Statements made "without prejudice" - when are admissions protected?

It is common for parties who are endeavouring to settle their disputes to state that documents and statements are made "without prejudice" and are therefore privileged. If correctly subject to "without prejudice" privilege, this means that the statements cannot be put in evidence without the joint consent of the parties. Will this always be the case?

This article looks at when admissions are protected and provides some practical tips to consider in the context of both the Building and Construction Industry Security of Payment Act 1999 (NSW) and mediation, which are two processes that are often used to resolve construction disputes.

What is without prejudice privilege?

The "without prejudice" privilege under the common law means that any admissions made by parties genuinely negotiating the settlement of an existing dispute are privileged and will be protected from disclosure to a court at a later date. Most Australian jurisdictions have supplemented the common law position with a legislative provision, for example section 131(1) of the Evidence Act 1995 (NSW).

The privilege exists to encourage parties to settle their disputes and allows parties to freely explore settlement options for their disputes without fear that any admissions made in the negotiation process will be tendered against them in court at a later date.

The "without prejudice" privilege belongs to all parties and can only be waived with the consent of all parties. In this respect, the "without prejudice" privilege differs from legal professional privilege which belongs solely to the person obtaining the benefit of the privilege.

It is also important to note that merely marking a document "without prejudice" does not automatically mean that the document is privileged, as the test is one of substance not form. The existence of the privilege is inferred from the intention of the parties and from the nature of the communication. This runs contrary to the view held by many people that the mere marking of a document as "without prejudice" is enough. There are also various exceptions to the application of the privilege both under common law and the Evidence Act which include:

• evidence that tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute (section 131(2)(e));
• if the evidence is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence (section 131(2)(g));
• if the communication or document is relevant to determining liability for costs (section 131(2)(h)); and
• if the communication or document affects a right of a person (section 131(2)(i)).

Understanding the scope and limits of the privilege will minimise the risk of inappropriate contents being included in statements made to the other party.

Security of payment claims

Payment claims made under the Security of Payment Act often deal with issues that the parties have been discussing for some time. Sometimes communications exchanged between the parties prior to issue of a payment claim made under the Act may have been made on a "without prejudice" basis in attempt to settle the dispute.

In the recent decision of National Vegetation Management Solutions P/L v Shekar Plant Hire P/L [2010] QSC 3, the applicant submitted a payment claim to the respondent. The respondent replied with a letter headed "Without Prejudice", that detailed an offer for the settlement of the payment claim. The issue was whether this letter was inadmissible because of the "without prejudice" privilege.

Justice Margaret Wilson noted that the "without prejudice" privilege does not preclude the proof of communications relied on as an objective fact having legal consequences. Her Honour then said that a "without prejudice" communication might be admissible as a payment schedule under the relevant Security of Payment Act if it met the requirements of the Act which require that the document:

• identifies the payment claim to which it related, and
• states any amount which the recipient of the payment claim proposed to make in response to it.
• If that amount is less than the amount claimed the payment schedule must state why it is less.

However, in the absence of full argument on that point, a determinative conclusion was not made because the letter did not satisfy the requirements for it to be a payment schedule under the relevant Act.

If the letter was found to be privileged and the evidence inadmissible, then it may have the unintended adverse consequence to the respondent under the Security of Payment Act.

This case provides a useful reminder to all parties to be careful when using the description "without prejudice", particularly when dealing with security of payment claims and schedules. While not determinative of a party's right, time and cost involved in the inquiry of the nature of the communications can be avoided by the unintended use of such description.

When dealing with payment claims under the Security of Payment Acts, parties should ensure that the specific legislative requirements set out in the Act are met. Parties may also consider settling the payment claim dispute by negotiation by use of parallel correspondence appropriately marked, in which case any admissions made may be protected under privilege.

How does it apply to mediations?

Where parties are attempting to mediate an outcome to their dispute, the privilege which exists as between the parties does not automatically apply. We recently covered a similar situation in a UK decision which explained that while courts will generally uphold confidentiality both as between the parties and as between the parties and the mediator, there may be times when this confidentiality must yield to the interest of justice.

Parties may agree upon the scope of without prejudice privilege in their mediation agreement. The extent to which the privilege applies will then, subject to the exceptions at law, be determined by the terms of the mediation agreement as a matter of contract. For example, mediation agreements may include clauses:

• to ensure that the mediation proceedings and any preliminary steps (such as conferences) will be private, confidential and without prejudice;
• that the without prejudice privilege will apply to any settlement proposals, the willingness of a party to consider settlement proposals, any admissions or concessions by a party, any statement or document made by the mediator and any statement or document made by either party or their representatives for the purposes of the mediation; or
• to provide that if a settlement was reached, then either party may enforce the terms of the settlement agreement and in any such proceedings, adduce evidence of the settlement agreement.

Drafting a mediation agreement in this way ensures that the "without prejudice" privilege will apply to the entirety of the proceedings and that any documents created ancillary to the proceedings, subject to any exceptions under the law, cannot be used in subsequent legal proceedings unless agreed otherwise.