It is commonly understood that the relationship between a regulator and the people and companies it regulates is a complex one, where non-compliance may be addressed through a process of management and negotiation.

In some cases, these negotiations will take place in the context of contemplated or threatened proceedings between the regulator and the regulated entity, or in circumstances where proceedings have already been commenced, and the two are attempting to seek a negotiated resolution.

In either case, it is important for regulators to have an understanding of the evidentiary privilege that applies to without prejudice negotiations, so that they can tailor their enforcement and negotiation practices accordingly.

What is the 'without prejudice privilege'?

The without prejudice privilege applies to communications and documents made or created in the course of genuine negotiations to settle a dispute.

The privilege applies to protect parties so that they can make settlement offers in the context of a civil dispute, without fear that the content of their settlement negotiations will be used as evidence of some concession of liability.

Although it forms part of the common law, in Victoria, New South Wales, the ACT, the Northern Territory, Tasmania and in the federal jurisdiction, the without prejudice privilege has been codified, and amended in some respects, by section 131 of the Uniform Evidence Acts.

What does the privilege apply to?

The without prejudice privilege applies to:

• Communications that are made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of a dispute
• Documents prepared in connection with an attempt to negotiate a settlement of a dispute.

The without prejudice privilege does not apply to all disputes. Rather, it only applies in relation to existing civil litigation, or where there is a prospect of civil litigation.

Significantly for regulators, the without prejudice privilege does not apply in connection with an attempt to negotiate the resolution of a criminal proceeding.

What is the effect of the privilege?

When a communication or document is made on a without prejudice basis, it cannot generally be entered into evidence, except in limited circumstances discussed in more detail below.

Without prejudice is a joint privilege, and cannot be waived unilaterally

Importantly, the without prejudice privilege is a joint privilege that protects equally the maker and the recipient of the communication.

For example, Dodgy Brothers are a regulated entity, whose business registration has recently been cancelled by the regulator for critical non-compliance with the relevant legislation. They are seeking the review of that decision in an administrative tribunal. In the course of the proceeding, Dodgy Brothers wrote a letter to the regulator, incorporating an offer made on a without prejudice basis for the settlement of the review proceeding, on the basis that their registration will be restored in exchange for some lesser sanction.

If the without prejudice privilege applies, the regulator cannot produce that letter to the tribunal as evidence of a concession by Dodgy Brothers in respect of their non-compliance. Similarly, however, Dodgy Brothers also cannot produce that letter to the tribunal, even if they decide at a later point in time that they wish to do so, unless the regulator also agrees, or they are entitled to rely upon one of the exceptions to the without prejudice privilege.

Because of the joint nature of the privilege, and the mutual protection it affords, a without prejudice meeting between a regulator and regulated entity can be a very useful way to hold a frank conversation about the concerns held by each, where a dispute might otherwise result in litigation.

Substance over form

The test for determining what is protected by the without prejudice privilege will be a matter of substance over form.

For example, the simple fact that a letter is marked 'without prejudice' does not mean it necessarily attracts the privilege. In order to be privileged, the letter must be written in connection with an attempt to negotiate a settlement of a dispute.

Similarly, there is no strict legal requirement that a person making a without prejudice communication actually specify that they are speaking or writing on a without prejudice basis.

In some cases, particularly in very heated or adversarial negotiations, it can be difficult to determine whether the without prejudice privilege will apply to a particular communication.

For example, where a letter is marked without prejudice, but is essentially a demand or an assertion of rights, and cannot be connected with an attempt to negotiate a settlement, it may not attract the without prejudice privilege. However, courts have generally adopted a fairly conservative approach to this issue. Accordingly, in some cases, a demand marked 'without prejudice' may be regarded as the opening shot before subsequent negotiations, and the privilege will apply.

In our view, if a regulator wishes to make a without prejudice offer or hold a conversation in the context of a dispute, the best practice is to communicate clearly that you wish to do so on a without prejudice basis. In the interests of clarity, you should use the term 'without prejudice', and explain its meaning if necessary. Other phrases, such as 'off the record', should be avoided – they have no defined legal meaning, and will be open to interpretation by a court.

Firstly, there is a practical reason for being upfront about when you wish the without prejudice privilege to apply – indicating clearly that you wish to communicate on a without prejudice basis will minimise disputes about the status of the communication at a later date, and encourage the other party to respond in kind. Clarity in this respect would also be consistent with a regulator's obligations under any model litigant guidelines that may apply.

Secondly, there is also a legal reason to specify if communications are without prejudice. In particular, previous court decisions have indicated this will generally give rise to a presumption that the person is attempting to resolve a dispute, unless the circumstances indicate otherwise.

Exceptions to the Rule

In many cases, practical questions will arise not in respect of whether a particular communication was made on a without prejudice basis, but whether any exceptions will apply so that the communication can be entered in evidence before a court in any event.

Those exceptions are contained in section 131(2) of the Uniform Evidence Acts, and there are too many to be covered in detail here. However, the exceptions that may be of particular interest to regulators are dealt with below.

