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The scope of the fraud exception to the without prejudice rule

June 30, 2021

In Berkeley Square Holdings & Ors v Lancer Property Asset Management Ltd & Ors [2021] EWCA Civ 551, the Court of Appeal provides useful guidance on the scope of the ‘fraud exception’ to the ‘without prejudice’ rule.

The facts

The claimants owned a portfolio of properties, which was dealt with by an individual under a power of attorney (the Attorney).

Between 2004 and 2017, the portfolio was managed by the respondents. During that time, in 2012, a dispute arose over the respondents’ management fees but it was settled following a mediation.

Some nearly six years later, in 2018, the claimants commenced proceedings in which they alleged that the respondents were “complicit in a substantial fraud perpetrated on the claimants” by the Attorney, whereby the management fees payable to the respondents were increased and the Attorney was granted the authority to direct the respondents to make payments to a company that he controlled. The claimants contended that they only learned of these payments in 2016.

In their defence, the respondents contended that the claimants had known of the payments since at least 2012. To that end, the respondents relied on position statements from the 2012 mediation, in which the respondents referred to the payments. As is commonly the case, the mediation position statements were marked ‘without prejudice’, which would ordinarily prevent them being admitted as evidence, but the respondents argued that they were admissible under (inter alia) the ‘fraud exception’ to the ‘without prejudice’ rule.

The claimants sought to strike out the relevant parts of the defence on the basis that they referred to ‘without prejudice’ communications and as such were inadmissible.

The decision

The ‘fraud exception’ provides that evidence of ‘without prejudice’ negotiations is admissible to show that an agreement concluded by the parties during these negotiations should be set aside on grounds of misrepresentation, fraud or undue influence.

The claimants argued that this exception did not apply, since the respondents were seeking to uphold the settlement agreement and not to set the agreement aside.

The Court of Appeal agreed with the decision in the High Court at first instance that this approach “would lead to an unprincipled asymmetry”. The Court of Appeal said that the ‘fraud exception’ is directed at determining whether a contract concluded during or as a result of ‘without prejudice’ negotiations has been made with the necessary consent of the parties or whether either party’s consent was invalidated by misrepresentation, fraud or undue influence (though it noted that this is not an exhaustive list, e.g. duress could also qualify).

The claimants’ case was that the Attorney had no authority to commit them to the side letter or the settlement agreement, pursuant to which the payments were made, because he had an undisclosed interest in both. The claimants’ knowledge of the relevant arrangements was therefore central to this issue and the position statements went directly to the question of claimants’ knowledge at the time of the settlement agreement. As the claimants would have been able to adduce the position papers as evidence of their knowledge of the arrangements, then the defendants must also be able to do so. Accordingly, the ‘fraud exception’ could be used defensively, to defend allegations of fraud and to uphold an agreement, as well as offensively, to evidence fraud and to set it aside.

The ‘fraud exception’ applied to the circumstances of the case and the position statements were admissible thereunder.

Comment

The Court of Appeal’s analysis of the ‘fraud exception’ represents a helpful clarification of the extent of that rule (or in the words of Roth J in the High Court belowa small and principled extension of it to serve the interests of justice”).

Evidence of ‘without prejudice’ negotiations is not just admissible to show that a contract agreed during such negotiations should be set aside on grounds of misrepresentation, fraud or undue influence – it is admissible to show whether the contract has been made with the necessary consent of – and is therefore binding on - the parties; and this lack of consent might arise otherwise than just as a result of misrepresentation, fraud or undue influence.

Moreover, the court held that there should be no distinction between this evidence being used to set aside an agreement or to defeat a claim to set it aside, meaning that it could be used both offensively and defensively.

With thanks to Maria Zeber for her assistance with this post.