In Sternberg Reed Solicitors v Harrison  EWHC 2065, the English High Court considered a novel point of law in application under s.69 (which allows parties to appeal to the court on a question of law, save where such appeal is excluded), concerning an arbitrator’s decision that he could consider without prejudice correspondence when deciding the issue of costs, where the court held that the arbitrator (i) had erred in admitting without prejudice communications; but (ii) could take into account correspondence that was impliedly without prejudice, that is, correspondence not marked without prejudice but created as part of an attempt at compromise.
When dealing with without prejudice correspondence, the Arbitrator stated:
“The objective of making either sealed or Calderbank offers is to encourage parties to make offers to settle as early as possible. I find it unappealing to disallow offers made on a without prejudice basis simply because they are not marked up ‘save as to costs’. I have read the decision in Cleveland Management Limited v HSBC Pension Trust (UK)  3238. I have as much of an overriding discretion to account for all offers that the parties have made as the judge had in that case. Thus, I think we have moved on from the restrictions outlined by Megarry J in the 1983 decision of Computer Machinery Co Ltd v Drescher. I accept the claimant’s argument that I should accept purely ‘without prejudice’ offers. In saying all this, I do note anyway that the claimant’s initial officer (in Colin Howe’s email of 12 November 2015) is not apparently made ‘without prejudice’ although subsequent correspondence became so.”
The Court referred to the decision of Computer Machinery Co Ltd v Drescher  1 WLR 1379 (@1382), where Sir Robert Megarry V-C stated: “For a long while it has been settled law that if letters written ‘without prejudice’ do not result in an agreement, they cannot be looked at by the court even on the question of costs unless both parties consent…”, and then went on to acknowledge and accept that where the offer is made not ‘without prejudice’ but ‘without prejudice save as to costs’, the offer could be referred to when the court proceeded to make its decision on the issue of costs; but where an offer was expressed to be simply ‘without prejudice’ without more, then the court could not look at the offer, even on the question of costs, unless both parties consented.
The Court concluded that the Arbitrator had erred in law, stating [30-31]
“I accept that (as submitted by the claimant) that particular Court of Appeal authority makes it absolutely clear that communications expressly made on a ‘without prejudice’ basis are inadmissible, even for the purpose of costs arguments; and also that the court has no general discretion to disapply the ‘without prejudice’ rule. That authority makes it clear that the non- admissibility of communications expressly made on a ‘without prejudice’ basis extends to the deployment of such communications for the purpose of determining issues as to costs.”
“I am satisfied that the arbitrator (as the claimant submits) plainly erred in law in holding that he had a discretion to admit evidence of ‘without prejudice’ communications…”
And went on to state [45-46]:
“…In my judgment, when communications take place expressly on a ‘without prejudice’ basis, then the authorities are clear that they may not be referred to, even after the determination of the substantive dispute, for the purpose of deciding issues of costs unless the communications had been expressly marked ‘without prejudice save as to costs’, or the right to refer to the communications on issues of costs is otherwise expressly being reserved… Where, however, communications take place to resolve a live dispute and they are not expressly labelled ‘without prejudice’, then they will be treated as impliedly ‘without prejudice’ on the substantive dispute, and they may not be referred to until after the determination of that dispute, but they may thereafter be referred to on questions of costs. Since the law has come to recognise the concept of communications on a ‘without prejudice save as to costs’ basis, I see no reason why the law should impute to parties who do not expressly mark their communications ‘without prejudice’ an intention that the communications should be treated as impliedly ‘without prejudice’ for all purposes. It is clear on the authorities, including the case of Cutts v Head, that there is no underlying public policy justification that favours any wider exclusionary rule preventing communications not expressly marked ‘without prejudice’ from being referred to on issues of costs. I see no reason why, where the parties have not chosen to label a communication as expressly ‘without prejudice’, the law should imply an agreement that that communication should be treated as ‘without prejudice’ rather than as ‘without prejudice save as to costs’.”
“Where correspondence is treated as being ‘without prejudice’, not because it is labelled as such, but simply because it is an attempt to compromise actual or impending litigation, there can be no public policy justification for preventing it being referred to on issues of costs as distinct from the issues in the substantive litigation; and I see no basis for implying any agreement that no reference should be made to such correspondence on issues of costs once issues in the substantive litigation have been determined.”
Herbert Smith Freehills note the following key points from this decision:
- Whilst arbitrators usually have a broad discretion when considering costs arising out of an arbitration, English law rules on privilege will limit what evidence of the parties’ discussions are admissible.
- The court’s decision on impliedly “without prejudice” correspondence is novel and significant, and may impact how parties to an arbitration or litigation react to settlement offers. Parties to a dispute should ensure correspondence aimed at settlement is marked expressly “without prejudice” if they do not intend that it be taken into consideration when costs are being decided. Alternatively, correspondence should be marked “without prejudice save as to costs” if a party wishes to be able to refer to it at the costs stage.
Littleton Chambers note that the Court was not taken to the decision in Gresham Pension Trustees v Cammack  EWCA (Admin) 635, where the court there considered the status of a note of various inter-partes conversations about settlement, and held that these conversations were plainly covered by the without prejudice doctrine despite the fact that neither side had said the words ‘without prejudice’. The authors go on to state:
“HHJ Hodge QC in Sternberg Reed Solicitors was not taken to the Court of Appeal’s decision in Gresham Pension Trustees. He dismissed the notion that the basis for excluding reference to without prejudice correspondence in costs proceedings is an implied agreement based on general usage and understanding that the party making the offer will not do so. He concluded that there could be no such implied agreement where the inter-partes communications had not expressly been marked without prejudice (and cited the earlier case of Bradford & Bingley PLC v Rashid  UKHL 37 (per Lord Brown at 63 – 4) in support). The Court of Appeal in Gresham Pension Trustees appears to have taken the opposite view of the basis for excluding reference to without prejudice correspondence in costs proceedings (see 25), but made no reference to Lord Brown’s judgment in the Bradford & Bingley PLC decision.
The case law is currently in a muddle. It would appear that Gresham Pension Trustees may have been wrongly decided, however counterintuitive that might seem to practising lawyers used to the operation of the without prejudice doctrine in cases where correspondence has been expressly labelled.
Why does it matter?
In Marcura Equities FZE & Ors v Nisomar Ventures & Ors  EWHC 523 (QB) Nicholas Vineall QC (sitting as a Deputy High Court Judge) commented that “[t]he distinction between WP and WPSATC is both real and important. The advantage of a purely WP meeting is that it can lead to the frankest possible discussion, without either party being worried that what they say might be used against it on costs” (at 34). It is obviously important that parties know exactly when settlement discussions or correspondence can and cannot be admitted into evidence on costs issues (and not just substantive issues). That certainty will only help to promote inter-partes discussion and the possibility of out of court settlements being reached.”