During the last UK property crash Mr. Rashid lost his Bradford home. The £47,000 sale left negative equity. Fifteen years later Bradford & Bingley's attempts to recover the shortfall have reached the House of Lords on a preliminary point. The judgements are, in the Court of Appeal (on second appeal from a circuit judge) in Bradford & Bingley Plc v. Mohammed Rashid [2005] EWCA Civ 1080, and in the House of Lords in Bradford & Bingley Plc v Rashid [2006] UKHL 37.

The point is this. In 2001 an advice centre wrote to the building society on Mr. Rashid's behalf as follows: "Thank you for your letter dated 2nd October 2001. I have informed my client Mr Rashid of the contents of your letter. He is willing to pay approximately £500.00 towards the outstanding amount as a final settlement. He is only able to afford this amount by borrowing from friends and family."

If that (or other similar letters - a second letter was subject to the same kind of dispute in the present case) was an acknowledgement of the debt for the purpose of s. 29 of the Limitation Act, it started the limitation period running again. If it was not an acknowledgement of the debt, and / or if it was not admissible under the 'without prejudice' rule (since it formed part of a negotiation) then the building society were out of time to sue for the debt.

Imagine a client comes to you and shows you such a letter offering to settle a debt for a fraction of the sum owed, and that you have to decide whether that letter has extinguished his limitation defence. You might feel, and the client might be forgiven for feeling, it is a fairly routine question for a solicitor in general practice. In reality the question was very difficult. In answering it, a unanimous House of Lords reversed a unanimous Court of Appeal.

The unanimous House of Lords has left as many questions as answers for practitioners who negotiate every day under the 'without prejudice rule'. Their Lordships had no difficulty in deciding that such a letter is an acknowledgement of debt. They also decided the letter was not excluded from evidence by the 'without prejudice' rule. The unfortunate aspect of the case was that their Lordships gave competing explanations of why the letter was admissible. These explanations bear on what could be called the 'mechanics' of the 'without prejudice' rule. An advisor dealing with day-to-day disputes needs to rules of thumb about where the boundaries of the rule lie, and how to draft letters so that they fall within the rule where possible and appropriate.

The Court of Appeal's approach in a nutshell was this. The public policy of encouraging negotiated settlements should encourage parties to be frank with each other. A debtor should be able to write saying 'I offer to settle for part of what I owe' without fear that this offer can be used against him in evidence. That is still true even he or his advisors overlooked the existence of the 'without prejudice' rule, or perhaps overlooked the convention of including the phrase 'without prejudice' at the head of a letter making such an offer. The letter offering £500 was written in the course of negotiations. Therefore it was not admissible.

In the Court of Appeal Counsel had put two arguments favouring the admissibility of the two letters in dispute. One, that the 'without prejudice' rule does not apply where the only reason for invoking it is to prevent the limitation period from re-starting under Limitation Act ss. 29 or 30. The court gave that argument short shrift: "No authority has been cited in support of that submission and I would be most surprised to find one." Two, that the purpose of the 'without prejudice' rule is to protect admissions in connection with matters in dispute. The debt was not disputed, so saying 'I will pay part of what I owe' was not an admission of a disputed fact. The Court of Appeal rejected that argument on the basis that the rule is not so narrow, and on the basis of a quotation from Unilever Plc v Procter & Gamble Co [2000] 1 WLR 2436, at page 2448, to the effect that separating out admissions from correspondence and admitting the rest would be impractical.

The House of Lords rejected the application of 'without prejudice' to letters along the lines of 'I offer to settle my debt for part of what I owe', at any rate where a party wanted to use such a letter to re-start the limitation period. The policy reason in the House of Lords is simple. Public policy, as well as encouraging debtors to negotiate, should encourage creditors to stay their hand from issuing a claim, where a debtor is engaging in negotiations. To have that effect, creditors need to know that where such negotiations are ongoing, they are not under pressure from limitation problems. Therefore, such letters offering settlement of an undisputed debt should and do allow creditors to treat the limitation period as having re-started.

The problem which divided the judges in the House of Lords was not the public policy, but the technical rule: What is it which takes a letter of negotiation with a view to settlement, and allows it to be admitted in evidence in spite of the 'without prejudice' rule?

Each of their Lordships gave a different answer. By way of summarising LORD HOFFMANN's answer I quote from his speech:
It is in accordance with principle because the main purpose of the rule is to prevent the use of anything said in negotiations as evidence of anything expressly or impliedly admitted: that certain things happened, that the party concerned thought he had a weak case and so forth. But when a statement is used as an acknowledgement for the purposes of section 29(5), it is not being used as evidence of anything. The statement is not evidence of an acknowledgement. It is the acknowledgement. It may, if admissible for that purpose, also be evidence of an indebtedness when it comes to deciding this question at the trial, but for the purposes of section 29(5) it is not being used as such. All that an acknowledgement does under section 29(5) is to allow the creditor to proceed with his case. It lifts the procedural bar on bringing the action. Questions of evidence to prove the debt will arise later.

LORD HOPE summarises the modern 'without prejudice' rule in Scotland. He says that there, suggestions or concessions are not admissible, but clear admissions made in a letter headed 'without prejudice' are admissible. He draws parallels from other common law jurisdictions. He says that the phrase 'without prejudice' is always used in Scotland where required but that the same principle of admitting clear admissions made in 'without prejudice' correspondence could be extended to England. Lord Hoffmann had described this as wider than his own approach to what is admissible, and unnecessarily wide.

LORD WALKER in a short judgment substantially agrees with Lord Brown.

