Insurance · 2 July 2018

Will trying to negotiate an early settlement of a dispute prejudice future legal action?

dispute settlement
The “without prejudice” rule is something many people in business have heard of.

Grid Law founder David Walker returns to dispute resolution by explaining the “without prejudice” rule to help business owners negotiate an early settlement without risking the credibility of future legal action.

If you have ever been involved in a business dispute where someone owes you money or they’ve failed to provide a service you have paid for, you will know the feeling of wrestling two conflicting views.

On one hand, emotions are running high and you naturally want to recover as much compensation as possible. You may even have thoughts of putting the other party out of business.

On the other hand, your rational business mind knows you should settle the dispute as quickly as possible. If you don’t, there’s a risk that it will distract you from more important tasks and if you’re not careful your business will suffer as a result.

I had to advise a client facing this dilemma the other day.

My client paid a lot of money for a service that wasn’t provided. The service provider gave him high expectations of the results that could be achieved but the reality was very different.

The service was a complete disaster. The service provider didn’t do anything they promised and even damaged my client’s business by upsetting some of his important customers.

There was a realistic chance of a quick settlement as the service provider knew they had taken on too much and seriously let my client down. They wanted a quick resolution to the dispute but their offer of settlement was too low.

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My client was sure he could resolve this dispute himself and wanted to continue settlement negotiations. However, he was concerned about jeopardising his position in case a settlement wasn’t reached and we had to start legal action.

This is an extremely common situation and thankfully our legal system is designed to help deal with this.

The Civil Procedure Rules (the rules that govern how to conduct legal proceedings) contain a series of pre-action protocols. These pre-action protocols are rules that apply (as their name suggests) even before you start formal legal action.

The objective of these protocols is to help the parties resolve their dispute without involving the courts.

To do this, both parties must exchange information about the dispute so they both understand each other’s position. They are then encouraged to negotiate a settlement if they can. If necessary, they should try mediation or other forms of alternative dispute resolution to help achieve this.

Going back to my client, he was all in favour of trying to settle the dispute. However, his biggest concern was what a judge would think if he tried to claim a much higher amount than the figure being discussed during settlement negotiations.

This isn’t something my client needed to worry about because all settlement discussions are held on a “without prejudice” basis.

The “without prejudice rule” means that all negotiations held with a genuine intent of reaching a settlement are “off the record”. The judge at the trial won’t know that they have taken place or what was discussed.

Therefore, offers can be made and the parties can make concessions without it adversely affecting their case if a settlement of the dispute isn’t reached.

The without prejudice rule is something many people in business have heard of, but very few understand how to apply it correctly. This isn’t really surprising if you haven’t been to law school but getting it wrong can make future legal proceedings a little tricky.

Hopefully I can prevent this by helping you avoid the three most common mistakes I see with it.

  1. The first mistake is people writing “without prejudice” on all correspondence

Most correspondence won’t be without prejudice. As I said above, only correspondence written with a genuine intent of reaching a settlement is without prejudice. A letter of claim, for example, isn’t without prejudice. You will want the judge to see your letter of claim because it contains full details of the amount you are claiming and why you’re claiming it.

  1. The next mistake I see is that a letter or email is only partially without prejudice

For example, I have seen many letters of claim which conclude with an offer of settlement. The offer of settlement is without prejudice and so you won’t want a judge to see it, but the rest of the letter of claim isn’t.

To avoid making this mistake, you should write two letters. You should write a letter of claim which only refers to the full amount you’re claiming and then a second letter that contains the offer of settlement.

Only the second letter should be headed “without prejudice”. Then, the trial judge can see your letter of claim and the details of your settlement offer will be kept separate.

  1. The final mistake is that the words “without prejudice” are not actually used

This isn’t really too much of an issue because strictly speaking you don’t have to use them. Even without being marked “without prejudice”, any genuine offers of settlement are automatically considered to be “off the record”.

But, by saying they are without prejudice, it avoids any confusion and prevents offers being inadvertently disclosed to a judge.

In my view, if you’re unsure whether something is without prejudice or not, it’s better to leave the words off. However, make sure that any settlement discussions are contained in a separate letter.

A final point on the “without prejudice rule” is that it applies to verbal discussions too. Sometimes, you will talk about your dispute and you will want to refer to those discussions at trial. Other times you will want to talk about a settlement and the discussions will be without prejudice.

It’s easier to separate parts of a conversation than it is to separate parts of a letter. However, you should, if you can, make it clear when you have stopped talking about your dispute and have switched to discussing a settlement.

As you can see, there was nothing for my client to worry about. By explaining about pre-action protocols and the without prejudice rule, I was able to put his mind at rest.

If you ever find yourself in a similar position, attempting to settle a dispute on terms you’re happy with is always the best option. If the negotiations don’t work out, then you can proceed with legal action without worrying that your position has been compromised.

If you have any questions about trying to resolve business disputes please feel free to email me at editors@businessadvice.co.uk and I’ll happily answer them for you.

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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