Vestergaard Frandsen A/S & Ors v Bestnet Europe Ltd & Ors

This is an application on behalf the Claimants to strike out various paragraphs in the 22^nd witness statement of Mr Tackley filed on behalf of the Defendants in these proceedings, on the grounds that they refer to ‘without prejudice’ communications. The Defendants dispute that the communications in issue are covered by the without prejudice privilege. Alternatively they contend that this privilege has been waived.

Only a brief explanation of the background to this application (which is the latest dispute in a very long-running action) is necessary. The parties are manufacturers of mosquito nets. In 2006, the Claimants brought this action against the Defendants for misuse of confidential information. The Defendants’ net in issue was called ‘Netprotect’. At a trial before Arnold J, the Defendants were found liable for misusing confidential information in the development of their first Netprotect formulation. This was then used as the starting point for a substantial program of further development leading to formulations which were different from the Claimants’. These later formulations were held not to amount to a misuse of confidential information in themselves and no injunction in respect of them was awarded. The judgment was appealed by both parties, though the only successful appeal was that brought by the Defendants concerning the personal liability of one of the Defendants, a Mrs Sig. The decision of the Court of Appeal on personal liability was upheld by the Supreme Court.

The Defendants elected to proceed with an inquiry as to damages. This was heard by Rose J, who handed down judgment on 3 October 2014. In the inquiry the Claimants sought damages in the region of $48M. They argued that they were entitled to damages in relation to all the Netprotect mosquito nets sold by the Defendants, including those which were not themselves held to be a ‘misuse’ but which were ‘derived’ and developed from the original formulation. The Judge rejected this argument and held that damages for lost sales were only payable in relation to the relatively small number of nets made during the period of breach. However she also rejected the Defendants’ case that this amounted to only some 11,500 nets. The correct number was 248,152 nets. As a result (and after adding a figure representing a lost consultancy fee) she arrived at a damages award of $600,000 (around £385,000).

The question of costs of the inquiry is to be resolved at a hearing from around 12 December 2014. The present estimate for this hearing is apparently three days although both counsel appearing before me claimed that one day was more realistic.

The Claimants’ total bill of costs for the inquiry (to date) comes to £3.2M. The Defendants’ bill comes to some £1.4M. Given the vast sums at stake, the costs issue is obviously of great importance to both sides.

In the course of the proceedings on the inquiry, the Defendants made two Part 36 offers. The first was for £100,000. The second, much later, was for £300,000. It will be apparent that those offers failed to beat the actual award, though the later offer did not miss by much. The Claimants failed to respond to either offer and made no competing Part 36 offer of their own.

The Defendants wish at the upcoming hearing to criticise the conduct by the Claimants in the inquiry. Specifically they wish to criticise the way the Claimants maintained what, according to the Defendants, was an excessively high claim, failing to make any offer to accept anything less than the total, either by way of an offer of their own or by way of a response to the Defendants’ Part 36 offers.

In support of that argument they wish to refer to an exchange of letters between the solicitors for the parties. All the letters in question were marked ‘without prejudice’. Some of them were in fact marked ‘without prejudice save as to the costs of the detailed assessment’. The ‘detalied assessment’ in question was a reference to the assessment proceedings to determine the final amount of costs of the liability trial to be paid by the Defendants, and it is common ground that this makes no difference to their status so far as concerns the costs of the inquiry.

The letters form part of a chain of correspondence. The context of that chain was an attempt by the parties to resolve the assessment proceedings. In the first letter sent by email and dated 10 November 2011, the Defendants’ solicitors (McGuire Woods) made two without prejudice offers. The first of these was that they would pay a total of £3M immediately. £2.9M of this was offered by way of costs to settle the assessment proceedings. The remaining £100,000 was offered to cover the damages payable to the Claimants in the incipient inquiry (the Points of Claim had yet to be served). The second offer was that they should pay just the £2.9M in respect of costs, payment to take place over 36 months in instalments.

There followed a without prejudice telephone conversation on 22 November 2011 between Mr Tackley of McGuire Woods and Nick Rose on behalf of Fieldfisher, solicitors for the Claimants, in which Mr Rose gave his clients’ response to the offer. The thrust of Mr Rose’s response (as summarised in a subsequent email from McGuire Woods – see below) was that the Claimants were willing in principle to accept the £2.9M in relation to costs, but not the offer of £3M to include the damages claim.

On 5 December 2011, the Defendants’ solicitors, McGuire Woods, responded to this by a further without prejudice email. This email purported to summarise the conversation with Mr Rose (though there is a dispute as to the accuracy of the summary). It then withdrew the offer of £2.9M to settle the costs claim alone ‘since VF insists on an up front payment of £500,000.’ It went on to say that the Defendants had now concluded that the only way of bringing the matter to an end was a global settlement of damages and costs. It suggested finally that this could only happen if the Claimants were more ‘realistic’ about their damages claim than the figure which had been mentioned in the injunction proceedings (I am not entirely sure what this was, but it was no doubt many millions of pounds).

