Are negotiations admissible evidence when the charterer is in repudiatory breach of charter?
Without prejudice privilege (WPP) applies to exclude all negotiations genuinely aimed at settlement, whether oral or in writing, from being given in evidence in legal proceedings.
This rule exists as a matter of public policy to encourage parties to settle disputes, rather than to prolong litigate. When negotiations are privileged, parties can be confident that what they say will not prejudice their position on quantum or liability.
Parties typically include ‘without prejudice’ to highlight that the content of that correspondence is intended to settle a dispute, and that correspondence should not be referred to in proceedings without the consent of both parties.
A recent arbitration dealt with whether negotiations in meetings and correspondence were admissible as evidence on the issue of whether the charterer was in repudiatory breach of a charterparty.
“The critical question as to whether privilege applies to discussions was dependent on whether the discussions were aimed to resolve a dispute”
Default on payment
The respondent time charterer chartered a ship on an NYPE form for a period of 118 to 122 months. After the charterer took delivery of the ship, the freight market collapsed and the charterer was unable to pay the hire owed to the disponent owner. The disponent owner terminated the charterparty for repudiatory breach and commenced proceedings against the charterer to recover the outstanding sums.
When the charterer was unable to settle the outstanding demurrage, the disponent owner in turn defaulted on their payment obligations to the head owner who exercised a lien on hire payable by the charterer to the disponent owners and on sub-freights due to the charterer. All parties concerned proceeded to discuss a possible novation, removing the disponent owner from the contractual chain so that the charterer would become liable for the (lesser) hire payments due to the head owner directly.
The disponent owner’s claim submissions referred to several meetings between parties where the novation was discussed. The disponent owner argued that following the meetings they could only conclude that the charterer’s income was inadequate to meet their payment obligations and that the charterer had therefore evinced an intention to no longer be bound by the charterparty and demonstrated an inability to perform their obligations. The charterer asserted that the negotiations about a possible novation were privileged and thus subject to WPP.
Aim of the game
The tribunal held that the critical question as to whether privilege applies to discussions was dependent on whether the discussions were aimed to resolve a dispute. In order to answer this question, it was not necessary for either party to specifically state that discussions were privileged, but rather an objective test had to be applied, having regard to all the material circumstances, in order to determine whether it was implicit that negotiations were without prejudice.
The tribunal held that discussions of a novation did not imply that there was a legal dispute. A novation relates to future commercial relations, not to the past.
The drastic collapse of freight rates between the signing of the charterparty and delivery of the ship had created commercial problems with potentially adverse consequences for the parties in the charterparty chain. The negotiations were intended to find a commercial solution to avoid parties defaulting on their payment obligations.
In this case, the tribunal concluded that at the time of the relevant negotiations the parties were not in dispute and that, accordingly, what was said in those negotiations was not privileged. The charterer’s application to strike out the relevant parts of the pleadings was therefore dismissed.
Where parties are trying to settle a legal dispute without recourse to legal proceedings it is desirable that they should not be inhibited from open discussion by the fear of suffering prejudice in those proceedings. Parties must however be careful to ensure that any discussions are conducted within the confines of WPP or risk these discussions becoming public.