Jeremy Winter is Managing Partner of the Construction and Engineering Group within the London office of international solicitors, Baker and McKenzie. He advises on a wide range of contractual and disputes resolution matters, often overseas, and whenever possible acts as advocate in his cases. He is a Member of the Society of Construction Law, the Technology & Construction Solicitor's Association (of which he is a Member of the IT Sub Committee), the Geological Society and the International Society of Trenchless Technology. In 1996 he was appointed Honorary Fellow of the Institution of Civil Engineering Surveyors for his services to that Institution. He has also been appointed a Member of the Association for Project Management, based on his experience of managing construction disputes.

Jeremy is a frequent speaker at seminars on construction law topics. He writes a regular legal column in Construction News on topical issues, and has made several contributions to the publications of the Centre of Construction Law & Management at King's College London over the last twelve years. His more recent papers cover topics such as 'The New ICC Arbitration Rules', 'Analysis of New UK Construction Contract Legislation', 'English Civil Procedure & Arbitration', 'Concurrent Delay' and 'Control of Legal Costs in Litigation & Arbitration'.

Summary by Richard Swan for complete text

On 17 October 2000, we were 'privileged' to have Jeremy Winter, of Baker and McKenzie, address us on "without prejudice and privilege". This minute summarises the major issues brought to our attention.

Jeremy opened his presentation by stating that the use of "without prejudice" was a much misunderstood and misused term in construction disputes. Laymen believe that its use will protect them, as a document will not be able to be shown to a judge; in effect, they believe that liberal use of the phrase on documents does no harm, as the content will not be used against them - this is quite wrong.

The principal purpose of "without prejudice" is to encourage the brokering of settlements outside the courtroom, without generating correspondence which could subsequently be used in the courtroom should negotiations fail. This is a genuine and proper use of the term and the document will be "privileged". It is also important to note that a document does not have to be marked in order for it to be privileged. Again, the attempt to settle goes to the root of the problem, and the courts have held that unmarked correspondence attempting to settle can be protected.

So when may documents cease to be protected? Threats or unequivocal admission of liability are unlikely to remain privileged and where settlements are achieved and correspondence forms a binding contract, documents will lose their privileged status in order to prove that a contract has been made.

This variation is becoming more common in arbitrations, and follows the procedure of Calderbank offers, or the paying of a sum into court by the defendant. Whilst it is not possible to pay money into court in arbitration, the defendant will make an offer to the claimant, clearly marking the document as "without prejudice save as to costs". This document will be privileged until such time as the arbitrator has made his decision on liability. As with a Calderbank offer, if the award is less than or equal to the offer, generally the claimant will be liable for the defendant's costs.

Jeremy sign-posted Section 61(2) of AA 96, which indicates that costs should follow the event, but this section does give the arbitrator powers to decide who should be liable for costs. It is felt that a letter marked "without prejudice save as to costs" would probably fall within these circumstances.

The concept of privilege is more complicated, particularly when considering "legal professional privilege". There are two classes of this, which protect documents from disclosure: Correspondence for obtaining legal advice, and correspondence that anticipates litigation.

This has far reaching effects in arbitrat-ions as the concept applies strictly to lawyers ¹ ²

Without prejudice is a phrase that is much misused in construction disputes in the UK. Letters and documents are frequently headed without prejudice because the writer is worried about something he has said in the letter, or because "it does no harm". The most common and dangerous misunderstanding is "if it's marked without prejudice it can't be shown to the judge".

What does it mean?

The policy of the courts (and therefore arbitrators) is to encourage settlements. If parties in dispute are to be encouraged to solve their problems without taking up court time, they must be able to communicate frankly without worrying that what they write or say will be used against them in court. From this has developed the policy that communications between parties in dispute which are part of a genuine attempt to settle the dispute cannot be used in evidence against them as admissions. Those communications can be oral or in writing. If a document is properly marked "without prejudice", it is "privileged", which means that it does not have to be produced in evidence and so seen by the judge (or arbitrator). In this respect, the concept of "without prejudice" is just one part of the wider topic of privilege that will be developed further below.

If the communication is part of a genuine settlement attempt, even if it is not an offer itself, it will be protected from being produced in evidence. But threats or unequivocal admissions are unlikely to be protected even if they are made in negotiations. For example, a letter from a debtor marked without prejudice admitting that he owed the debt, but saying that he could not pay it, and would just declare himself bankrupt if the creditor took legal action, would probably not be protected.

Any communications which are intended to be part of a genuine settlement attempt should be clearly marked without prejudice at the top of the letter. The courts have held, however, that the principle of privilege can protect subsequent and even previous letters in the same chain of correspondence. Strictly speaking, therefore, it not necessary that every letter be marked without prejudice if it is clear that the communication is intended to be part of the settlement negotiations.

Without prejudice correspondence remains privileged even after a compromise has been reached and is generally inadmissible in any subsequent litigation on the same subject matter whether between the same or different parties. But where the negotiations are successful and the without prejudice correspondence constitutes a binding contract the correspondence may be produced to prove that such a contact has been entered into (if, say, one party does not comply with the terms of the settlement, and the other wants to enforce it).

