Barnetson v Framlington Group Ltd and another: [2007] EWCA Civ 502

CA: Auld, Longmore and Toulson LJJ: 24 May 2007

The claimant was engaged by the first defendants for a two-year term as their chief operating officer on 7 March 2005 on terms, agreed orally with the company chairman, which included an annual salary of £172,500 and standard benefits. The claimant also understood from his discussion with the chairman that he would be allotted restricted shares in the company and would receive guaranteed and discretionary bonuses. He began work immediately but a conflict developed between the claimant and the chairman, who would not confirm that the shares and bonuses were part of the employment package. On 25 April 2005, under pressure from the chairman, the claimant signed a document purporting to set out the terms of his contract which did not mention the share entitlement. Further attempts by the claimant to sort out the matter were rebuffed. In October 2005 the claimant wrote raising the matter again with the chairman, and, after an exchange of views on the telephone, was told that he would be dismissed at the end of the year. Discussions then took place about the terms on which the claimant's employment would be terminated, during which the defendants offered to compromise the bonus claim for sums of up to £200,000. The claimant was presented with a draft compromise agreement which he refused to read but which was said by the defendants to have been marked "without prejudice". On 13 December 2005 the claimant wrote threatening legal proceedings if the dispute was not speedily resolved. He was dismissed on 31 December 2005 and issued proceedings in April 2006, inter alia, for breach of contract in relation to the restricted shares and the bonuses. In preliminary proceedings the judge refused an application by the defendants to strike out from the claimant's witness statement references to the compromise terms which had been offered during the negotiations in November and to the letter of 13 December 2005. The judge held that the disputed passages in the witness statement referred to exchanges which had taken place before the commencement of litigation at a time when there was no basis for potential litigation and therefore no dispute.

The defendants appealed.

The Court of Appeal held:
The "without prejudice" rule was founded chiefly on a basis of public policy, namely the need to encourage the settlement of disputes without recourse to or continuation of litigation, and, to give full effect to that policy, the rule could be engaged in a dispute in which litigation had not begun. While the ambit of the rule should not be extended further than was necessary to promote the public policy interest, the validity of a claim to privilege turned on the subject matter of the dispute rather than on the distance in time between the first airing of the dispute and the start or threat of litigation. The crucial consideration was whether in the course of negotiations the parties contemplated or might reasonably have contemplated litigation if they should not agree. Given the amount of money in issue and the manner and content of the parties' negotiations, the parties were clearly conscious, at the time of the disputed exchanges, of the potential for litigation in the event of failure to agree, and the defendants were entitled to an order requiring them to be removed from the claimant's witness statement.

The appeal was allowed.

Appearances: Paul Nicholls (Slaughter & May) for the defendants; Peter Oldham (Ferguson) for the claimant.