A CASE WHERE LAWYERS BECOME RESPONDENTS TO THE ACTION WHERE A PARTY IS SEEKING TO RECOVER COSTS: ALSO WAIVING PRIVILEGE IN WITHOUT PREJUDICE CORRESPONDENCE

Technically speaking, the judgment of Mrs Justice Andrews in Willers v Joyce & Ors [2019] EWHC 937 (Ch) is about the “without prejudice” rule. However the point that has caught everyone’s attention is the fact that lawyers, previously  acting for a litigant, are now respondents in an action.  However it is important that litigators do not overlook the potential consequences of writing “without prejudice except as to costs” in place of “without prejudice”. The difference between these two wordings is significant and played a major role in the outcome of this application.

THE CASE

Mr Willers brought an action for malicious prosecution against the defendant (and subsequently his estate).  Solicitors, leading and junior counsel (“the lawyers”) had represented Mr Willers under a Conditional Fee Agreement.

Mr Willers’ claim was brought because a company “Langstone” had brought an action against him which it subsequently discontinued.  Mr Willers sought the costs of that action against Langstone but “only” £1.450,000 of the  £3.4 million claimed as costs was allowed on assessment.

In this action, the malicious prosecution action,  Mr Willers sought to recover the shortfall as costs in damages from Mr Gubay’s estate, in addition to other heads of claim.

That action was dismissed at trial. Mr Willers was ordered to pay the Executor’s costs, to be assessed, with £1 million to be paid on account of costs.  Mr Willers did not pay that sum.   The successful defendant applied for, and was successful, in obtaining an order that Mr Willers’ lawyers become parties to the action for the purpose of recovering costs.

THE ROLE OF MR WILLERS’ LAWYERS

The judge observed

1. The Lawyers who represented Mr Willers in the Malicious Prosecution action had a substantial financial interest in its outcome. That interest went beyond the realistic prospect faced by any lawyers acting for an impecunious client that they would not be paid their fees incurred in that action unless their client succeeded and recovered them pursuant to an order for costs against the Executors, or else reached a settlement that was large enough to enable him to pay them. They had a direct interest in the damages, to the extent that they comprised the indebtedness which their client had already incurred in respect of their fees in the Langstone action, and which he was clearly unable to pay from his own existing limited resources.

1. 1. There was a hearing before Rose J on 20 December 2018 to consider an application made by the Executors to join the Lawyers as parties under CPR 46.2 for the purposes of making a claim for costs against them. The application was supported by a witness statement of Mr Thomas dated 14 December 2018. It was the 11^th witness statement that he had made in the Malicious Prosecution action. In paragraph 41 of that statement Mr Thomas explained that his clients were seeking an order for their costs to be paid on the indemnity basis by the Lawyers because they had a direct personal interest in the outcome of the proceedings and were in a position to influence that outcome, despite ostensibly being cloaked in the neutral garb of officers of the court.

   2. The Executors’ case, as summarised by Mr Mitchell QC and Mr Shepherd, is that the Lawyers each:

1. had a direct personal financial interest in the outcome of the malicious prosecution action;

2. provided substantial financial support to Mr Willers in the conduct of the Malicious Prosecution action by (i) failing to enforce payment of the sums allegedly due to them under the CFAs in connection with the Langstone action, and (ii) continuing to provide legal services to Mr Willers in connection with the Malicious Prosecution action without requiring [staged] payment or entering into any agreements regarding the late payments of their fees, or into any further CFAs; and

3. had a very significant influence over the strategy for the conduct of the litigation and, significantly, had a large amount of control over their client’s ability to settle the Malicious Prosecution action and the terms on which he could do so.

1. The facts relied on in respect of each of these limbs of the argument were addressed in earlier passages in Mr Thomas’s 11^th witness statement. Some days after that statement was served, the legal representatives of the Lawyers expressed the view that some parts of the material on which he sought to rely was subject to the “Without Prejudice” rule, and therefore inadmissible in evidence. The pragmatic view was taken that Mr Thomas’s statement and its exhibits would be redacted to remove any references to such material, pending an application in due course to determine whether the Executors could rely upon it.

