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Thursday, December 30, 2010

Insurance Claim Correspondence - the settled "Without Prejudice" Rule

THE  WORLD keeps changing and quite often settled tenets are also challenged.  The business of Insurance companies is to collect premium and to settle claims. The process starts with the Insured intimating the Insurer of the claim and the Insurer issuing the claim form besides the other  formalities.  The claim form would boldly proclaim that “ issuance of this form is not to be  taken as  admission of liability”.   Though not used in e-mail exchanges, all communications from Insurers pertaining to claim used to have the words ‘Without Prejudice”

By definition this words are “ A reservation made on a statement or an offer that it is not an admission or cannot otherwise be used against ”.  in dispute between parties, communication or accomplishment by performance of an act is often seen as admission or a step towards it.  These words are meant to deprive the determinative legal effect and reserving the right of determination independently at a later stage.

This term used in discussion and correspondence in civil dispute or negotiation would mean that the terms or offer so made is not be admitted in evidence without the consent of both the parties concerned.   The words WP when added to letters sought to mean that in the event of a non-agreement, these are not to be relied or quoted on one’s side.

The words,  for the Underwriter, were sought to provide a layer of protection that whatever information was being sought or was being communicated is not determinant of consideration or conclusion of the claim that is being preferred.  The words contained whilst paying a claim would mean that such payment is not be seen as a precedent for future similar claims.  Some Insurers in their wisdom would put ‘without prejudice / without admission of liability  and without precedence to similar claims” – all trying to build a defence fort.

In effect, the communications were intended to be limited, provisional, non-final, inconclusive, non-conditional,  non-binding statements – all in favour of the person making such statements …. The Insurers !!. 

In legal parlance, prejudice is a loss or injury and formal determination against a claimed legal right or cause of action.  In a civil case, dismissal without prejudice is a dismissal that allows refilling of the case in future.  What is being dismissed is the present action but the possibility of filing another suit would remain open.  Most cases are dismissed in finality that they cannot be brought out again.

In Halsbury's Laws of England:  "Letters written and oral communications made during a dispute between parties which are written or made for the purpose of settling the dispute, and which are expressed or otherwise proved to have been made without prejudice cannot generally be admitted in evidence”.

Without Prejudice – are also the words most abused.  Many Attorney will often send letter WP and sometimes Insurers would unwittingly use this even after the claim is concluded and settlement is being effected.

All that is a thing of the past.  In UK  an appeal has raised questions on the scope of the exceptions and the principle that statement made in the course of ‘without prejudice’ negotiations are not admissible  in evidence.   It is a judgment given recently in Oct 2010,  in the High Court of Justice, Court of Appeal in an appeal filed by TMT Asia Limited against Oceanbulk Shipping & Trading SA.

The factual details of this case  are taken from : and not reproduced in its entirety but stated in a very concise form.  Though this was no insurance claim in dispute, the decision is felt relevant to all contracts.   The impugned judgment was on a dispute between  parties relating to forward freight agreements (FFA) on the volatility of freight market of bulk carriers.  It was on the swap agreement on settlement rate in relation to Baltic Exchange index of daily rates of time charter hire for vessels.  One of the parties failed to effect settlement and the parties entered into settlement negotiations which were expressed to be ‘without prejudice’ held between the representatives of the parties and solicitors.  

The party which did not make the payment sought to rely upon the representations which the appellant stated that such reliance was excluded by ‘without prejudice’ rule.    They contended that the other contracting party are not entitled to rely upon those representations as they were made in the course of without prejudice negotiations.

It was recorded that the approach to without prejudice negotiations and their effect has undergone significant development over the years.  It  initially focused on the case where the negotiations between two parties were regarded as without prejudice to the position of each of the parties in the event that the negotiations failed. The essential purpose of the original rule was that, if the negotiations failed and the dispute proceeded, neither party should be able to rely upon admissions made by the other in the course of the negotiations.   It was stated to be a  rule governing the admissibility of evidence,  founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish.

Reference was drawn to the  'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.

The Hon’ble Judge held that the interpretation exception should be recognised as an exception to the without prejudice rule stating that  it is not sought  to underplay the importance of the without prejudice rule or to extend the exception beyond evidence which is admissible in order to explain the factual matrix or surrounding circumstances to the court whose responsibility it is to construe the agreement in accordance with the principles. In particular nothing in this judgment is intended otherwise to encourage the admission of evidence of pre-contractual negotiations.

The appeal was allowed.  This judgment clearly conveys that  in construing a contract between two parties, evidence of facts within their common knowledge is admissible where those facts have a bearing on the meaning that should be given to the words of the contract. This is so even where the knowledge of those facts is conveyed by one party to the other in the course of negotiations that are conducted "without prejudice". This principle applies both in the case of a contract that results from the without prejudice negotiations and in the case of any other subsequent contract concluded between the same parties.

There is lot to learnt from this particular case and in particular mere display of some words might not provide the ‘concrete defence’ that has all along been imagined to exist.

Incidentally, read about another latin phrase “ Nullum crimen, nulla poena sine praevia lege poenali”  - a maxim in contintental European.

The maxim means that  there can be no crime committed, and no punishment meted out, without a violation of penal law as it existed at the time.   i.e., penalties can be imposed only for those offences for which penal provision exists.    Thus,  it is not only the commitment of a crime but also the existence of a previous legal proviso declaring it penal offence which would ensure action against the errant.   

With regards – S. Sampathkumar.


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