The Court of Appeal has upheld a High Court judgment which found that defendants could rely on WP statements made in a mediation position paper to rebut the claimants’ allegations that a settlement agreement apparently concluded should be set aside for fraud: Berkeley Square Holdings v Lancer Property Asset Management Ltd  EWCA Civ 551.
The decision is significant in confirming that the fraud exception to the WP rule extends further than had generally been understood before the High Court’s decision in this case. It is not limited to a situation where a party wishes to rely on WP material to show that a settlement agreement should be set aside on grounds of misrepresentation, fraud or undue influence. The exception will apply equally where a party wishes to rely on the WP material to rebut an allegation that the agreement is invalid on these or similar grounds.
The decision is also of interest for the Court of Appeal’s comments on the scope of the so-called Muller exception to the WP rule, which has long been of uncertain ambit. In particular, the court held that this exception does not apply merely on the basis that the party seeking to rely on the WP rule has raised an issue which cannot fairly be determined without reference to WP material, as the High Court’s decision in this case had suggested. Whether a new exception of this type exists, and if so its terms, should be considered in a case where it would be a decisive issue, which was not the case here.
The decision recognises that, depending on the circumstances, raising such an issue might give rise to a waiver of the WP privilege – which the counterparty to the negotiations (at least if they are also the counterparty to the litigation) can choose to accept as a waiver so that the WP material becomes admissible. In the present case, however, the defendants did not seek to argue that there had been a waiver, and so the point was not considered further.
The background is set out in our blog post on the first instance decision here. In very brief terms, the defendants to a fraud claim argued that the claimants had been aware of the payments alleged to constitute the fraud, and in fact had ratified or affirmed them. In support of this allegation they sought to rely on the fact that the payments were detailed in their position paper provided to the claimants in an earlier mediation.
The claimants applied to strike out those parts of the defence which referred to the statements in the position paper, on the basis that they were WP and therefore inadmissible.
The defendants argued that they were admissible under one or more established exceptions to the WP rule, including the “fraud exception”, which (as typically summarised) allows a party to rely on WP material to show that an agreement should be set aside on the ground of misrepresentation, fraud or undue influence.
The High Court (Roth J) held that it would be “contrary to principle” if parties could rely on this exception to admit WP material into evidence to prove misrepresentation, fraud or undue influence (therefore setting aside an agreement), but could not admit such material to defend themselves against these allegations and uphold the agreement concluded between the parties. The WP material was therefore admissible under the established exception, or a “small and principled extension of it in the interests of justice”.
Roth J held that the statements would also have been admissible under the Muller exception to the WP rule, because the claimants’ claim would not be “fairly justiciable” without disclosure of the WP statements into evidence.
The claimants appealed.
The Court of Appeal dismissed the appeal, agreeing with the High Court’s finding that the fraud exception applied. David Richards LJ gave the leading judgment, with which Henderson and Popplewell LJJ agreed.
As a preliminary point, the claimants submitted that the court’s approach to any extension to the categories of exception to the WP rule must be a “principled, incremental development by reference to existing exceptions”. Although it had no relevance to the present case, Richards LJ did not accept that any extension must be an incremental development: “New factual circumstances may arise, or conditions or attitudes may change, and the common law must retain the ability to meet them.”
The fraud exception
As Richards LJ noted, the fraud exception is exception (2) in a list of established exceptions referred to by Robert Walker LJ in Unilever Plc v Procter & Gamble Co  1 WLR 2436 (in a passage subsequently approved by the Supreme Court). Richards LJ rejected the claimants’ submission that the exception is intended to prevent a party from abusing the cloak of the privilege by making a wrongful or actionable statement so as to induce a settlement. That purpose would make the fraud exception indistinguishable from exception (4) in the Unilever list, which permits evidence of WP negotiations to be admitted where the rule would otherwise act as a cloak for perjury, blackmail or other “unambiguous impropriety”.
Instead, the fraud exception is directed to the question of whether an apparent agreement has been made with the necessary consent of the parties to it. In referring to misrepresentation, fraud and undue influence, Robert Walker LJ was not setting out an exhaustive list; duress would also qualify, and a lack of consent to an agreement could arise in other ways. Here, the claimants’ case was that their own agent had lacked authority to commit the claimants to the settlement deeds, due to a substantial and undisclosed personal interest on the part of the agent. The claimants’ knowledge, or lack of it, was central to this issue.