2. Rose J therefore determined the joinder application without seeing the Contested Material. Having heard the legal arguments, she made an order joining the Lawyers as parties for the purposes of costs only in accordance with CPR rule 46.2 (1) (a). She also gave detailed directions regarding the application against them, including directions relating to the hearing of any application relating to the admissibility of the Contested Material.

3. The substantive costs application is due to be heard by Rose LJ (as she now is) sometime after Easter, although I understand that the date has not yet been fixed. In determining this application, I have taken care to express no views about the merits of that application.

THE CONTESTED MATERIAL

The contested material

1. 1. The Contested Material comprises the contents of:

1. a letter dated 11 September 2018 from De Cruz to Laytons;

2. a letter from Laytons in response to that letter dated 14 September 2018;

3. the response to that letter sent by De Cruz on 17 September 2018;

4. a letter from Laytons to De Cruz dated 24 September 2018,

all of which letters were marked “WPSAC”; and paragraphs 34 to 35 of Mr Thomas’s 11^th witness statement, which makes reference to aspects of what was said in that correspondence.

1. The first letter in this sequence was written in the context of discussions between the respective parties’ solicitors about whether there was any purpose to be served by engaging in a second mediation. By the time that the correspondence took place, apart from a residual matter which still remains to be determined, Mr Willers had lost the proceedings in the Isle of Man. On the basis of the evidence before me, at least, (though the Lawyers’ evidence in the substantive costs application has not yet been served, and thus the evidential position may change) everyone concerned appeared to be aware that there was no realistic prospect of his being able to afford to pay the Executors’ costs of the Malicious Prosecution action if he lost. Indeed, the Executors had put the Lawyers expressly on notice of their intention to claim their costs against them in the event that they were unable to recover them from Mr Willers.

2. In an open letter dated 16 August 2018, Laytons indicated that the Executors were ready in principle to attend a second mediation, but that before any arrangements were made in that regard it would be helpful for the parties to indicate on a “without prejudice” basis whether there had been any shift in their respective positions since the last mediation. They repeated that request in a further open letter of 7 September 2018, stating that if it transpired that Mr Willers’ position had not changed in any material respect, they did not see that any useful purpose could be served by mediating.

3. The open response to that letter sent by De Cruz on 11 September 2018 was to the effect that since both parties had indicated they were willing to mediate without any preconditions, no further response was appropriate. De Cruz’s second letter of 11 September, the first in the sequence of Contested Material, took a different stance. They said that at the first mediation the negotiations hardly got off the ground, and that they did not recall any offers being made until what they characterised as an “absurd offer made right at the end of the day“. They then mentioned a comparatively modest figure which they said had been offered by the Executors “in full and final settlement of the action“.

4. That letter was marked WPSAC, not “without prejudice” as Laytons had invited. It thereby signified an intention on the part of Mr Willers and his legal team to refer to the allegedly derisory last minute offer by the Executors at some future stage in an argument about costs, despite the fact that any such offer was made “without prejudice” and could not be referred to in evidence for that or any other purpose without the assent of the Executors. The most obvious circumstances in which they might wish to deploy the information in an argument about costs would be if the Executors succeeded in the action, and someone who would or might otherwise be liable to pay their costs (including, in these circumstances, the Lawyers) wished to argue that the Executors had behaved unreasonably with regard to attempts to settle the matter in February 2017 and should therefore not recover the full amount of their claimed costs.

5. It would have been open to the Executors to have said that they did not consent to the lifting of the prohibition on use of “without prejudice” material in evidence, even for the purposes of a future argument on costs. However, the Executors’ position was that what de Cruz had said in their letter was a mischaracterisation of what had happened in the 2017 settlement discussions, and that it needed to be corrected.

