A cautionary tale on drafting settlement agreements

A settlement agreement is invariably the product of negotiations – sometimes straightforward; other times, highly protracted. Without prejudice (WP) privilege protects written communications made during those negotiations from being disclosed so that if the negotiations fail, those communications cannot be used against the parties later on during litigation.

If the negotiations succeed though, and a settlement agreement is concluded, that agreement is not covered by WP privilege (and the WP offer which led to the settlement also ceases to be privileged, because it forms part of the contract).

A recent case has now held that other WP communications also cease to be privileged if they are referred to in the settlement agreement.

In BGC Brokers v Tradition (UK) Ltd, the claimant settled with one of the co-defendants. The settlement agreement included a warranty and representation that the co-defendant had made full disclosure in certain communications between him and the claimant before the settlement agreement was concluded. The agreement also expressly provided that the communications retained WP privilege, although the parties could waive that privilege in future if the co-defendant breached a term of the agreement.

A redacted copy of the settlement agreement was supplied to the other defendants, but they sought inspection of the communications referred to in the agreement. This was resisted on the basis that those communications were covered by WP privilege.

What did the court decide?

The Court of Appeal found that those communications were not covered by WP privilege when they were incorporated (by reference) into the settlement agreement. Although the original communications remained privileged, when they were repeated in the settlement agreement the status of those communications "radically changed". That was because otherwise the claimant would be unable to sue the co-defendant for the separate potential claim of breach of warranty relating to the contents of those communications.

Comment

This decision might be said to be a continuation of the principles referred to above regarding the settlement offer and agreement. But statements made during a negotiation (which have not yet been proven to be false) might be damaging in a way that the amount of the settlement (which only reflects what the party was prepared to settle for and not what the value of the claim was) might not be.

This puts a party entering into a settlement agreement with only one co-defendant or co-claimant in a difficult position. That party will want to be able to sue the party it settled with if it turns out it only entered into the settlement on the basis of false statements made during the negotiations. But if those statements are referred to in the agreement itself, they will become disclosable to third parties in any future litigation with those third parties.

A balancing exercise will therefore need to take place, with a party weighing up how likely it is that it will want to sue over any false statements with how damaging the disclosure of those statements to third parties might be.