Richards LJ could not see any principled ground for (a) admitting evidence of the WP statements if they disclosed facts which showed that the agent lacked authority to conclude the settlement deeds on behalf of the claimants, which settlement should therefore be set aside, but (b) not admitting the WP evidence if it was to be relied on to defend a claim that the settlement should be set aside.
The claimants’ arguments failed to give full weight to the nature and purpose of the fraud exception, which is directed to the question of whether the agreement apparently reached is binding on the parties. It will not be binding if it was made without authority (as the claimants alleged in this case) or if it is liable to be set aside on other grounds. Evidence of WP negotiations could be admitted to resolve issues as to the validity of the apparent agreement, just as (under exception (1) in Unilever) such evidence could be admitted to determine the terms and meaning of the agreement. If that was an extension of the fraud exception, it was a principled extension – contrary to the claimants’ argument.
The Muller exception
The Muller exception, exception (6) in the list in Unilever, derives from the case of Muller v Linsley and Mortimer  PNLR 74, in which WP negotiations were admitted to show that a party had acted reasonably to mitigate its loss in reaching a settlement of proceedings with a third party. Richards LJ described the Muller exception as “troublesome”, because neither of the bases on which the court reached its decision in Muller could stand in light of developments in the law since the decision was reached. Nonetheless, the Muller decision (as opposed to its reasoning) had not been overruled and had been treated as correct, and so the court had to proceed on that basis.
At first instance, Roth J had adopted the court’s analysis of the Muller exception in Briggs v Clay  EWHC 102 (Ch) (considered here). On that analysis, the rationale for the exception is that a party cannot raise an issue to be tried but, at the same time, rely on the WP rule to prevent the court seeing the evidence needed to determine that issue. Accordingly, Roth J held that evidence of WP negotiations will be admissible if, without that evidence, an issue raised by the party seeking to rely on the rule would not be “fairly justiciable”.
Roth J held that this applied to the claimants’ claims in the present case, although (unlike both Muller and Briggs v Clay) the parties to the subsequent litigation and the parties to the settlement negotiations were the same, ie it was a two-party case, not a three-party case. Roth J rejected a submission that the exception applies only in a three-party case. The claimants’ critical argument was that the defendants had acted dishonestly and the claimants had been unaware of the relevant payments. Roth J held that “justice clearly demands” that the claimants should not be permitted to put forward such an argument while excluding evidence that they were told of those same facts some five years earlier, because to do so would create a serious risk that the court would be misled.
Richards LJ found that reliance on the Muller exception was “misplaced”, both in the present case and in Briggs v Clay. In both cases the analysis of the exception had “moved a long way from the facts of Muller”.
In Muller, the claimants had put the WP negotiations in issue in the litigation by relying on the settlement to show they had discharged a duty of mitigation. In doing so the claimants themselves had waived their right to rely on the WP rule (though there had been no waiver by the counterparty to the negotiations, as is required for an effective waiver of WP privilege). The judge in Briggs v Clay held that there had been no waiver. Nevertheless, he found that the exception applied because a party “cannot at one and the same time raise an issue to be tried and rely on without prejudice privilege to prevent the court from seeing the evidence that is needed to decide it”. In the present case, Roth J took that exception further by applying it in a two-party case, and watering down the requirement for the WP material to be necessary for the court to determine the issue in question.
Richards LJ concluded that the exceptions developed in Briggs v Clay and by Roth J in the present case could not be considered to be based on the decision in Muller or to fall within the Muller exception. Muller proceeded on the basis that there had been a waiver of privilege. In a two-party case, no further issue arises: the other party can elect whether to treat the privilege as waived. This cannot apply in a three-party case such as Muller. The question left unanswered in Muller is whether anything further is required before the third party’s right to WP privilege is overridden.
Briggs v Clay, and Roth J in the present case, had developed a new exception which would apply where one party raises an issue which cannot, or cannot fairly, be decided without recourse to evidence of without prejudice negotiations or communications but the party raising the issue resists disclosure or use of such evidence. Even if limited to cases where the WP negotiations were themselves put in issue by the parties, this would give rise to significant questions that would have to be resolved. It was not appropriate to decide in the present appeal whether a new exception of this sort exists, as it was not necessary for the resolution of the appeal, which was determined on the basis of the fraud exception.