This is a variation on the theme, familiar to those involved in arbitration. As a general rule, without prejudice communications cannot be taken into account in the court's decision on costs. There is a limited exception to this rule, which has led to more letters being marked without prejudice save as to costs, particularly in construction arbitrations. Where a defendant in litigation believes that there is some merit in the plaintiff's claim, but not as much as the plaintiff claims, then he should pay into court the amount he thinks the claim is genuinely worth, and notify the plaintiff of this. If he gets the number right, this gives him some protection from liability for the plaintiff's legal costs. It is not possible to pay money into court in arbitration, so what the defendant does is write to the claimant offering the amount he thinks is properly due, marking the letter without prejudice save as to costs. The arbitrator will not be told about this offer until after he has made his decision on liability. If the amount he awards the claimant is less than or equal to the amount included in the defendant’s without prejudice offer, then the general rule is that the claimant should pay the defendant’s legal costs (and his own) from the date the offer is made. The logic behind this is that the defendant has correctly assessed the justified level of the claimant's claim, and the arbitration from that date on has been a waste of time and money.

It is unfortunate that when the Arbitration Act 1996 was drafted, this was not something that was codified in the Act. As you will know, section 61 of the Act gives arbitrators discretion as to costs, though subject to the following guidance:

I am not aware that any commentator has suggested that this does not permit an arbitrator to give the same effect to an offer made without prejudice save as to costs that he would have given under the old legislation (whether the procedure was also not codified).

The lessons from this are to think carefully before putting "without prejudice" on a letter. It should be used only in attempts to settle disputes. It should not be used on letters that a party may want to rely on later. If part of a letter is intended to be without prejudice and part not, separate letters should be written. If you are worried about the implications of something you say in a letter, it is probably better not to say it at all - marking it "without prejudice" will not help. If you have a settlement meeting, agree at the beginning that it is "without prejudice". But remember the limitations on the rule - you cannot be sure it will protect you if you clearly admit that the other side is right. Laymen should take great care before using the expression "without prejudice save as to costs"; it is a complex area of legal procedure.

Privilege is defined in the Glossary to the Civil Procedure Rules as:

Perhaps the most important aspect of the law of privilege is what is known as legal professional privilege (another part of the law of privilege protects settlement communications, as discussed above). The following paragraphs are all derived from authority on litigation, but unless stated otherwise, they apply equally to arbitration. If a document is regarded as privileged in litigation, it will probably be privileged in arbitration. However, if a document is not privileged, that does not necessarily mean that an arbitrator will order the document to be disclosed to the other party. Under section 34 of the Arbitration Act 1996, the arbitrator has discretion as to whether he will order documents to be disclosed, and if so what documents. In deciding what to order disclosure of, he will have regard to his duty under section 33 of the Act to act fairly and impartially between the parties.

There are two classes of legal professional privilege that protect documents from disclosure. They are: (a) documents that are privileged whether or not litigation was contemplated or pending and (b) documents that are only privileged if litigation was contemplated or pending when they were made or came into existence.

In R v Derby Magistrates Court, ex parte B [1996] AC 487, the then Lord Chief Justice, Lord Taylor said:

Under the first class of legal professional privilege, letters and other communications passing between a party and his solicitors are privileged from production, provided they are confidential and written to or by the solicitor in his professional capacity and for the purpose of obtaining legal advice or assistance for the client.

This class of privilege does not only apply where there is litigation. The test is whether the communication or other document is made confidentially for the purposes of legal advice. Legal advice is not confined to telling the client what the law is; it may include advice about what should prudently and sensibly be done in the particular situation.

The same privilege is attached to communications with an in-house solicitor as it applies to communications with a solicitor practising independently, provided that such communication relates to legal as distinct from administrative matters.

Instructions and briefs to counsel and counsel’s opinions, drafts and notes etc. are also privileged.

Under the second class of legal professional privilege, communications between a solicitor and a third party which come into existence after litigation is contemplated or commenced and made with a view to such litigation, either for the purpose of obtaining or giving advice in relation to it, or of obtaining or collecting evidence to be used in it, or obtaining information which may lead to the obtaining of such evidence, are privileged.

Documents embodying communications with non-lawyers are privileged if and only if they come into existence for the purpose of obtaining legal advice in existing or anticipated proceedings. Where it is clear that a document was created with a view to obtaining legal advice, deciding whether the document is privileged or not is not difficult. Difficulties do however arise when a document is created for more than one purpose. It may also be difficult to decide at what stage it can fairly be said that the purpose of creating the document is obtaining advice in anticipated litigation, as opposed to obtaining information on something which might lead to litigation. An accident report is a classic example illustrating this difficulty.

The courts have tried to resolve these difficulties by deciding that where the dominant purpose of producing a document is to use it or its contents in order to obtain legal advice, or to conduct litigation a document, the document is privileged and excluded from inspection. This was decided by the House of Lords in Waugh v British Railways Board [1980] AC 521. Litigation does not actually have to have been threatened - just reasonably in prospect.