6. In their response on 14 September 2018, which was also marked WPSAC, Laytons began by stating that the 11 September WPSAC letter completely misrepresented the position, and that it purported to contain information from a strictly without prejudice mediation which would, if true, remain privileged in all circumstances including on questions of costs. However, they then went on to say that they were writing back to set the record straight “on the same WPSAC basis“. They said that at the mediation they had insisted that, in order for there to be settlement, Mr Willers’ lawyers would need to budge on the quantum of their stake in the action, but they had refused point-blank to do so. They then set out their account of the various offers that the Executors had made, and of the final position adopted by Mr Willers at the mediation (mentioning the figure he had demanded). They added that, in particular, Mr Willers’ legal team insisted on payment for them of £3.5 million. Laytons commented that unless Mr Willers’ legal team had budged on what they hoped to recover, there really was no point in having the mediation. Finally, they said they reserved the right to refer to that letter on any question of costs.

7. Pausing there, Laytons were indicating that they were prepared to condone De Cruz referring to what was said and done during the settlement discussions in 2017 at a future costs hearing in which the parties’ behaviour with regard to settlement might be relevant to the exercise of the court’s discretion, but the quid pro quo of that relaxation of the rule would be that they, Laytons, would also be entitled to put forward their version of events in that context for the same purpose, and to correct what they said was De Cruz’s inaccurate account.

8. The next letter in the sequence, also written WPSAC, was the letter sent by De Cruz on 17 September. It began by thanking Laytons for their letter of 14 September. It then stated that Laytons’ note of the various offers and counter offers made by their respective clients at the mediation last year “does not accord with ours.” It did not explain in what respects there is a divergence between Laytons’ note and De Cruz’s note. On the face of it, therefore, it appeared that De Cruz were joining issue with everything that Laytons had said, including their account of the attitude that had been adopted by the Lawyers, and were maintaining their account of the derisory last-minute offer. That letter did not join issue with Laytons’ express reservation of the right to rely on their letter of 14 September at a future hearing on costs.

THE ADMISSION OF ALLEGEDLY “WITHOUT PREJUDICE” MATERIAL

The judge, at this hearing, allowed certain material to be adduced even though it was alleged to be without prejudice. She held that there had been a waiver of the without prejudice rule.

1. 1. That leaves the question of waiver, or agreement that the “without prejudice” material can be deployed. It has been established in the authorities that waiver must be mutual and that it is not to be lightly inferred. However, the parties may expressly agree that communications are “without prejudice save as to costs“. As Robert Walker LJ said in Unilever, when discussing this subject, item 7 on his list, at p.2445C-D:

“[This exception or apparent exception] stands apart from the principle of public policy (a point emphasised by the importance which the new Civil Procedure Rules Part 44.3(4) attach to the conduct of the parties in deciding questions of costs).”

He added:

“There seems to be no reason in principle why parties to without prejudice negotiations should not expressly or impliedly agree to vary the application of the public policy rule in other respects, either by extending or by limiting its reach”.

1. As the case of Somatra Ltd v Sinclair Roche & Temperley (No 1) [2000] 1 WLR 2453 exemplifies, once the protection of the “without prejudice” rule has been waived, the waiver covers the whole of the without prejudice communications and not just those aspects of them that one of the parties has sought to deploy. In that case, one of the parties to the negotiations deployed protected material in evidence on an application for a freezing injunction, and it was held by the Court of Appeal that the other party was free to refer to the whole of the settlement negotiations at trial.

2. Clarke LJ provided two different justifications for admitting the evidence, the narrower of which was that the second party was entitled to use the “without prejudice” material to correct a misleading impression created by the affidavit of the opposing party sworn in support of the freezing order: see [18] – [20]. However, he went on to explain the justification in wider terms which made it clear that the use of the material by the second party was completely unfettered.