Exception: Costs

In jurisdictions where the Uniform Evidence Acts apply, any communication made on a without prejudice basis may still be referred to a court if relevant for determining liability for costs in a proceeding.

This might be particularly relevant if the without prejudice communications show that one party has acted unreasonably in the course of the proceeding, or has pursued litigation for a collateral purpose that is unrelated to the enforcement of their rights or the determination of a genuine dispute.

In that case, although the communications cannot be entered in evidence on the actual matter in dispute, they may be admitted when the court or tribunal determines which party should bear the costs of the proceeding.

When a regulator is writing a letter that it wishes to refer to a court or tribunal on the question of costs, the best practice would be for it to indicate clearly its intention in the letter itself, although this is not strictly necessary under the Uniform Evidence Acts. As a practical matter, by giving clear notice in this way, the regulator will be acting in a manner that is proper to a model litigant, and the letter is also likely to have greater weight when considered by a court.

For more information on settlement offers made 'without prejudice save as to costs', see our previous article here.

Exception: Where necessary to avoid misleading the Court

Another important exception arises where it is necessary to introduce evidence of without prejudice communications in order to avoid misleading the Court or tribunal.
Although not in a regulatory context, this exception was recently considered by the Fair Work Commission in Hammerton v Knox Grammar School [2013] FWC 9024.

Ms Hammerton was a teacher employed by Knox Grammar School, who had been engaged in without prejudice discussions with the School in relation to a dispute regarding her employment. The discussions were not successful in resolving the dispute, and Ms Hammerton resigned shortly afterwards.

Ms Hammerton brought a claim in the Fair Work Commission regarding her resignation from the School, indicating in her evidence that she had no choice following the breakdown of negotiations but to resign or be dismissed.

The School contended that the Commission would be misled by Ms Hammerton’s evidence if it could not hear evidence concerning the without prejudice negotiations, which the School said tended to contradict her evidence that she subsequently had no choice but to quit or resign.

Deputy President Sams, the Commissioner hearing the matter, accepted the School's argument and held that the evidence could be admitted. Although evidence of the negotiations could not have been admitted in relation to Ms Hammerton's original dispute, it was necessary to understand her claims regarding her resignation in the context of the earlier without prejudice negotiations, and in order to avoid the likelihood that the Commission might be misled.

The important lesson for regulators is that, although without prejudice communications won't be used as a concession of liability, they might still be admitted in evidence if they are put in dispute in some other way. To provide an example that might easily arise in a regulatory context, if a regulated entity had been made aware of certain facts in the course of a without prejudice conversation, and then later claims ignorance of those facts, it is likely that evidence of the earlier conversation would be admissible to avoid misleading the Court.

Exception: Where the communication or document affects a right of a person

This exception has a potentially very broad scope, and serves to confirm the true purpose of the without prejudice privilege.

Effectively, the without prejudice privilege will serve to protect a party to a negotiation in relation to any concessions they may make regarding an existing dispute, but it may not provide any protection if their conduct in the course of that negotiation gives rise to a new cause of action or legal issue.

For example, Loose Lips Pty Ltd are involved in a without prejudice negotiation with a regulatory authority, in the course of which they disclose the substance of the advice provided by their lawyers. Generally speaking, by disclosing the substance of their legal advice, Loose Lips would have waived their right to assert legal professional privilege in respect of that advice.

In that case, because Loose Lips' disclosure of that advice, even in a without prejudice conversation, impacted their right to claim legal professional privilege in respect of the advice, it is likely the statement could be admitted as evidence against them in relation to that issue.

Exception: Communications made in furtherance of a fraud / crime / civil penalty / abuse of a statutory power

In addition, the without prejudice privilege will not apply to communications made, or documents created, in furtherance of a fraud, crime, civil penalty offence or the abuse of a statutory power.

In many regulatory schemes, it is a crime or a civil penalty offence to provide false information to the regulator, either generally or in a particular context. The fact this was done in the course of a without prejudice communication will be unlikely to prevent that communication from being entered in evidence in relation to a prosecution of the offence.

Similarly, from a regulator's perspective, if communications made on a without prejudice basis indicate that the regulator is proposing to act in a way that would be an abuse of its statutory powers, and then does so, those communications might also fall within the scope of this exception.

Conclusion

In relation to the more contentious issues within their scope of responsibility, regulators may seek to resolve potential disputes by negotiating compliance, while keeping one eye on the fact that some matters will inevitably come before a court or tribunal.

In the course of those negotiations, an understanding of the law and the practical issues regarding without prejudice privilege will allow regulators to make the most of their negotiations, while also understanding what matters can, and cannot, be raised in evidence in the event that negotiations break down.

If you have any further queries regarding without prejudice negotiations, please contact one of the authors below, or a member of Maddocks' Commercial Disputes team.

If you have any questions regarding the issues discussed in this article or any other regulatory matters, please contact the authors or a member of our Regulation and Compliance team.