In AZ v BY, the Technology and Construction Court (TCC) considered the enforceability of an adjudication decision where without prejudice material had been disclosed to an adjudicator – ultimately holding that the adjudicator's decision was unenforceable as a result.

We explore below the useful practical guidance offered by the TCC judgment on the concept of without prejudice privilege, exceptions to that privilege, the test for apparent bias and how all of this fits within the context of adjudication.

What does 'without prejudice privilege' mean?

Without prejudice privilege applies to communications (whether in writing or oral) made by parties in a genuine attempt to settle an existing dispute, such that they are generally inadmissible before the English courts. The purpose of the without prejudice rule is to encourage parties to conduct settlement discussions freely and allow them to 'put all their cards on the table', in the confidence that any admissions made may not be used against them if settlement fails.

In AZ v BY, the parties were in dispute as to whether correspondence constituted 'without prejudice correspondence' and, to that end, whether the adjudicator's decision was enforceable in circumstances where such correspondence had been put before the adjudicator.

Background to the case

  • BY intended to contract with AZ for the replacement of stair core pressurisation systems in a building. A dispute arose as to whether a contract had been created between the parties during correspondence. The parties instructed an adjudicator, who concluded that a contract did exist ("the Decision").
  • Subsequently, AZ bought a Part 7 Claim to enforce the Decision.
  • However, BY alleged that AZ had put forward certain material subject to without prejudice privilege before the adjudicator. To that end, BY disputed the Decision and brought Part 8 Proceedings to: (i) establish whether the material was without prejudice and (ii) seek a declaration that as a result of the without prejudice material, the Decision was unenforceable.

Were the documents submitted to the adjudicator subject to without prejudice privilege?

Mr Justice Constable noted that the without prejudice rule is founded partly in the public policy of encouraging parties to settle disputes and partly in the mutual understanding between the parties that such communications are confidential. The test for determining whether without prejudice privilege applies to correspondence is an objective test and is twofold: (i) whether the communications demonstrate a genuine intention to negotiate and (ii) whether (on a reasonable basis) the author intended to partake in negotiations, and whether this is what would be understood by a reasonable person.

The judgment is largely redacted due to the confidential nature of the without prejudice correspondence in question, however, Mr Justice Constable ordered that the communications subject to BY's Part 8 Claim were without prejudice and were subject to without prejudice privilege.

An exception to the rule

While there is an exception to the without prejudice rule where the communications have resulted in a settlement / agreement, the TCC found that this was not the case in AZ v BY. The without prejudice communications subject to BY's Part 8 Claim did not result in any concluded agreement and, as such, those communications did not satisfy the exception.

Mr Justice Constable went on to explain that where without prejudice communications adverse to one of the parties have been put before a decision-maker in circumstances where a settlement / agreement has not been reached, it is for the respective decision-maker, having read such material, to "reflect upon their ability to resolve the …dispute".

Apparent bias and enforceability

Mr Justice Constable reiterated the test, set out in prior case law, to determine whether, having seen or become aware of without prejudice communications, the adjudicator can act in an impartial manner. The test is whether having seen and / or been informed of such communications, a "fair-minded and informed observer" would conclude that there was a "real possibility, or a real danger" of bias. He also considered Akenhead J's observation in Ellis Building Contractors Limited v Vincent Goldstein [2011] that if without prejudice correspondence appears before an adjudicator, there is often a greater sense of unease as to whether that adjudicator is able to put that correspondence aside, as compared to when such correspondence appears before a judge in Court[1]. This is because an adjudicator, although an expert in their field, is not legally trained, as compared to a Judge who is trained to do so.

Having established that the relevant correspondence was without prejudice, Mr Justice Constable concluded that there would be a real risk that a fair-minded and informed observer would be unconsciously biased having seen such communications. There was an "inevitable question mark" about whether the Decision had been shaped, "however inadvertently or sub-consciously", by the adjudicator's knowledge of BY's concessions / admissions made during negotiations.

As a result of this, Mr Justice Constable held that this was "one of the few cases in which a breach of the rules of natural justice, by reason of apparent bias", dictated that the Decision should not be enforced. To that end, BY's request for a declaration that the Decision was unenforceable was granted and AZ's application for summary judgment was discussed.

Practical tips on the application of without prejudice privilege

AZ v BY serves as a useful reminder both for parties engaging in without prejudice settlement discussions and for parties considering which materials to deploy in an adjudication. Practical tips that may be derived from the decision include:

  • Without prejudice correspondence should be headed "without prejudice" (although this does not necessarily mean that the correspondence constitutes without prejudice).
  • Where parties come to an agreement / settlement during the course of without prejudice negotiations, the correspondence giving rise to such an agreement / settlement is admissible and may be put before a court / adjudicator, notwithstanding the words "without prejudice".
  • If a party is partaking in without prejudice correspondence and wishes to change the basis of that correspondence, the party wishing to make such a change is responsible for making that change known to the other party.
  • Any communications that may be protected by the without prejudice privilege rule should not be disclosed in an adjudication, and if there is any doubt as to which materials may be covered by the rule, legal advice should be sought. Disclosure of without prejudice communications to an adjudicator may risk rendering their decision unenforceable.

If you have any questions about this article, please contact Michael O'Shea.

Footnote

[1] [2011] EWHC 269 (TCC) [25]