3. At [36]-[40] he analysed the position by reference to the two underlying reasons for the “without prejudice” rule, implied agreement and public policy. At [37]-[38] he analysed the first party’s deployment of the material as a repudiatory breach of the agreement by each party not to rely in evidence on anything said or written by the other party in the course of “without prejudice” communications. The second party was entitled to accept the repudiation or hold the first party to its promise. Then at [39] he said that the matter could not be analysed in wholly contractual terms because of the element of public policy recognised in the cases. He described the essential point as being that, in a case such as Somatra, it would be unjust to allow one party to deploy the material for its benefit on the merits in one part of the litigation without allowing the other to do so too in another.

4. The present case is not one in which Mr Willers, or the Lawyers, have actually deployed “without prejudice” material, even though they indicated an unequivocal intention to do so in the relevant correspondence. To that extent Somatra is not directly analogous; but the approach adopted by Clarke LJ is helpful in considering the interpretation of communications that have been labelled “WPSAC”, which are specifically amenable to the contractual interpretation analysis.

5. I have already set out the chain of correspondence in September 2018. It is an important part of the factual matrix that all parties were well aware by then that Mr Willers was a “man of straw” and that the Executors, if they won, would be looking to the Lawyers to pay their costs. By marking the correspondence “WPSAC” I cannot accept that De Cruz were confining the scope of proposed relaxation of the “without prejudice” rule to the hearing of an application for costs against their client. Objectively construed, the initial letter in the run of Contested Material sent by De Cruz on 11 September was intended to be for the benefit of the Lawyers as well as their client Mr Willers. It evinced a clear intention to use evidence about what was said and done during the “without prejudice” settlement negotiations in February 2017 at a future costs hearing (and/or in written costs submissions). This could be viewed as an anticipatory repudiatory breach of the existing “without prejudice” agreement covering the settlement negotiations in February 2017, but in my judgment, it is better characterised as an offer to vary its terms.

6. That offer was accepted by Laytons on behalf of the Executors in their response, which made it clear that both parties would be able to deploy the offers and counter-offers and what was said at the mediation for the purposes of argument about costs. I cannot construe Laytons’ response as being dependent upon De Cruz actually putting the Executors’ behaviour in issue at a costs hearing or being the first party to deploy such material. It assumes that De Cruz and Mr Willers wish to be able to deploy “without prejudice” material in connection with submissions on costs, and assents to that course, on the basis that Laytons can and will also be free to deploy such material in evidence in connection with such submissions. In essence, the parties (including the Lawyers) have agreed to treat the settlement negotiations in February 2017 as if they had always been conducted WPSAC.

7. Although Laytons specifically referred to correcting inaccuracies in De Cruz’s version of events set out in the letter of 11 September, that was the justification given for their clients’ agreement to relax the rule, not a contractual limit being set on the purposes for which the material could be used. If and insofar as Laytons’ letter constituted a counter-offer, that offer was accepted when De Cruz responded in the terms they did on 17 September, again under the express rubric WPSAC, putting Laytons’ version of events squarely in issue for the purposes of a costs hearing without explaining the areas of factual disagreement. There was no objection taken to Laytons’ reservation of the right to deploy the contents of their letter of 14 September at a future costs hearing. By then, there was clearly an issue between the parties as to what offers had been made, when, and why, which the Court dealing with costs would probably have to resolve.

8. At that stage, the parties had agreed that everything said and done at the mediation by or on behalf of either party (including, significantly, Laytons’ version of the final offer made by Mr Willers and the reasons given for it set out in their WPSAC letter of 14 September) could be referred to at a future costs hearing.

9. Mr Carpenter, and Mr Lawrence QC, on behalf of the Barristers, contended that even if there was an agreement (or a mutual waiver) the agreed purpose for which the “without prejudice” material was to be deployed was to demonstrate the reasonableness or otherwise of the level of any offers made and the behaviour of the parties, and there was no agreement that it could be used for some collateral purpose. I do not regard the variation of the underlying express or implied agreement to negotiate “without prejudice” as confining the purposes for which the material was to be deployed or the nature of the material that could be deployed, apart from the fact that it could only be deployed in argument about costs.