Fieldfisher responded to this on 7 December, again by email and again without prejudice. They expressed extreme unhappiness that the offer to pay costs separately from damages had been withdrawn. They denied being insistent on the ‘up front’ payment of £500,000, saying that this was put forward as a ballpark figure, and they wanted as close to that figure as could be afforded. They were ‘very close to walking away entirely from these discussions’ but were willing to have one last attempt to settle the costs at the figure of £2.9M with a payment schedule. So far as the damages was concerned, they were not willing to discuss it as part of an overall package, and their position was ‘going to harden’. They said they ‘could not see any merit in debating the strength of our damages claim with you in correspondence. We now have the remaining information we needed and I anticipate being able to complete the pleading and serving it before the Christmas break.’ I should say that the Points of Claim in the damages inquiry had still not been served at that stage.

This letter was followed up by another from Fieldfisher on 19 December 2011 ‘without prejudice save as to costs of detailed assessment’ offering to accept £2,552,000 in respect of the costs, payable in equal instalments over 36 months.

McGuire Woods replied on 3 January 2012 once again ‘without prejudice save as to costs of detailed assessment’. They informed Fieldfisher that their clients’ bankers were only prepared to fund the payment of costs on the basis of an overall deal settling the damages as well. They reverted to their offer of £3M by way of an overall settlement. They concluded that they were willing to discuss a global settlement (presumably an indication that they were prepared to increase this offer in the course of negotiations) and trusted that ‘your client will now be persuaded to enter into a constructive discussion.’

On 16 January 2012, Fieldfisher wrote again ‘without prejudice save as to the costs of detailed assessment.’ This was a long letter, highly critical of the approach taken by McGuire Woods and their clients in the negotiations. The first part of it was taken up with a summary of the previous correspondence dealing with costs, noting in particular that the offer previously made by the Defendants to settle costs separately had been withdrawn. The second part was headed ‘Our Clients’ Claim to Damages’. This took issue first of all with McGuire Woods’ suggestion that the Claimants had been tardy in commencing the damages inquiry. It noted that the Points of Claim would be served shortly. It then challenged McGuire Woods’ claim that the damages would be negligible in the context of costs. It claimed that the Claimants were entitled to damages in respect of the sale of every ‘Netprotect’ product sold by the Defendants. It quoted from the judgment of Arnold J, interpreting this as indicating that they were entitled to such damages even on products which were not manufactured in breach of confidence. It concluded that the £100,000 proposal in respect of damages was ‘so derisory, and we are so far apart, not only on the numbers but also on the legal basis of the claim for damages (we say it is on all the sales) that there is no basis for sensible, constructive discussions.’ It is this passage in particular which the Defendants wish to bring before Rose J in the argument on costs.

In response, again ‘without prejudice save as to costs of detailed assessment’, McGuire Woods wrote on 26 January 2012. They defended their approach to the costs settlement. In relation to the damages issue they disputed Fieldfisher’s interpretation of the judgment of Arnold J and the suggestion that damages were payable on all ‘Netprotect’ nets. They concluded that their offer, including that of £100,000 was entirely appropriate and would result in a cost-effective outcome.

For completeness I should note that on 7 March 2012 McGuire Woods made a ‘without prejudice save as to costs’ offer in the inquiry of £100,000. They increased this to £300,000 on 10 June 2013.

In the 22^nd witness statement of Mr Tackley in this action, filed in support of the Defendants in relation to the costs of the inquiry, he puts all these letters in evidence. In essence his point is that they support the Defendants’ overall contention that the Claimants failed at any time to engage in a negotiating process with the Defendants which might have arrived at a settlement of the inquiry. Specifically, they are said to indicate that the Claimants were not willing to discuss settlement at all.

As a general proposition, it is clear that a Court may take into account the winning party’s failure to make counter-proposals to a settlement proposal made by the losing party, even if that settlement proposal was for slightly less money than the amount ultimately awarded (see proposition (vii) in paragraph 72 of Multiplex Constructions (UK) Limited v Cleveland Bridge [2008] EWHC 2280:

So far as that point is concerned, the Defendants already have the material to make the argument based on their own ‘without prejudice save as to costs’ and Part 36 offers, and the fact that they were not responded to by the Claimants. The material at issue on this application is unnecessary for that purpose, since the amount being offered by the Defendants on a without prejudice basis was the same as the amount offered on a Part 36 basis a couple of months later on 7 March 2012. In fact, since the ‘without prejudice’ correspondence contains no offer on damages which was not bundled up and inextricably linked to an offer on costs, the Defendants’ position based on the Part 36 offer would seem to be much stronger (even without the problem of admissibility).

