Is the confidentiality of mediation impenetrable?

Summary

• The “without prejudice” (“WP”) rule protects communications or information passing between parties involved in settlement negotiations from being brought before the court as admissions on questions of liability
• The WP rule is a rule at common law founded on the public policy of encouraging parties to negotiate and settle their disputes out of court
• There are a number of exceptions to the WP rule; one of which concerns behaviour in WP negotiations which, if protected by the WP rule, such rule would act as a “…cloak for perjury, blackmail or other “unambiguous impropriety”…”
• The key exceptions in this case were i) when one party alleges that a settlement agreement should be set aside on grounds of fraud, misrepresentation or undue influence and ii) the so-called Muller exception (see below)
• In cases of alleged fraud, such exceptions may be crucial in lifting the lid on an opponent’s underhand behaviour

Facts

The case of Berkeley Square Holdings & Ors v Lancer Property Asset Management Ltd & Ors [2020] EWHC 1015 (Ch) arose out of an arrangement between Lancer Property Asset Management Ltd (“Lancer”) and a number of companies incorporated in the British Virgin Islands (“BVI”) and ultimately owned by Sheikh Khalifa (the Emir of Abu Dhabi and President of the United Arab Emirates). Between them, the Claimant companies owned a portfolio of properties in Central London for which Lancer acted as asset manager. Dr Mubarak Al Ahbabi was responsible for the management of Sheikh Khalifa’s private assets and held powers of attorney from the Claimants.

By way of an agreement made in 2005 (the “2005 Agreement”), Lancer was to be paid a performance fee of 10% of the excess of the net proceeds of the sale of any individual property above its value at purchase (after allowing for annual RPI increases). By a side letter, signed in April 2006 (but back dated) (the “Side Letter”) Lancer’s fees were increased and amended. Both the 2005 Agreement and Side Letter were signed on behalf of the Claimants by Dr Ahbabi.

Dr Ahbabi was the ultimate beneficial owner of two further BVI companies, namely Becker Services Ltd (“Becker”) and Reilly Consultants Ltd (“Reilly). Both of these companies were paid substantial sums by Lancer pursuant to the fees payable under the Side Letter, though these companies did not perform any services in relation to the Claimants’ portfolio of properties or otherwise. Part of the dispute between the parties was whether the Claimants and/or Sheikh Khalifa knew of and authorised such payments.

In 2012, a dispute arose between Lancer and the Claimants, whereby Lancer claimed payment of sums due under the Side Letter in the sum of £75.5 million. The dispute went to mediation, and a Deed of Settlement was executed by Dr Ahbabi on behalf of the Claimants.

The current proceedings were issued in 2018. The claim alleged that Lancer and its directors had been complicit in a substantial fraud perpetrated on the Claimants by Dr Ahbabi, in dishonest breach of his fiduciary duties. The Side Letter was considered to be the main instrument of fraud, which had significantly increased the management fee due under the 2005 Agreement. The Claimants claimed that it was only in May 2017 that they had become aware that Becker was Dr Ahbabi’s company, that Lancer had paid Becker £32 million and that Becker had provided no services to Lancer. However, the Defendants relied upon their position statement and response submitted in the earlier 2012 mediation which made reference to payments to Becker totaling £27.4 million.

The position statement and response were both marked “without prejudice” and it is not contested that both sides’ position statements fall within the WP rule. Therefore, the question before the court in this case was whether the Defendants could rely on one of the exceptions to the WP rule.

Exceptions to the WP rule

The underlying policy of the WP rule is that stated by Oliver LJ in Cutts v Head [1984] Ch 290, 306 namely:  “It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations…may be used to their prejudice in the course of the proceedings.” However, as quoted by Roth J at para 42 of his judgment, in Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 Lord Griffiths acknowledged that “…the rule is not absolute and resort may be had to “without prejudice” material…when the justice of the case requires it.” [emphasis added]

In Unilever Plc v Proctor & Gamble Co [2000] 1 WLR 2436, Robert Walker LJ considered the exceptions to the WP rule as follows:

1. If it is contested whether or not a compromise agreement has been reached through without prejudice communications, then such communications will be admissible.
2. Where the issue is whether an agreement concluded during negotiations should be set aside on the ground of misrepresentation, fraud or undue influence then evidence of the negotiations shall be admissible.
3. Where there is no concluded compromise agreement, but there are grounds for an estoppel argument based on something which was said as part of negotiations.
4. Where another party’s behaviour in WP negotiations amounts to perjury, blackmail or other “unambiguous impropriety”.
5. Evidence of negotiations may be admissible in order to explain delay or apparent acquiescence.
6. Described as the Muller exception after the case in which it was established (see Muller v Linsley and Mortimer [1996] PNLR 74), the exception is understood to come into play where negotiations are relied on to prove some connected matter and the other party to the WP communications will not be prejudiced by their admission, or where the party seeking to rely on the WP rule has raised an issue which can only be determined by admitting WP communications.

Comment

The established exceptions to the WP rule give a number of options to those who consider they have been affected by fraud. In the Berkeley Square case the judge considered that exceptions 2) and 6) were relevant. Of course, exception 2) had always been framed as enabling a concluded agreement to be set aside, whereas in Berkeley Square the Defendants were seeking to rely on the exception to uphold the settlement agreement. Roth J stated at para.52 that: “…the statements here are admissible either under this exception, properly interpreted, or by reason of a small and principled extension of it to serve the interests of justice.” This is the first reported case where this fraud exception has been successfully relied upon, and arguably, extended. This is good news for victims of fraud in such circumstances.

In relation to exception 6), Roth J stated at para.87 that: “…I do not see that the Claimants can fairly advance a case based on their ignorance until May 2017 of certain key facts while excluding evidence that they were told those facts some five years earlier.” To invoke this exception, Roth J made it clear that the privileged evidence of negotiations must be so central that if excluded a fair trial could not take place.

As can be seen from these two short extracts from his judgment, justice and fairness featured heavily in the reasoning of Roth J. At the very heart of the exceptions to the WP rule is the desire to prevent parties from hiding underhand, deceitful and fraudulent behaviour.  This judgment serves as a warning to those hoping to conceal such behaviour in privileged communications.

Should you suspect that you are a victim of fraud or other wrongdoing, please do not hesitate to get in touch at hello@tenetlaw.co.uk