10. However, even if the agreement had been limited to matters concerning the level of any offer or the behaviour of the parties (and by necessary extension their legal representatives) it is impossible to segregate an insistence on payment of the £3.5 million and what was allegedly said about its importance as a component in the Willers offer, and treat those aspects of the negotiations as falling outside the scope of the agreement on admissibility. The effect of the agreement is that everything said and done in the context of the mediation is admissible for the purposes of argument on costs.

11. So far as the “without prejudice” conversation between the two solicitors after the mediation is concerned, Mr Carpenter and Mr Lawrence submitted that it was not the subject of the agreement or waiver even if such an agreement existed. It was an entirely separate matter, and when Laytons evinced an intention to refer to that conversation, De Cruz immediately made it clear that they did not agree to this. Mr Lawrence submitted that this was a conversation about what it would take to settle the litigation in future and shed no light on what happened at the mediation or on the attitude towards settlement displayed at the mediation by the parties to it (or their lawyers).

12. If the conversation had taken place weeks or months later, this submission might have had greater force. However, as I have already pointed out, it took place on Tuesday 14 February 2017, only 4 days after the mediation, 2 of which were the intervening weekend. It is also important to consider the context and content of the conversation. It began with Mr De Cruz asking for clarification of the final offer made at the mediation on the previous Friday by the Executors, and then confirming that the offer was rejected. It continued with Mr De Cruz explaining what any settlement agreement would have to include, in the course of which he expressly referred to the amount of an offer to settle which had already been made on behalf of Mr Willers. In context, that can only be a reference to an offer made at the mediation. The figure he mentioned is the same figure as is mentioned towards the end of Laytons’ letter of 14 September 2018. In this respect, and in others, the contemporaneous file note supports Laytons’ version of what happened at the mediation, as set out in that letter. It would help to resolve the dispute about that which had arisen in the course of the WPSAC inter-solicitor correspondence in September 2018.

13. Mr De Cruz also gave a breakdown of that figure which included, as a distinct element, the sum of £3.5 million said to be owed to the Lawyers. What Mr De Cruz is recorded in the attendance note as saying by way of explanation of why the settlement would need to include that £3.5 million, is a repetition of what Laytons said in their letter of 14 September 2018 about the stance adopted by De Cruz/Mr Willers at the mediation. To that extent also it is contemporaneous evidence which is capable of supporting the truth, or accuracy, of the Executors’ version of what was said and done at the mediation. That was, of course, the very reason why Mr Thomas was referring to it in the WPSAC run of correspondence. In the note of the conversation, Mr Thomas responded by setting out his clients’ attitude at the end of the mediation. The conversation then went back to the subject of the importance of the amount of any settlement including the £3.5 million.

14. In my judgment it would be wholly artificial to treat the conversation between the solicitors on 14 February 2017 as anything other than a direct continuation of the settlement negotiations that took place during the mediation the previous week. The agreement to vary the “without prejudice” status of the settlement negotiations in February 2017 to WPSAC so that both parties would be able to deploy arguments at a future costs hearing about each other’s behaviour during those negotiations encompassed this discussion as much as it encompassed the discussions that took place at the mediation itself. It would make no sense to treat those aspects of the conversation that referred back to what was said or offered at the mediation as falling within the varied agreement, but those aspects which sought to explain why Mr Willers had taken that position in the negotiations and was maintaining it after the mediation failed, as falling outside it.

15. De Cruz’s belated realisation that its decision to open up the without prejudice discussions for the purposes of a costs hearing potentially allowed material to be deployed by the other party that it did not wish to be used came too late. The letter of 26 September 2018 was ineffective to limit the scope of the agreement that had already been reached.