Lord Clarke said,
1. This appeal raises a question as to the scope of the exceptions to the principle that statements made in the course of without prejudice negotiations are not admissible in evidence (“the without prejudice rule”).
Specifically, the question is whether facts which
(a) are communicated between the parties in the course of without prejudice negotiations and
(b) would, but for the without prejudice rule, be admissible as part of the factual matrix or surrounding circumstances as an aid to construction of an agreement which results from the negotiations, should be admissible by way of exception to the without prejudice rule.
Without prejudice—the legal principles
19. The approach to without prejudice negotiations and their effect has undergone significant development over the years. Thus the without prejudice principle, or, as it is usually called, the without prejudice rule, initially focused on the case where the negotiations between two parties were regarded as without prejudice to the position of each of the parties in the event that the negotiations failed. The essential purpose of the original rule was that, if the negotiations failed and the dispute proceeded, neither party should be able to rely upon admissions made by the other in the course of the negotiations. The underlying rationale of the rule was that the parties would be more likely to speak frankly if nothing they said could subsequently be relied upon and that, as a result, they would be more likely to settle their dispute.
The exceptions to the without prejudice rule
30. The cases to which I have referred (and others) show that, because of the importance of the without prejudice rule, its boundaries should not be lightly eroded. The question in this appeal is whether one of the exceptions to the rule should be that facts identified during without prejudice negotiations which lead to a settlement agreement of the dispute between the parties are admissible in evidence in order to ascertain the true construction of the agreement as part of its factual matrix or surrounding circumstances.
31. This issue must be put in the context of the exceptions which have already been permitted to the rule. In this connection I again turn to the illuminating judgment of Robert Walker LJ in the Unilever case. Having set out the general principles at pp 2443–2444…which included the general working assumption that the rule has a wide and compelling effect, he said, at p 2444 c-d , that there are nevertheless numerous occasions on which the rule does not prevent the admission into evidence of what one or both parties said or wrote in the course of without prejudice negotiations.
32. Robert Walker LJ then set out (at pp 2444–2446) a list of what he called the most important instances. He described them thus (omitting some of the references) [see separate entry for Unilever].
34. It was submitted on behalf of Oceanbulk that none of those exceptions applies here and that the general principle that one party should not be permitted to cross-examine the other party (or its witnesses) on matters disclosed or discussed in without prejudice negotiations should be applied in its full rigour. Although it was correctly accepted that the point for decision in this appeal was not decided in the Unilever case  1 WLR 2436 , or any of the other cases, it was submitted that the decided cases, especially Unilever and Ofulue v Bossert  AC 990 strongly point the way.
35. By contrast, it was submitted on behalf of TMT that facts which (a) are communicated between the parties in the course of without prejudice negotiations, (b) form part of the factual matrix or surrounding circumstances and (c) would, but for the without prejudice rule, be admissible as an aid to construction of a settlement agreement which results from the negotiations should be admissible in evidence by way of exception to the rule because the agreement cannot otherwise be properly construed in accordance with the well recognised principles of contractual interpretation and because there is no distinction in principle between this exception (“the interpretation exception”) and, for example, the rectification exception.
Should the interpretation exception be recognised as an exception to the without prejudice rule?
36. I have reached the conclusion that this question should be answered [yes] for these reasons. The principles which govern the correct approach to the interpretation of contracts have been the subject of some development, or at least clarification, in recent years as a result of a number of important decisions of the House of Lords
38. It is not in dispute that, where negotiations which culminate in an agreement are not without prejudice, the exclusionary rule applies to the correct approach to the construction of the agreement. Nor is it in dispute that in those circumstances evidence of the factual matrix is admissible as an aid to interpretation even where the evidence formed part of the negotiations…
39. Trial judges frequently have to distinguish between material which forms part of the pre-contractual negotiations which is part of the factual matrix and therefore admissible as an aid to interpretation and material which forms part of the pre-contractual negotiations but which is not part of the factual matrix and is not therefore admissible. This is often a straightforward task but sometimes it is not. In my opinion this problem is not relevant to the question whether, where the pre-contractual negotiations that form part of the factual matrix are without prejudice, evidence of those negotiations is admissible as an aid to construction of the settlement agreement. The two questions are, as I see it, entirely distinct.
40. In these circumstances, I see no reason why the ordinary principles governing the interpretation of a settlement agreement should be any different regardless of whether the negotiations which led to it were without prejudice. The language should be construed in the same way… As I see it, the process of interpretation should in principle be the same, whether the negotiations were without prejudice or not. In both cases the evidence is admitted in order to enable the court to make an objective assessment of the parties’ intentions.
41. The parties entering into such negotiations would surely expect the agreement to mean the same in both cases. I would not accept the submission that to hold that the process of interpretation should be the same in both cases would be to offend against the principle underlying the without prejudice rule. The underlying principle, whether based in public policy or contract, is to encourage parties to speak frankly and thus to promote settlement. As I see it, the application in both cases of the same principle, namely to admit evidence of objective facts, albeit based on what was said in the course of negotiations, is likely to engender settlement and not the reverse… Moreover this approach is the only way in which the modern principles of construction of contracts can properly be respected.
42. Any other approach would be to introduce an unprincipled distinction between this class of case and two others which have already been accepted as exceptions to the without prejudice rule. I have already expressed the view that the rectification exception is correctly accepted because no sensible line can be drawn between admitting without prejudice communications in order to resolve the issue whether they have resulted in a concluded compromise agreement, which was the first exception identified by Robert Walker LJ in Unilever  1 WLR 2436 , 2444, and admitting them in order to resolve the issue what that agreement was. There is also no sensible basis on which a line can be drawn between the rectification case and this type of case.
47. For these reasons, I would hold that evidence in support of representations (iii) and (iv) is in principle admissible as part of the factual matrix or surrounding circumstances on the true construction of the agreement. It is I think common ground that it follows that it is also in principle admissible on the issues of estoppel and remoteness…
Edited for ease of reading. Unilever appears under the same tag.