Can contractually required negotiations be considered "without prejudice"?

In construction contracts, parties should anticipate that there may need to be changes agreed for the project to continue. In discussing alterations, parties will often identify areas where their opinions differ, leading to disputes about the necessity or value of various sections of work. Disputes often arise from these discussions, so there should be an awareness that statements made around changes to the project may be used as evidence in resultant litigation.

Those used to disputes may be familiar with the phrase "without prejudice". The "without prejudice" rule allows parties to conduct negotiations to settle an action without having statements made in those negotiations used against them in that action, or any subsequent related action. While the without prejudice rule has only limited exceptions, merely labelling a meeting or letter as "without prejudice" does not necessarily bring it under the rule in contemplation of settlement. In the case before the Judicial Committee of the Privy Council below, the mere demarcation of a set of negotiations as "without prejudice" was insufficient to prevent the negotiations from being relied on in court.

A&A Mechanical Contractors v Petroleum Company of Trinidad & Tobago [2022] UKPC 39

This case concerned a contract where the employer was allowed to instruct variations. This required the employer to give written authorisation for the variations, and to agree with the contractor the costs required for those particular works.

By the end of the contract, it was accepted by the employer that there had been changes, but the employer contended that some of these changes were included in the original contract sum. As the parties litigated over the costs of the variations, the question arose as to whether a letter was admissible evidence where the employer argued that it formed part of without prejudice negotiations.

The Judicial Committee of the Privy Council found it relevant that the negotiations were required under the variations clause. In his leading judgment, Lord Stephens agreed with the words of the first instance judge:

"[Having the meetings and correspondence] was a necessary process to finalise the payments due".

The Privy Council held that the clause imposed an obligation on the parties to conduct a process in which they state and revise their respective positions with a view to seeking agreement on the contract itself. This was considered to be distinct from negotiations between parties who, in contemplation of litigation, look to settle their differences.

Lord Stephens recognised that the main policy reason for deeming "without prejudice" correspondence inadmissible is to encourage parties to settle their differences. It is thought that, unless parties are secure in the knowledge that any statements they make will not be used against them in present or subsequent litigation, they will be unwilling to be open about their position, making settlement less likely.

However, there was a distinction to be drawn between negotiations within the contract and those in contemplation of a dispute. The policy of facilitating the extra-judicial settlement of litigation was held not to apply to the former, as there is no need to encourage parties to do what is contractually required of them.

Even if the correspondence had been held to be without prejudice, the court stated that the letter should still have been taken into consideration because examination of the letter was required to determine whether an agreement had been reached. This meant it fell within the exception to the general rule that without prejudice correspondence should not be admitted, with the justification that the letter was relied on not as an admission of liability, but as evidence of the existence of the agreement to the value of certain variations.

Comment

It could be argued that the negotiations to agree the value of the works going forward and those to finally settle an action are similar in that they concern subject matter over which there may be a claim and they aim to prevent further dispute. However, this similarity is insufficient to extend the "without prejudice" protection to contractually based negotiations.

A party to a construction contract should therefore be careful when discussing a change with another party. Statements made by a party may be used as evidence against a position that party later takes in litigation, regardless of how that statement was described at the time.