An interesting take on without prejudice with unusual facts

19 November 2020

Setting – just how confidential is mediation?

One of the praised advantages of mediation is that it offers the chance to sweep matters under the carpet – the chance to wash dirty linen in private without prying eyes picking over the gory details of your dispute.

Mediation is said to be not only confidential but also “privileged” i.e. privileged from production from a court in later proceedings. But when things are said “without prejudice” in the course of settlement negotiations which are part of a mediation, can that precious privilege be lost? Can a party in fact end up regretting being so free with words and find that those words can still be used even though the party thought everything was covered by privilege?

It seems that mediation, while by no means a leaking sieve, is not entirely waterproof either. The recent case of Berkeley Square Holdings v Lancer Property Asset Management [2020] EWHC 1015 (Ch) throws some interesting light on when without prejudice statements made in a mediation could still find their way before a judge.

Factual background

The claimants were in fact twenty-four BVI companies, twenty-three of which were owned by the Emir of Abu Dhabi and the other one by his daughter. The claimants owned a portfolio of property in Central London. Lancer was the asset manager for the claimants and the other defendants included Lancer’s holding company and the directors of Lancer.

An agreement was originally executed in 2005 whereby Lancer would provide property management services for (eventually) all the claimants. This was quickly followed by a side-letter providing for further fees payable to Lancer. In all of this, one Dr Al Ahbabi represented the claimants but the allegation was that Lancer made payments to two BVI companies owned by him following execution of the side-letter: in particular, most of the money went to one company called Becker, wholly owned by Dr Al Ahbabi.

By early 2012, a dispute emerged about sums (c. £75m) Lancer said were due to it under the side-letter. The dispute went to mediation. The mediation was successful and the claimants agreed to pay Lancer £30m, which was approved by the Emir. The claimants then made payments as had been agreed in the original agreement as varied by the side-letter.

Events then moved fast: the Emir apparently suffered a stroke in 2014, Dr Al Ahbabi was removed from his role and replaced and the claimants then gave notice to terminate Lancer as asset managers, leading to Lancer losing that position in September 2017. The claimants soon afterwards started proceedings alleging that the defendants had been complicit in a major fraud committed by Dr Al Ahbabi and that the side-letter had been the means for achieving this. In brief, the allegation was that the side-letter increased the fees Lancer charged, and Dr Al Ahbabi was then able to receive a portion of these fees which were paid by Lancer to his BVI company, Becker. The agreements resulting from the mediation were also said to be part of this dishonest scheme.

Lancer’s defence stated that it had made payments to Becker, but said that this was known to the claimants by their agents (including their lawyers) present at the mediation, as all the information was contained in the Lancer’s mediation position statements. With all the background fully disclosed at the mediation, the claimants proceeded to enter into the settlement agreements, part of which ratified the previous payments made to Dr Al Ahbabi’s companies. The defendants therefore said that there was no fraud as the claimants were fully apprised of the truth and that the claimants were estopped from claiming from Lancer the moneys paid to Becker.

Legal background

It was accepted that the statements made for the purpose of or at the mediation were privileged as they were expressly “without prejudice”. The mediation agreement itself confirmed this position.

The origin of the without prejudice privilege of course is the policy of the law in encouraging full and frank discussions by litigants in an atmosphere of complete confidentiality so that they are able to come to settlements without the expense of a full trial.

Having said which, the law does recognise exceptions to the rule when the justice of the case demands it. Most obviously, there is an exception where without prejudice statements need to be disclosed to show that the parties actually concluded a settlement agreement, or where those without prejudice statements are necessary to show that a settlement agreement was obtained by fraud or some misrepresentation. Another exception is where a party makes a statement without prejudice and the other party relies on it as an estoppel. Yet another category of exceptions exists where the other party has made statements without prejudice as part of some cloak for perjury, blackmail or other “unambiguous impropriety”. In truth, the exceptions have arisen in a piecemeal manner as cases have been decided rather than as some sort of coherent list.

Decision

Roth J picked his way as best he might through the vast case-law in this area. The unusual situation in this case was that the defendants were not relying on the claimants’ without prejudice and fraudulent statements to undo a contract, rather the defendants were relying on their own without prejudice and honest statements to uphold the settlement agreements resulting from the mediation.

The judge admitted the statements using the fraud/misrepresentation exception: in his view, either this was simply applying the principle or it was making a “small and principled” extension to it to serve the interests of justice. There would be no doubt that, if Lancer had misled the claimants by a misrepresentation in the mediation, then the claimants could have relied on those statements to prove the misrepresentation, even though they were made without prejudice. Here, Lancer had been honest in the mediation and so their statements could be admitted to rebut an allegation of dishonesty made by the claimants.

This of course was enough to dispose of the application but the judge looked at the other points that were argued.

The judge found that the estoppel exception did not avail the defendants. To rely on this exception, the defendants would have to show something said by the claimants, not by themselves. It appeared that the defendants were relying on the claimants’ silence, but this exception required more than that: it required some sort of “clear and unambiguous statement” made by the claimants on which the defendants had relied.

However, the judge accepted that a further, and rather vaguer, exception existed to allow the admission of Lancer’s without prejudice statements. This was based on Muller v Linsley and Mortimer [1996] PNLR 74 and the considerable amount of case-law on the subject since the Court of Appeal’s decision in that case. After reviewing the relevant cases, Roth J decided that the rule, properly understood, means that, where a party has put an issue forward in litigation, and that issue cannot be “fairly justiciable” without disclosure of the without prejudice statements, then those statements are not protected by the without prejudice privilege. By “fairly justiciable”, the judge meant that the evidence contained in the without prejudice statements was so central to an issue that there was a serious risk that there would not be a fair trial if the evidence were excluded. For Roth J, this ground was also made out.

Thoughts

Cases on exceptions to the without prejudice rule are not infrequent – the fact is, things are said and written in negotiations to settle a dispute which, in retrospect, should perhaps not have been said or written so freely.

However, the reality is that the without prejudice rule is there to encourage precisely that freedom for the parties to say whatever they like without fearing that they will be foot-faulted and have their admissions dragged before the court. As Roth J emphasised by reference to other cases, there has to be some abuse of the without prejudice privilege, something going beyond simply saying the truth perhaps inadvisedly. An example of this is Savings & Investment Bank Ltd v Fincken [2003] EWCA Civ 1630 where the defendant debtor made a statement of his assets over £5,000. In a subsequent without prejudice meeting, he admitted owning shares which he had not disclosed. The Court of Appeal rejected an application to allow this without prejudice statement as an admission. As they pointed out, the privilege is there to encourage parties to speak frankly “… and the public interest in that rule is very great and not to be sacrificed save in truly exceptional and needy circumstances.

Should a participant in a mediation be worried? On balance, not really. Mediation is a wonderful opportunity to air all issues in an attempt to get at a resolution. The only difficulty is where a party is using the cloak of mediation (or any other without prejudice communications) to get some advantage: at that point the courts will intervene. This case, with such strikingly unusual facts, is an interesting example of the flexibility of the courts in approaching a sensitive problem, balancing the needs of upholding without prejudice communications as privileged against the needs of justice in seeing that the court has the right evidence to come to a fair outcome.

Richard Stephens
19 November 2020

This is a general update and not specific legal advice. Always seek professional advice first.