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Without prejudice and subject to contract

29 January 2016

Are you using the terms correctly?

The general rules are well established regarding the use and misuse of the headings "without prejudice" and "subject to contract". However, recent cases highlight that such headings do not provide "magic protection" from legal consequences without consideration of the circumstances.

"Without prejudice"

Any form of communication between negotiating parties, whether written correspondence, telephone calls or meetings, may be classified as 'without prejudice'. The legal effect of doing so will depend upon the substance of the communication. Public policy encourages genuine attempts by those in dispute to negotiate and settle their differences. Use of "without prejudice" allows them to negotiate behind a veil of confidentiality, with such communications being legally privileged and generally not admissible in evidence should the negotiations fail and the matter proceed to a trial.

However, privilege arises only if there is a real issue between the parties and the letter (or the discussion) is a genuine attempt to settle it. In Avonwick Holdings Limited v Webinvest Limited (2014) the court held that the "without prejudice" heading had no effect as at the time there was no dispute in existence nor was there any evidence of an agreement that the words would not be used in court.

Written communications (whether by letter or email) should therefore contain an admission, concession or offer to compromise. A letter demanding total capitulation and costs is unlikely to be privileged; nor for example does adding the heading to a defamatory letter prevent it being admissible in a libel action. Equally, omitting the heading from a genuine offer to compromise may not prove fatal if the letter is clearly written to begin or continue negotiations.

There are exceptions including where both parties consent, expressly or by implication, to waive their right to object to without prejudice statements being admissible in evidence. Other examples include where an agreement apparently reached should be set aside on the grounds of misrepresentation, fraud or undue influence or where exclusion of the evidence would act as a cloak for perjury, blackmail or other impropriety.  

Unless a without prejudice offer is also expressly made subject to contract, acceptance of the offer will create a binding agreement (unless greater formality is required, for example, contracts in relation to land). Once a binding agreement has been reached, the correspondence will be admissible in court to prove the existence of the contract.

Correspondence marked "without prejudice save as to costs" may be read by the court after judgment in the main dispute to see whether a party has acted reasonably or to determine who has really "won", since such a letter may define the real issues between the parties and allow the implications for costs awards to be considered.

Always carefully consider the circumstances and ensure that you make it clear if a telephone conversation, meeting or written communication is "without prejudice" and keep a note of all discussions.

"Subject to contract"

Surveyors, lawyers and other property professionals often send letters headed "subject to contract", "subject to lease", or "subject to licence". The intention is that the content of the letter will not have legal effect unless and until it is agreed that it will be binding on the parties.

Land sales and other negotiations

Correspondence between solicitors acting on the sale and purchase of land is usually headed "subject to contract" because the parties do not wish to be bound unless and until the detailed terms of the contract have been agreed. At that point, typically there will be an exchange of contracts and a completion which will transfer title. Similarly parties may wish to negotiate a settlement in commercial disputes not relating to land. In both these situations "subject to contract" means what it says and the parties will not be bound unless and until contracts have been exchanged or there has been some form of completion. The words have the "suspensive" effect intended.

In Taylor v Burton (2015) the court considered whether there was a binding agreement between two parties for the execution of a deed in a dispute  over a right of way. The court held there was no binding agreement as negotiations for the deed had been “subject to contract” and there was no evidence of an agreement to the contrary. This meant that either side, any time before the entry into such a formal contract, could withdraw from negotiations. 

It is important to note however that Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires that for the sale or other disposition of land to be binding, it must be in writing and incorporate all the agreed terms in one signed document or where contracts are exchanged, in each part.

Unilateral consent

A different situation arises in the case of so called “unilateral” consent where it is only necessary for one party to a lease to give consent at the request of another party. Examples include where a tenant requires the landlord’s consent for alterations, an assignment or subletting. In these circumstances a “subject to licence” heading to a letter giving “in principle” consent subject to certain matters or formalities will not alone prevent that letter giving a binding consent. To avoid giving consent before formal documentation is concluded, in addition to the heading, additional wording is advisable. The following wording has for example been held to be sufficient to avoid consent: “for the avoidance of doubt, we must stress that this letter forms no consent in itself, and no consent will be granted until the execution of a formal licence to assign”.

Here again care needs to be taken to consider the circumstances. Some leases and contracts include provisions that provide a procedure to help the landlord regulate applications for licences or stipulate that consent must be in writing in a formal deed.

This article was written by Robert Highmore.

For more information, please contact Robert on 0207 203 5201 or robert.highmore@crsblaw.com.