LORD BROWN could not accept Lord Hoffmann's distinction between treating a statement as an acknowledgement, and admissible as such, and treating it as evidence of the fact acknowledged, and treating it as inadmissible as such. He said:
In my opinion the without prejudice rule has no application to apparently open communications, such as those here, designed only to discuss the repayment of an admitted liability rather than to negotiate and compromise a disputed liability. I find it impossible to regard the correspondence here as constituting "negotiations genuinely aimed at settlement" (Lord Griffiths in Rush & Tompkins v GLC) or "an attempt to compromise actual or impending litigation" (Megarry V-C in the Lindt case). Nor does the underlying public policy justification for the rule appear to have any application in circumstances such as these... As I have explained, acknowledgements may well leave issues of quantum outstanding and negotiations designed to resolve these to my mind should qualify for without prejudice protection. In these cases the policy underlying the without prejudice rule seems to me to outweigh the countervailing policy reason for lengthening the period in which the creditor must issue proceedings.

LORD MANCE said,
Here, the respondent, Mr Rashid, was not offering any concession. On the contrary, he was seeking one in respect of an undisputed debt.. But, even if Mr Rashid had been offering a lesser sum on a basis which could, if accepted, have precluded the appellant bank from pursuing the admitted larger debt ..there would have still have been no relevant dispute about his indebtedness, and the "without prejudice" rule would still have had no application.

At serious risk of over simplifying, this can be taken as close to Lord Brown's approach, and could be summarised in this way: In order to decide whether a statement is made without prejudice, ask in narrow terms whether it is aimed at settling a genuinely disputed point. This seems close to the second argument which Counsel had advanced in the Court of Appeal, as discussed above. The problem it raises (and which Lord Hope's suggestion raises) is how far a court should go in dissecting a 'without prejudice' letter into admissible and inadmissible parts.

Lord Mance then turns to another problem which had been lurking in the background of their Lordships' speeches. The 'without prejudice' rule is based in part on public policy, and in part on the agreement of the parties. The letters in the present case were not marked 'without prejudice.' The resolution of the question of their admissibility was decided on an examination of the scope of the public policy aspect of the rule. What if the letters had been marked 'without prejudice'? Would that have shown there was an agreement of the parties, so that the rule could be invoked even where it was not supported by the public policy of the rule?

Lord Mance, after discussing the matter, says this:
In the light of this analysis, it is wrong to assimilate the express use or effect of the phrase "without prejudice" in a context where there is no dispute or attempt to compromise a dispute with the significance of the "without prejudice" rule which applies, or of the "privilege" which exists, where there is an attempt to compromise a dispute. I am unable therefore to agree with my noble and learned friend Lord Brown's statement in paragraph 63 that "generally speaking" communications marked "without prejudice" will "attract the privilege even without the public policy justification of encouraging parties to negotiate and settle their disputes out of court". It is not open to a party or parties to extend at will the reach of the "without prejudice" rule or of the "privilege" it affords as regards admissibility or disclosure. Nor is this conclusion in any way affected if one takes the view (which Hoffmann LJ, as my noble and learned friend then was, did in Muller v. Linsley and Mortimer [1996] 1 PNLR 74, at pages 77D and 79G) that convention, rather than a questionable view of public policy, was the basis of the prohibition which (unless otherwise stipulated: cf Cutts v. Head [1984] Ch. 290) precludes the use of without prejudice communications on questions of costs. Indeed, Hoffmann LJ at page 79F identified the conventional position regarding costs as "the only case" where the use of without prejudice communications otherwise than as admissions was precluded.

Practical advice: it is impossible, in the light of these disagreement in the House of Lords, to give reliable practical advice on the use of the 'without prejudice' rule. In an attempt to give a helpful summary of the case for practical purposes, I set out the following propositions in the form of question and answer. These must be treated with very great caution in a field which suffers from real uncertainty:

Question: does a reference to a debt in a letter of negotiation with a view to settlement count as a acknowledgement of the debt, so as to re-start the limitation period? Answer: almost certainly, yes. However, if there was a genuine dispute about liability on the debt, then it probably would not re-start the limitation period.

Question: aside from the above point, does a clear admission of fact (as distinct from one framed as a hypothetical admission, or a concession) fall outside the protection of the 'without prejudice'? Answer: probably not in England and Wales, if it is made in the context of genuine negotiations towards settlement; but it is a dangerous area. A clear admission might be admitted in evidence if, as suggested by Lord Hope, English law should follow the recent Scots cases on 'without prejudice.'

Question: to what extent can a 'without prejudice' letter be dissected to separate points which are not entitled to attract that privilege? Answer: it is very hard to say. The authority in favour of permitting an attempt at such dissection is now pretty good. Lower courts are not likely to have much appetite for dissecting 'without prejudice' letters. On the other hand, it may be dangerous to make an unambiguous admission, in a genuine 'without prejudice' letter, of a point you may later wish to dispute, just in case the courts are prepared to attempt to dissect a letter in this way.

Question: does writing 'without prejudice' on a letter increase its chances of being inadmissible under the 'without prejudice' rule? Answer: possibly, if Lord Brown (with whom Lord Walker agreed) is right. However, I submit that it is probably the better view, and probably the effect of Lord Mance's analysis, that testing for admissibility under the rule is the same, regardless of whether one can point to a clear sign of the agreement of the parties or not. In other words splitting the rationale for the rule into 'agreement of the parties' and 'public policy' probably has no practical consequence for this question. Where it may be appropriate to do so, mark correspondence 'without prejudice' (a) for clarity; (b) in case it does make a difference. Where it is not appropriate to do so (perhaps because there is no real attempt to settle a dispute), marking correspondence 'without prejudice' may make it inadmissible on the 'agreement of the parties' theory, but it is unlikely.

I should be interested to hear from anyone who takes a different view of the practical effect of the case law, and of the recent Bradford & Bingley case in particular.

Dr John Birchall - Professional English, Legal English, and Common Law Training