08 Apr 2011

Misled during mediation? Will "without prejudice" privilege protect those misrepresentations?

by Karen Ingram, Roxana Carrion

The common law "without prejudice" privilege rule is not absolute and will not protect all communications made during settlement negotiations.

Settlement discussions during mediation are generally protected by "without prejudice" privilege as well as through standard confidentiality terms in most mediation agreements. However, Justice Lander's recent decision in Pihiga Pty Ltd v Roche [2011] FCA 240 highlights that the protection of "without prejudice" communications is not absolute.

In that decision, Justice Lander considered the extent to which communications made during the course of mediation was protected by "without prejudice" privilege. As well as finding that two of the exceptions to the statutory rule protecting "without prejudice" communications in section 131 of the Evidence Act 1995 (Cth) applied, he found that:

  • there are a number of exceptions to the common law "without prejudice" rule, including where there are allegations of misleading and deceptive conduct; and
  • contractual terms in mediation agreements can give no more protection than that given by the common law.

Having said that, it is important to note that this case was not a Court-ordered mediation. As such, the mediation was not subject to section 53B of the Federal Court of Australia Act 1976 (Cth) which provides absolute protection to anything said or admissions made during mediations from being admissible as evidence in any Court. Presently, the construction of section 53B (along with corresponding State legislation) and their interaction with the common law "without prejudice" rule remain unresolved.

What happened?

The parties were shareholders and advisers of the ADC/EDC Group, which was in the business of property development. The Group's assets were mostly real estate.

A dispute arose regarding the future financing and management of the Group. Following a voluntary mediation of that dispute, the parties entered into a settlement deed in which the applicants agreed to sell their shares in the Group to the second respondent.

Pihiga subsequently sought an order declaring the settlement deed void and for it to be set aside or rescinded on the basis that the property valuations provided by the respondents for the Group's assets at the mediation were false and that the respondents' conduct was misleading or deceptive.

At trial, the applicants sought to rely on:

  • the parties' mediation position papers;
  • the Group's list of assets prepared by the respondents for the mediation; and
  • affidavit evidence of the parties' oral exchanges during the mediation.

The respondents argued this material shouldn't be admitted because it was protected by:

  • the common law "without prejudice" privilege rule;
  • the terms of the mediation agreement, in which the parties had agreed that communications which took place in the course of the mediation were "without prejudice".

In the alternative, the respondents claimed that the mediation evidence was inadmissible because of section 131 of the Evidence Act, the statutory form of the without prejudice rule. They also argued that the Court should exercise its discretion under section 135(a) of the Evidence Act and refuse the tender of the mediation evidence on the basis that it might be unfairly prejudicial to them.

Why the common law "without prejudice" privilege rule did not apply

Justice Lander noted that the rule extended to protect communications of all kinds which are genuinely entered into for the purpose of trying to reach a compromise, and that it existed both on public interest principles and the parties' express or implied agreement to keep their communications confidential.

However, he added, the rule is not absolute and that there were exceptions, including where:

  • the evidence, if withheld, would act as a cloak for perjury, blackmail or some other “unambiguous impropriety”;
  • the evidence showed that an agreement should be set aside on the grounds of misrepresentation, fraud or undue influence, extending to conduct which is misleading or deceptive and a contravention of section 52 of the Trade Practices Act (now section 18 of Schedule 2 of the Competition and Consumer Act 2010 (Cth));
  • the evidence gave rise to an estoppel;
  • the evidence explained delay or apparent acquiescence;
  • there is a question as to whether the "without prejudice" communications have resulted in a concluded compromise agreement; and
  • an offer is made "without prejudice except as to costs". In such cases, the parties "without prejudice" negotiations may be considered when deciding the question of costs.

Justice Lander considered that the first three exceptions set out above applied and ultimately held that the mediation evidence was not protected by the "without prejudice" rule. This is because the issue was whether the applicants' entry into the settlement deed had been induced by the respondents' false or misleading and deceptive conduct.

Why the mediation agreement did not protect the "without prejudice" communications

Although the mediation agreement contained express terms which protected the "without prejudice" nature of the mediation, Justice Lander held that the protection afforded by these terms was no greater than that of the common law. This is because a party cannot contract out of the consequences of breaching the Trade Practices Act, the Corporations Act and the Australian Securities and Investments Commission Act.

Would the result have been different if it had been a Court-ordered mediation?

Section 53B of the Federal Court of Australia Act gives absolute protection to anything said during court-ordered mediations. The respondents argued that it would be odd for different rules to apply, depending on whether the mediation was ordered by the Court or not, and that the common law should develop by reference to Parliament's policies, as shown by the legislation regarding confidentiality of mediations.

Ultimately, Justice Lander held that as the mediation in this case was not court-ordered, section 53B did not apply and noted that, having regard to the current state of the law, this issue was "a matter for the High Court [and] not for a Judge of this Court".

What this means for you…

While the common law "without prejudice" privilege rule has a wide scope, it is not absolute and will not protect all communications made during settlement negotiations – so don't get lulled into a false sense of security!

If you are involved in a mediation and subsequently ascertain that the other party acted in bad faith in the course of reaching a settlement, it is unlikely that the "without prejudice" privilege rule will protect those communications which occurred during the mediation, even if there were express terms in the mediation agreement protecting those communications.

More importantly, it probably will not protect communications that were made in good faith but were misleading and deceptive. That means that your representations must be made with the same level of care as any representation made outside the mediation room.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.