Without Prejudice Letter in Hong Kong litigation

– A Shield As Well As A Sword In Settlement Negotiation

Without Prejudice Letter – What is It?

The nature and application of without prejudice correspondences are by no means strange to lawyers in common law jurisdictions.  Without prejudice communication is a branch of the law of evidence. Its primary purpose is to facilitate settlements in civil proceedings.

Therefore, if a party to a civil action states in his verbal or written communications with the other party in his proposal or negotiation for a settlement of the civil action that such communications are made “without prejudice”, then they will be inadmissible in evidence should the proposal or negotiation fail to result in a settlement. This way, litigants will be able to speak freely in negotiation for settlement without the fear that what he says or writes in the process will be used as evidence against him should settlement fail.

For example, in a typical running down case where the plaintiff being a pedestrian who was injured in a car accident commences a civil proceeding against the driver of the vehicle for damages of, say, $1,000,000. The defendant’s lawyer, shortly after the commencement of the litigation, believes that the defendant driver does have a responsibility, but the amount of damages he has to pay does not amount to $1,000,000. So, he made a settlement proposal of, say, $500,000. When he writes to the plaintiff’s lawyer to put forward this proposal, he should state in his letter “without prejudice”, failing which if the plaintiff’s lawyer rejects the settlement proposal he can use it as evidence of admission of liability by the defendant to the extent of $500,000 and ask the court to grant judgement in such an amount.

Inadmissibility of Without Prejudice Letter

However, the inadmissibility in evidence of without prejudice communications is not absolute, and is subject to exceptions.

If the relevant without prejudice letter or communication discloses fraud or other criminal offences, it may still be admitted in evidence to prove such fraud or criminal offence.

Also, if the letter is marked “without prejudice, save as to costs “, it is still admissible for determining the issue of costs. And it is in this scenario that without prejudice correspondences can be used as a sword in settlement negotiations.

Cost Consequence of Without Prejudice Letter

In common law jurisdictions, the general principle is that cost follows the event in civil proceedings, which means whoever wins the lawsuit will be awarded his legal costs. In the above example, if the plaintiff wins the lawsuit in the end and the court finally awards him $1,000,000, the defendant will also need to pay the plaintiff’s legal costs.

In the same example, if the defendant’s lawyer marks “without prejudice” in his offer of settlement of $500,000 to the plaintiff, there is no doubt that the plaintiff cannot disclose the defendant’s offer letter to the court should the settlement offer not be accepted. But for the defendant’s lawyer, this strategy is defensive at best. If he wants to turn defensive into offensive, he should mark in his offer letter “without prejudice, save as to costs”, so that if the plaintiff rejects such offer, the defendant’s lawyer can still show the offer letter to the court for determining the issue of costs.

In the above example, if the plaintiff’s lawyer rejected the defendant’s offer of $500,000 and the proceedings continues but the court finally holds that the plaintiff is only entitled to damages of $500,000 or less, the defendant’s lawyer can still produce the offer letter (which is marked “without prejudice, save as to costs”) to the court and ask the court to award him costs (incurred after his offer was rejected), notwithstanding that the plaintiff wins the lawsuit.

The reason is that the law takes the view that had the plaintiff accepted the defendant’s offer of $500,000 in the first place the civil proceeding would have been unnecessary and discontinued and the fact that the plaintiff is only awarded $500,000 (or less) in damages proves he was acting unreasonably in rejecting the defendant’s offer in the first place so he should pay the defendant’s legal costs incurred after his rejection of the settlement offer. Therefore, when the defence lawyer makes a settlement offer marked with “without prejudice, save as to costs”, he is turning his strategy from defensive into offensive in that the settlement offer puts the plaintiff’s lawyer under pressure to consider the offer seriously or he will have to face the risk of being penalised in costs should he get less than the amount offered from the court at the end of the day. In this connection, one should not under-estimate the amount of costs in civil proceedings, since in common law jurisdictions civil proceedings have to undergo lengthy and costly procedure before they can be set down for hearing, and such costs could range from hundreds of thousands to millions in large and complex cases.

Of course, in the above example, if the plaintiff is finally awarded more than $500,000 in damages, he can get his legal costs as well. Therefore, without prejudice correspondences should always incorporate accurate calculation of damages, which if coupled with manipulative bargaining strategy of the lawyers, could achieve terms of settlement favourable to a party without the need to have a hearing by the court. The difficulty however is that quantum of damages in civil proceedings cannot always be predicted with certainty, so besides legal strategy and knowledge, luck is always important!

 

Author, Mr. Edward Tai, consultant of our firm. Born and educated in Hong Kong, he is a solicitor admitted in Hong Kong, Australia (NSW & SA) and England & Wales. He started off his legal career by practicing as a commercial litigator in Hong Kong. After that, he went in-house in different roles of counsel, head of legal and/or company secretary etc.  In the last 10 years, he has been mainly focused in the law and commercial practice relating to cross-border M&A, corporate finance and listing compliance. Please contact Edward by his email edwardtai@cnhklawyer.com



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