Without prejudice privilege: are threats made in the course of settlement negotiations protected?

Without prejudice privilege protects discussions during settlement negotiations, whether made in writing or orally, from being used as evidence in court.

A recent case in the Court of Appeal explores one of the exceptions to this general rule, where the exclusion of such evidence would act as a cloak for perjury, blackmail or other unambiguous impropriety.

What was the case about?

Ferster v Ferster was a dispute involving an application by Jonathan Ferster to amend a petition under section 994 of the Companies Act 2006 (the unfair prejudice provision) to refer to the contents of an email sent in the context of a mediation.

At the mediation the opposing party, Stuart Ferster and Warren Ferster, offered to sell their shares in Interactive Technology Corporation Ltd (the company) to Jonathan.  The mediatior sent an email to Jonathan’s solicitors detailing Stuart and Warren’s message after no agreement was reached at the mediation.  The email highlighted the following:

• that a failure to accept the offer could also have “serious implications for Jonathan’s partner”;
• it put a 48 hour time limit on his response;
• that “a settlement would obviate the need of further steps such as committal proceedings being issued.”;
• it stated that Jonathan could “face charges of perjury, perverting the course of justice and contempt of court and is likely to be imprisoned.”; and
• “Jonathan’s credibility and reputation will be destroyed barring him out of the online gaming business in the future.”

The amendment to the petition sought to rely on this email.  Jonathan argued that Stuart and Warren sought to extort a ransom price for their shares in the company by making improper and unwarranted threats to cause the company to commit him for contempt and cause criminal proceedings to be brought against him unless he agreed to purchase their shares at an inflated price.

What did the Court of Appeal decide?

The Court of Appeal dismissed the appeal.  Jonathan was allowed to amend his petition to include the email.

Floyd LJ, giving the leading judgment, agreed with the High Court decision that the email fell within the “unambiguous impropriety” exception to without prejudice privilege:

• The use of the threat of committal proceedings placed increased pressure on Jonathan to pay Stuart and Warren more for the shares and it therefore went far beyond what was reasonable.
• The threats also mentioned serious implications for Jonathan’s family and that the allegations would be publicised within a short timescale if the offer was not accepted.
• No attempt was made to make any connection between the alleged wrong and the increased demand despite Stuart and Warren being given the opportunity to do so.

Floyd LJ noted in his concluding remarks that it is “not necessary for the threats to fall within any formal definition of blackmail for them to be regarded as unambiguously improper.”

Comment

Distinction must be drawn between “admission” cases and “threat” cases.  The court has held before that admissions of truth do not fall under the exception.  In Savings & Investment Bank Ltd v Fincken the claimant applied to amend its pleading to include an admission by the defendant that he owned shares in a company which he had not disclosed in his affidavit.  The court held that the admission did not fall within the exception:  “It is not an abuse of privilege to tell the truth, even where the truth is contrary to one’s case.”  After all, the whole purpose of without prejudice privilege is to encourage parties to speak openly with the aim of reaching a settlement.

Ferster represents a stark reminder to businesses to be careful when negotiating a settlement.  Businesses should be cautious when advising the other side of the potential benefits of accepting their offer as the courts may decide that this represents undue pressure.  Courts will only allow this exception if there is clearly an abuse of the without prejudice rule.