Don't get caught out: not all settlement negotiations are protected by the without prejudice rule

An employer that wants to exit an employee from their organisation will usually enter into settlement discussions on a without prejudice basis. If negotiations fail, those conversations can't be referred to in any subsequent litigation. The underlying principle behind that policy is to encourage parties to settle their disputes without having to go to court. In order to apply, the parties must be in dispute with each other - if they are not, their negotiations won't be protected even if they use the expression 'without prejudice'. Conversely, even if the parties don't expressly state that their negotiations are 'without prejudice', the rule will still apply if they were attempting to resolve a dispute. 

In Scheldebouw v Evanson, the EAT had to determine if a company's offer of £68k to compensate an employee for untaken holiday could be referred to his tribunal claim.

Facts

Mr Evanson was the chief risk officer for the company, a position he'd held for a number of years. In 2018 the company decided that it didn't need a CRO anymore and held meetings in September and October to agree the terms of his exit. These discussions were amicable and the parties expected that they would be able to agree a financial settlement. The company initally offered Mr Evanson £68k to compensate him for holiday he'd accrued but hadn't yet taken (which represented 168 days). 

In early December 2018, the parties reached, a 'gentleman's agreement' about the terms of Mr Evanson's exit. The only sticking point was in respect of his accrued holiday but, at that stage, both parties expected to agree this. 

The company prepared a draft settlement agreement and Mr Evanson suggested some revisions - including increasing the holiday payment to £81k to reflect the 200 days he believed he was owed. This issue wasn't resolved and Mr Evanson was dismissed in March 2019. He issued proceedings in the employment tribunal arguing that the company's decision not to pay outstanding holiday pay amounted to an unlawful deduction from his wages. His claim form referred to the October meeting and to the company's initial offer of £68k. The company argued that this should be redacted as it had been made on a without prejudice basis and, therefore, shouldn't be disclosed to the tribunal.

The tribunal rejected the company's application and ruled that Mr Evanson could refer to the company's opening gambit about the amount of holiday it was prepared to pay him. The without prejudice principle didn't apply because the parties were not in dispute at the time the offer was made. Mr Evanson was happy to retire and the parties clearly believed that they would be able to agree terms. It was only after the first settlement agreement was sent, and rejected by Mr Evanson, that it became clear that they were in dispute. 

The company appealed to the EAT, arguing that the tribunal had misinterpreted the law and had set the 'pass mark' for without prejudice litigation too high.

EAT decision

The EAT said that the tribunal had applied the law correctly to the facts and that the company's offer of £68k could be disclosed to the tribunal. 

Although the EAT opined that knowledge of the offer would not necessarily influence a tribunal at a final hearing, the employer will now feel as though they are on the back foot and may find it harder to defend the claim.

Tips for other employers

1. With the exception of protected conversations (see below) you can only discuss issues with an employee on a without prejudice basis if you are trying to resolve an existing dispute or where you anticipate that litigation is likely if your negotiations break down. 

2. If litigation hasn't yet started, or been threatened, the tribunal will have to determine at what point that changed. Expressing correspondence to be 'without prejudice' won't protect negotiations if that point hasn't yet been reached.

3. Drafting a settlement agreement which you want your employee to sign does not necessarily signal that there is a dispute. In this case, the tribunal said that the company prepared a draft settlement agreement to tie up loose ends and had taken a sensible commercial precaution; it didn't imply that the  company was worried about its litigation risk. The EAT put it this way:

'Experienced people will be aware that there is always some theoretical risk of litigation arising out of almost everything they do. That does not mean that they are contemplating litigation every time they become involved in discussions.'  

4. If you are in dispute with an employee and they have issued proceedings or threatened to do so, make sure that any correspondence or discussions with them are made on a 'without prejudice' basis if it's about settlement proposals. If you don't make this clear, you will still be able to claim privilege, but if the other side disputes it, the tribunal will have to determine the point. That will take additional time and, if you are represented, increase your legal fees.

5.  Provided you follow specific rules, you can have a 'protected conversation' with an employee about exiting them from your organisation on agreed terms without those conversations being used against you. However, the protection is limited - it only applies to ordinary unfair dismissal claims which don't include any allegations of discrimination or whistle-blowing, for example. You also won't be able to avoid your negotiations being disclosed during proceedings if you have exerted 'improper behaviour' on the employee (such as pressurising them to accept your offer) or their claim is one of automatic unfair dismissal. 

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