English Court of Appeal considers the "unambiguous impropriety" exception to without prejudice privilege

Introduction

The English Court of Appeal has handed down its judgment in the case of Motorola Solutions, Inc. and another v Hytera Communications Corporation Ltd. and another¹, which concerned the issue of whether a statement made during a "without prejudice" meeting was nonetheless admissible in evidence, on the basis that it fell within the "unambiguous impropriety" exception.

The decision highlights the way in which the English Courts impose a very high threshold for parties who seek to override the protection afforded by the "without prejudice" rule - which is intended to create an environment in which parties seeking to resolve their disputes can speak freely to one another, absent the concern that those communications/discussions may later be referred to in open court.

Background

The issue before the English Courts arose from a US judgment obtained by the Respondents ("Motorola") against the Appellants ("Hytera") in February 2020, pursuant to which Hytera was required to pay Motorola several hundred million dollars in damages.

In March 2020, Motorola issued an application in the English Courts for a domestic freezing order against Hytera and two of its indirect UK subsidiaries.  To support its case that there was a real risk of dissipation of assets, Motorola relied on the evidence of one of its in-house lawyers regarding statements made by Hytera's former CFO during without prejudice settlement meetings in the United States in October and November 2019.

In summary, it was alleged by Motorola that Hytera's CFO told Motorola that Hytera would take steps to limit Motorola's ability to enforce a judgment in western jurisdictions (such as the US and UK), by concentrating its assets in China and other jurisdictions where enforcement would be more difficult.  Motorola alleged that this had been described by Hytera as a "retreat to China".

Although Hytera accepted that it had referred to a "retreat to China" it disputed Motorola's interpretation of what it had said.  Hytera submitted that it did not indicate a plan to avoid enforcement, but simply reflected the commercial reality that it would need to focus on its key markets in China and elsewhere if a substantial judgment were to be enforced against its business and revenue around the world.

First instance decision

At first instance, Mr Justice Jacobs held that a threat to deal with assets in order to frustrate a judgment would constitute unambiguous impropriety.  He then addressed the evidential standard that a party seeking to rely on without prejudice communications must satisfy before without prejudice privilege will be disapplied, concluding that the relevant test was whether there was a "good arguable case" or a "plausible evidential basis" that there had been an unambiguous impropriety.  This did not require him to determine what was said, but instead to address whether, if Motorola's evidence regarding what was said was true, that would amount to unambiguous impropriety.

The judge accepted that there was scope for misunderstanding what had been said at the meeting, but the judge's view was that this was irrelevant because all he had to decide was whether Motorola's evidence amounted to a good arguable case.

Hytera appealed the first instance judgment on the grounds that the judge:

• was wrong to have concluded that that the CFO's statement amounted to unambiguous impropriety; and
• had applied the wrong test for admissibility of the evidence – he should have held that the relevant impropriety had to be proved unambiguously.

Court of Appeal's judgment

The Court of Appeal unanimously allowed the appeal and held (in a judgment delivered by Lord Justice Males) that the without prejudice statements should not have been admitted into evidence.

In reaching this view, the Court of Appeal considered the prior authorities relating to the unambiguous impropriety exception, many of which involved the covert tape recording of without prejudice meetings.  In those cases, there was no scope for a dispute as to what was said – only whether the evidence was admissible.  By contrast, in the present case the Court was being asked to accept Motorola's interpretation of what was said at the without prejudice meeting, and find that it was improper.

In relation to one of the cases considered (Fazil-Alizadeh v Nikbin²), Males LJ identified three points from the judgment which he considered of importance to the present appeal:

1. the without prejudice rule must be "scrupulously and jealously protected" so that it does not become eroded;
2. even in a case where the "improper" interpretation of what was said at a without prejudice meeting is possible, or even probable, that is not sufficient to satisfy the demanding test that there is no ambiguity;
3. evidence which is asserted to satisfy this test must be rigorously scrutinised. While this last point had been made with particular emphasis in the context of evidence procured by clandestine methods, the point itself applies generally.

Males LJ noted that adopting the above approach is inconsistent with an approach "which simply takes at face value the evidence of a party seeking to disapply the without prejudice rule".

Consequently, the Court of Appeal held that the first instance judge was wrong to have applied the "good arguable case" test, which was inconsistent with the weight of prior authorities and would constitute an unjustifiable erosion of the without prejudice rule.  Males LJ noted that if that were the correct test, the result would be that parties would need to be careful not to say anything that might be misconstrued and would need a careful record of the without prejudice discussion.

The Court of Appeal drew the following conclusions from the cases:

"the courts have consistently emphasised the importance of allowing parties to speak freely in the course of settlement negotiations, have jealously guarded any incursion into or erosion of the without prejudice rule, and have carefully scrutinised evidence which is asserted to justify an exception to the rule".

The cases where the unambiguous impropriety exemption has been recognised are rare, and generally where there is no scope for dispute regarding what was said.

It was acknowledged that there are competing considerations: (i) setting a threshold that is too high – resulting in abusive statements not being admitted in evidence and impropriety not being exposed; and (ii) setting the threshold too low – resulting in statements which are not abusive being admitted into evidence, with the effect being that frank discussions in without prejudice meetings will generally be inhibited.  The Court of Appeal concluded that the authorities:

"firmly and rightly set their face against any erosion of the without prejudice rule even if that means some statements disclosing or constituting impropriety, albeit not unambiguously so, retain the protection of the rule.  The policy choice is that the public interest in the settlement of litigation outweighs the risk of abuse of the privilege in individual cases".

The Court of Appeal held that, instead of asking whether there was a good arguable case, the judge should instead have asked "whether the evidence before him established an unambiguous impropriety". 

The Court of Appeal went onto consider whether there was unambiguous impropriety.  It concluded that upon being "rigorously scrutinised" the substance of the "retreat to China" strategy was not improper.  It noted that the strategy was presented to Motorola as one of two options in response to any adverse judgment (the other option being an appeal) and that none of the specific steps identified as part of the strategy involved any impropriety.  Hytera's explanation put what was said into context. The judge's observation that there was scope for misunderstanding as to what was said was justified, so it was impossible to say that the evidence established unambiguous impropriety.

Comment

This case is a helpful reminder of the extent to which the English Courts will protect the without prejudice rule. 

From a public policy perspective, there are compelling reasons to maintain the sanctity of the without prejudice rule, so that parties can freely and openly conduct settlement discussions under the protection of the without prejudice umbrella, without being unduly inhibited by the concern that anything said in that context will later be used against them in Court. 

Notwithstanding the above, parties entering into without prejudice discussions should have in mind that there is a point where an overly aggressive or threatening negotiation strategy could cross the line and be considered by the Court as going beyond what was "permissible in settlement of hard fought commercial litigation"³ – which could result in the without prejudice protection being lost.

However, such occurrences are likely to be rare and this judgment is a useful illustration of how difficult it is for a party to succeed in invoking the unambiguous impropriety exception, save in the clearest of cases (for example, where an improper threat is made during the without prejudice discussions themselves⁴).  Furthermore, the position is likely to be even more challenging for an applicant where the relevant statement is not evidenced in a recording or in written form.