Within legal practice, the phrase “without prejudice” frequently appears in correspondence between legal practitioners representing opposing parties in a dispute. Although the phrase may appear to be legal jargon, it performs a critical role in the litigation and dispute resolution process. Its function is to protect certain communications made regarding genuine settlement negotiations from being admitted as evidence if the matter ultimately proceeds to court.

This protection encourages parties to communicate openly during negotiations by ensuring that genuine attempts to settle a dispute cannot later be used against them in litigation. This article explains how the “without prejudice” rule operates under the Evidence Act 1995 (NSW), Civil Procedure Act 2005 (NSW), and common law principles, and how it is applied in practice by courts in New South Wales.[1]

I WHAT DOES “WITHOUT PREJUDICE” MEAN?

The phrase “without prejudice” refers to a rule of evidence that protects communications made in the course of genuine settlement negotiations. Where the rule applies, those communications cannot be used as evidence in court proceedings.

The purpose of the rules is to encourage parties to resolve disputes without the need for a trial. Settlement negotiations require a degree of compromise, and parties must be encouraged to explore settlement options freely without concern that their statements might later be used against them.

In practical terms, this means that communications made in a genuine attempt to settle a dispute cannot generally be tendered as evidence of admissions of liability, reductions made during negotiation, a party’s assessment of the value of the claim or willingness to compromise.

For example, a party might offer to settle a claim for a certain amount to avoid litigation costs. Without protection, communications of that offer could later be interpreted as an admission that the claim is true or provide the value of the claim. The rule prevents such misinterpretations being made by either party.

II OVERRIDING PURPOSE

The “without prejudice” rule aligns with the overriding purpose of civil procedures in New South Wales. Section 56 of the Civil Procedure Act 2005 (NSW) sets out the overriding purpose as to “facilitate the just, quick and cheap resolution of the real issues in the proceedings”.[2] This is as it promotes settlement which is critical as Court can be expensive, time-consuming, and stressful for parties. By protecting settlement discussions, the law promotes early resolution of disputes and reduces unnecessary court proceedings. The without prejudice rule supports processes such as mediations and informal settlement conferences by ensuring that discussions aimed at resolving disputes cannot later prejudice a party’s legal position or potential entitlements.

III EVIDENCE ACT 1995 (NSW)

Section 131 of the Evidence Act 1995 (NSW) provides that evidence is not admissible if it relates to a communication made, or a document prepared, in connection with a genuine attempt to negotiate a settlement of a dispute.[3]

It must be noted that the legislation does not require the phrase “without prejudice” to appear in the communication. Protection instead arises from the context and purpose of the communication, not from the label itself. This means that even if correspondence is not marked “without prejudice”, it may still be protected if it was made in the course of settlement negotiations. In contrast, a document labelled “without prejudice” will not be protected if it does not actually relate to settlement negotiations. This is important, as many law students mistakenly assume that the phrase itself enables the protection.

Section 131(2) of the Evidence Act 1995 (NSW) sets out several circumstances in which the court may still admit such communications.[4] Exceptions include but are not limited to admitting documents for the purposes of:

1. Proving that a settlement agreement exists.[5] This is relevant if one party alleges that a settlement was reached and the other denies it, the court may examine “without prejudice” correspondence to determine whether a binding agreement was formed.

2. Proving fraud or misleading conduct.[6] This exclusion ensures that settlement discussions involving such conduct, are not protected from the rule.

These exceptions ensure that the rule promotes settlement while not allowing parties to be unfairly disadvantaged should the matter proceed to Court.

Australian Securities and Investments Commission v Union Standard International Group Pty (Trial Ruling No 1) [2023] FCA 169

The legislative provisions mentioned in Section 131 of the of the Evidence Act 1995 (NSW) is reflected directly in Section 131 of the of the Evidence Act 1995 (Cth).[7] The above case involved the second defendant objecting “globally” to material which ASIC sought to admit in the proceedings as per Section 131 of the Evidence Act 1995 (Cth).[8] The Court determined that some of the documents included in the correspondence sought to be excluded lacked “evidence of communications or documents made or prepared in connection with an attempt to negotiate the settlement of disputes”.[9] Further exemptions were found as per Section 131(2)(b), 131(2)(f) and 131(2)(j) of the Evidence Act 1995 (Cth).[10] The second defendant was allowed to individually object to specific documents if such did not fall within the scope of this “general ruling”.[11]

IV IN PRACTICE

In practice, communications intended to be protected by the rule are often clearly marked “without prejudice”. This label is typically placed at the top of written correspondence such as on letters or emails between solicitors containing settlement proposals or on draft settlement agreements.

The phrase may also be used during verbal communication such as during phone calls where parties may expressly state that discussions are conducted on a “without prejudice” basis.

However, as discussed earlier, it is important to understand that simply labelling a document “without prejudice” does not automatically make it protected and rather Courts will consider whether the communication demonstrates genuine settlement negotiation.

Communications that are not protected may include any purely factual statements made outside of settlement negotiations or other letters or emails unrelated to settlement.

V WHAT HAPPENS IF A PARTY TRIES TO ADMIT “WITHOUT PREJUDICE” CORRESPONDENCE?

If a party attempts to produce “without prejudice” correspondence as evidence, the other party may object on the basis that the material is inadmissible under section 131 of the Evidence Act 1995 (NSW).[12]

The court will determine whether the correspondence was made in connection with a genuine settlement negotiation and if any of the above exceptions apply.

If the rule applies and no exception exists, the court will exclude the evidence.

VI “WITHOUT PREJUDICE SAVE AS TO COSTS”

“Without Prejudice Save As To Costs” is a different form of the same rule however refers to communication remaining confidential when determining liability but may be admitted to the court after judgment when costs are being determined.

This amended rule is particularly relevant where a party makes a reasonable settlement offer that the other party rejects. If the party which rejected the offer later obtains a less favourable outcome at Court, the Court may consider the earlier offer by examining such correspondence when deciding who should pay legal costs.

This mechanism encourages parties to seriously consider reasonable settlement offers and further discourages unnecessary litigation in the Courts.

VII FOOTNOTES

[1] Evidence Act 1995 (NSW); Civil Procedure Act 2005 (NSW).

[2] Civil Procedure Act 2005 (NSW) s 56.

[3] Evidence Act 1995 (NSW) s 131.

[4] Ibid s 131 (2).

[5] Ibid.

[6] Ibid.

[7] Evidence Act 1995 (NSW) s 131; Evidence Act 1995 (Cth) s 131.

[8] Australian Securities and Investments Commission v Union Standard International Group Pty (Trial Ruling No 1) [2023] FCA 169; Evidence Act 1995 (Cth) s 131.

[9] Ibid.

[10] Evidence Act 1995 (Cth) s 131 (2)(b), 131 (2)(f),131(2)(j).

[11] Australian Securities and Investments Commission v Union Standard International Group Pty (Trial Ruling No 1) [2023] FCA 169.

[12] Evidence Act 1995 (NSW) s 131.