretation or enforceability of the settlement itself.

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^[1] [1993] 1 All E.R. 349

^[2] [2019] EWHC 2065 (Ch); [2020] Ch 223

^[3] [2000] 1 WLR 2436

^[4] [2010] UKSC 44

^[5] [1996] P.N.L.R.  74

^[6] [2000] EWCA Civ 229

^[7] [2023] EWHC 2388 (TCC)

^[8] [2014] EWHC 4205 (Ch)

^[9] [2009] EWHC 2538 (Ch)

^[10] [2020] EWCA Civ 1541

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Whilst every effort has been taken to ensure that the law in this article is correct, it is intended to give a general overview of the law for educational and/or informational purposes. It is not intended to be a substitute for specific legal advice and should not be relied upon for this purpose. 

This article represents the opinion of the author and does not necessarily reflect the view of any other member of St Philips Chambers.