You will have noticed that all of the above involve lawyers being involved in the communication. An obvious question is as to whether communications between a client in the construction industry and the other types of advisers that he might customarily use would be privileged. It is very clear that legal professional privilege does not apply to advisers other than lawyers. For example, in New Victoria Hospital v Ryan [1993] IRLR 202, the Employment Appeal Tribunal held that communications between an employer and its advisers, a firm of personnel consultants were not protected by legal professional privilege. Applying well established law, the tribunal held that legal professional privilege should be strictly confined to legal advisers such as solicitors and counsel who are professionally qualified and subject to the rules and etiquette of their professions and who owe a duty to the court. Professionally qualified construction advisers may consider this a little arrogant, but it is clearly the law.

Although privilege does not apply to non-lawyers, it does apply to advisers who are not English solicitors - the privilege has long been held to apply to Scots, French and Dutch lawyers.

As discussed above, the fact that a document passing between, say, a contractor and his claims consultant is not privileged does not necessarily mean that it will have to be disclosed in arbitration.

This is a special sub-set of privilege which applies in actual or anticipated litigation in which several persons have a common interest, although all such persons have not been made parties to the action. Examples of situations in which the common interest privilege may arise include where a party is being sued in respect of a liability for which he is insured (the insurer will have common interest privilege) and where a party is being sued in respect of a liability for which he has a guarantee (the guarantor will have common interest privilege)

The general principle is that a document once privileged is always privileged and the privilege applies both in the existing and any other litigation. If the privilege which applied in the original claim is properly claimed in a subsequent claim by the person originally entitled to it, there is no additional requirement that the subsequent claim should be between the same parties or involved the same subject matter, provided there is sufficient connection for the document to be relevant, the party entitled to privilege is able to assert it in the subsequent claim.

Documents which are in the public domain are not privileged. This means that great care has to be taken to avoid waiver of privilege. Privilege can only be waived by the party who has the benefit of the privilege.

Where part of a document contains privileged matter and the remaining unprivileged, it is not necessary to disclose the privileged content. If the document deals with a single subject matter and satisfies the dominant purpose test when taken as a whole, it is permissible to claim privilege for the entire document. If the document does not satisfy the dominant purpose test, then the document is not privileged, but if part of the document refers to privileged matters then the privileged parts may be blanked out - see GE Capital Corporate Finance v Bankers Trust Company [1995] 1 WLR 172.

If part of a privileged document is read out in open court, that results in waiver of privilege to the entire document DEF American Inc v Phonogram Limited [The Times 16 August 1994].

If a client sues his solicitor, he impliedly waivers privilege in relation to all relevant documents to the extent necessary to enable the court to adjudicate the dispute fully and fairly.

It is surprisingly frequently that one party comes into possession of privileged material belonging to the other party inadvertently. Under current professional conduct rules, solicitors have a clear obligation to return obviously privileged documents inadvertently disclosed to the other party without copying them or informing their client of the contents of the documents.

The courts will support this by means of injunction if necessary. In English and American Insurance Company v Herbert Smith [1988] FSR, solicitors received the other side’s counsel’s papers inadvertently, read the papers and advised their client on the contents before returning them to the other side. An injunction was granted restraining use of the information derived from these documents.

The rules regarding expert witnesses were substantially revised as a result of Lord Woolf’s review of civil procedure. In his Interim Report of June 1995, Lord Woolf proposed that all written and oral instructions that the expert received from his client and lawyers should be disclosed in the expert’s report. This caused great concern among lawyers and experts alike. As a result, the new civil procedure rules tone this down by providing (in Rule 35.10) that an expert’s instructions are not privileged, but that the court will only order them to be produced if it considers that the expert’s statement of his instructions (which must be contained in his report) is inaccurate or incomplete. Arbitrators may take a similar approach.

Confidentiality is quite different to privilege. The fact that a document is confidential (commercially sensitive price information, for example) does not make it privileged. Sometimes, confidential information may be key to a dispute, in which case an arbitrator will probably order it to be disclosed.

It is difficult for an arbitrator to make a determination as to whether a document is privileged or not, because if he sees it and the document is privileged, he will have received evidence he should not have seen. Experienced arbitrators feel that they can dismiss inadmissible evidence from their minds, just as judges say they do. Parties may prefer to avoid the difficulties involved in this by having a third party (no doubt a lawyer) determine issues of privilege. In an extreme case, it would be possible to have the court determine a question of privilege as a preliminary point of law under section 45 of the Arbitration Act 1996.

The concept of legal professional privilege is a highly complex one, which is under constant but very gradual change. As foreseen by Lord Taylor, the Human Rights Act may provide the next phase of development of the concept, though its effect will probably be to reinforce, rather than weaken, the privilege.

Jeremy Winter Baker & McKenzie 16 October 2000 (revised 1 November 2000)

Mail to: jeremy.winter@bakernet.com