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Most people involved in the administration of construction contracts or dealing with disputes on projects will have some experience of ‘without prejudice’ discussions or communications. In our experience, however, many have only a vague understanding of what ‘without prejudice’ privilege is and misunderstand how and when it applies.

For instance, it’s often assumed that if a discussion or communication is stipulated as ‘without prejudice’ then the discussion or communication is privileged, and that it cannot be relied upon for any purpose beyond the negotiations in which it arose.

However, assuming that any discussion or communication can be without prejudice by simply endorsing it as such can be a dangerous assumption to make. Slippery too is the path of those who assume that without prejudice discussions or communications can only be used for the purposes of negotiations.

In this article, we aim to provide industry participants with a better understanding of without prejudice privilege, including how and when it applies, in the hope that it might provide readers with a better understanding of how it applies in practice.

Origins of the privilege

The origins of without prejudice privilege are found in the common law, but the privilege has also since been codified in some state and territory evidence legislation.[1]

At its simplest, the privilege prevents admissions, which are made during attempts to settle a dispute, from being used as evidence in litigation.[2] The privilege exists as a matter of public policy, and specifically because the Courts recognise the advantages of litigation being avoided.

The privilege is intended to enable parties to communicate freely in efforts to avoid litigation, and without concern that their discussions or communications might be used as evidence against them. But the privilege is not absolute, and certain conditions must be satisfied for the privilege to come into effect.

When and how does without prejudice privilege arise?

It’s a common misconception within the construction industry that any discussion or communication stipulated to be ‘without prejudice’ is automatically privileged. Justice Wells summarised this common misconception as follows:

…[In] some quarters of the community there is a belief, amounting almost to a superstitious obsession, that the expression “without prejudice” is possessed of virtually magical qualities, and that anything done or said under its supposed aegis is everlastingly hidden from the prying eyes of a Court.

The classic statement of the law regarding without prejudice privilege can be found in the decision of the High Court of Australia in Field v Commissioner for Railways for NSW:

The law relating to communications without prejudice is of course familiar. As a matter of policy the law has long excluded from evidence admissions by words or conduct made by parties in the course of negotiations to settle litigation.

The purpose is to enable parties engaged in an attempt to compromise litigation to communicate with one another freely and without the embarrassment which the liability of their communications to be put in evidence subsequently might impose upon them. The law relieves them of this embarrassment so that their negotiations to avoid litigation or to settle it may go on unhampered.

This form of privilege, however, is directed against the admission in evidence of express or implied admissions. It covers admissions by words or conduct. For example, neither party can use the readiness of the other to negotiate as an implied admission.

It is not concerned with objective facts which may be ascertained during the course of negotiations. These may be proved by direct evidence.

(Underlining added)

For without prejudice privilege to arise, litigation must either be on foot or likely should negotiations fail. Put another way, without prejudice privilege will not extend to commercial negotiations where litigation is neither commenced nor contemplated. Moreover, it will not shield statements that do not actually demonstrate any intent to settle a dispute.

“That was communicated without prejudice! How can they now use that?!”

Sometimes, the answer involves explaining that litigation was never in contemplation. Other times, the answer involves explaining that there was no demonstrated intention to settle (or compromise). As we have explained above, those kinds of discussions or communications will not attract the privilege.

Often, the answer is neither. Though without prejudice privilege might shield a party from having its privileged discussions or communications admitted into evidence, it will not prevent a counterparty from using information obtained in without prejudice discussions or communications as the basis for finding alternative direct evidence.

This is because without prejudice privilege is only concerned with protecting what is communicated in the course of negotiations as evidence by way of admission. Effectively, the privilege only safeguards parties from having their admissions later used against them in court.

Without prejudice privilege is not at all concerned with protecting objective facts which are learned or ascertained during the course of negotiations. It does not protect parties against the risk that any admission may spark a chain of factual enquiries that ultimately leads to admissible, direct evidence.

Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25

An example of unintended consequences arising from disclosures made in without prejudice discussions is illustrated in the case of Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25. In that case, the NSW Court of Appeal considered the application of without prejudice privilege, specifically in the context of parties electing to exercise their contractual rights under a construction contract.

Galileo (Principal) issued a show cause and take out notice to Duffy Kennedy (Contractor) for alleged substantial breaches of contract. The parties then engaged in without prejudice discussions, attempting to resolve the disputes between them under the contract. Despite these efforts, no agreement was reached.

The Principal then specifically relied on statements made by the Contractor in the without prejudice meetings, rather than the Contractor’s response to the show cause notice, to inform its decision-making when exercising its take out rights subsequent to its show cause notice.

In response, the Contractor submitted that the Principal could not rely on anything said in the without prejudice meetings to inform its contractual decision-making regarding the Contractor’s response to the show cause notice.

Without prejudice discussions fair game to inform decision-making, says court

The Court disagreed with the Contractor’s submission. It found that without prejudice discussions, in a commercial/contractual context, could be relied upon by a party to inform its decision-making with respect to enforcing its contractual rights, based on the other party’s position as expressed during negotiations.

Referring to the High Court of Australia’s decision in Field v Commissioner for Railways for NSW, the Court dismissed the Contractor’s submissions that without prejudice privilege created an implied agreement that parties would make no use of disclosures made during the course of negotiations. The Court observed:

The principles upon which the privilege exists are the requirements of public policy or the implied agreement arising from the fact that negotiations are conducted on a without prejudice basis that the parties will keep their communications confidential. It has never been suggested so far as I am aware that the privilege is based upon an implied agreement that if the negotiations do not result in an agreement for settlement of the dispute, the parties will make no use of what has been disclosed by the other party in the negotiations.

Such an implication would be inconsistent with the policy that supports the privilege which is to encourage the negotiated settlement of disputes….

(Underlining added)

Final thoughts

It is important to understand that without prejudice privilege is ultimately a rule of evidence and not an ‘implied agreement’ that if negotiations fail to result in settlement, parties cannot use what was disclosed by the other party for any purpose.

A party can inadvertently compromise its position by believing discussions or communications are without prejudice when they are not, or for assuming that anything disclosed in without prejudice discussions or communications will be shielded from a court.

Macpherson Kelley’s Infrastructure, Construction & Energy team has extensive experience dealing with dispute resolution and litigation – including without prejudice negotiations.

If you are in doubt about whether a discussion or communication is or should be stipulated as ‘without prejudice’ or would like to discuss these matters further, our Infrastructure, Construction and Energy team are available to help.

[1] See section 131(1) of each of the Evidence Act 1995 (NSW), Evidence Act 2008 (Vic), Evidence Act 2001 (Tas), Evidence Act 2011 (ACT) and Evidence (National Uniform Legislation) Act 2011 (NT). In Queensland, South Australia and Western Australia ‘without prejudice’ privilege remains found in the common law only.

[2] Field v Commissioner for Railways for New South Wales [1957] 99 CLR 285 (‘Field v Commissioner for Railways for NSW’).

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.