The reason the Defendants give that their case on costs may nonetheless be bolstered by the without prejudice correspondence is that it is evidence of a certain attitude of mind on the part of the Claimants. Specifically they contend that it shows the Claimants to be unwilling even to discuss damages save on the basis of a royalty on all sales of its Netprotect mosquito nets, whether using the confidential information or not. Of course, ultimately the Judge found that damages should not be awarded on this basis. The Defendants contend that this intransigence on the part of the Claimants prevented any chance of a settlement being reached and therefore it should be taken into account on ‘conduct’ as justifying a reduction in the costs which should be awarded in the inquiry.

I do not find this very convincing. It is already clear from the evidence that the Claimants never made any admissible offers and did not respond to the Part 36 offers. The Court can take this into account on costs. It is hard to see how it really helps the Defendants to reveal that the Claimants’ intransigence in not making any offers was due to the fact that they believed they were entitled to an amount in damages which was far in excess of anything the Defendants would ever be prepared to pay. There is nothing disreputable or improper about that belief, which one must assume was based on the advice they were receiving (advice which of course will always be protected by privilege).

However, Mr Moody-Stuart for the Claimants did not take issue before me with the question of the relevance of the without prejudice material as such. I will therefore proceed on the basis that prima facie the evidence should be admitted into evidence subject only to its admissibility given the fact that the letters are all marked ‘without prejudice’.

The law on without prejudice privilege is well-established and it is unnecessary to set it out at any length in this Judgment. The rule rests on two foundations:

It has been said that the reason ‘without prejudice’ negotiations are not admissible on the question of costs is based on the agreement of the parties and not on public policy. This was the view of Oliver LJ in Cutts v Head and also of Hoffmann LJ in Muller v Linsley [1996] 1 PNLR 74. However, both those decisions were taken at a time when it was considered that the public policy was only concerned to protect the parties from the consequences of making admissions against interest in the course of negotiations. If one takes that approach (as both Courts expressly did), then it is obviously right that after the trial on liability is over, there is no danger in the Court seeing the admissions. On that limited understanding of the public policy rule, it made sense to say that the public policy principle could not be engaged. However, since the judgment of Robert Walker LJ in Unilever v Procter & Gamble [2000] WLR 2436, it is now well established that the public policy principle is not so limited. The House of Lords in Ofulue v Bossert [2009] AC 990 firmly rejected any attempt to treat the public policy as having such a narrow scope. Lord Hope at paragraph 12 said as follows:

In the light of this modern approach, confirmed more recently by the Supreme Court in Oceanbulk Shipping [2011] 1 AC 662, I would respectfully suggest that there is a strong public policy justification for denying the ability to rely on a without prejudice communication at any stage in the proceedings, including in the assessment of costs. The correct position as a matter of public policy is that originally stated by Bowen LJ in Walker v Wilsher:

In Cutts v Head Oliver LJ commented that he found it difficult to understand why that was so, since ‘as a practical matter, a consciousness of a risk as to costs if reasonable offers are refused can only encourage settlement.’ But in the modern era this type of ‘encouragement’ to settle is fully dealt with by the practice of making ‘without prejudice save as to costs’ or ‘Part 36’ offers (a prototype version of which was in fact used in Cutts v Head itself). That does not mean that there is no public policy value in a parallel process by which discussions can take place ‘without prejudice’ without the need to be concerned about later costs consequences. Such a process enables the parties to be entirely honest and open with one another. Thus, for example, solicitor A may be prepared to explain on a ‘without prejudice’ basis to solicitor B that his client is somewhat irrational about a claim and has told him that he is only prepared to settle it if he receives a personal and public apology from his protagonist (something he was not entitled to as a matter of law). This disclosure might well facilitate settlement, since at least solicitor B now knows the problem which he has to solve. But one can imagine that solicitor A would not be prepared to be so candid about the position if he knew that the communication could be relied on when it came to costs, when it would be said that his client had taken an intransigent and unhelpful position.

Ultimately, the distinction between the two bases of protection is probably irrelevant for the purpose of this application. The Courts have consistently stated that the ‘without prejudice’ correspondence is not admissible when considering costs because to do so would subvert the implicit agreement under which such correspondence takes place. This was recognised by the Court of Appeal in Cutts v Head and in Walker v Wilsher, and again, most recently, in Reed Executive v Reed Business Information [2004] EWCA (Civ) 887. At paragraph 21 Jacob LJ noted that:

Mr Wilson QC, for the Defendants, argues that the Claimants are not entitled to the protection of the without prejudice privilege in this case for two reasons.

First of all, he says, the privilege only applies to communications which were genuinely aimed at the settlement of proceedings. Whilst the letters from his client, in particular the letters of 10 November 2011 and 3 January 2012 offering (in combination with a deal on the costs of the main action) to pay £100,000 in damages, were a genuine attempt to settle, and therefore were entitled to the protection of the privilege, he says that the replies made by Fieldfisher, in particular the letter of 16 January 2012, were not.

I do not believe that this argument has any merit. Once a party has made a without prejudice offer, the recipient of the offer is plainly free to make a without prejudice response. The response may be to make a counter-offer, it may be to ask for more information, or it may be simply to reject the offer outright. He may even choose to ignore the offer completely. All those responses are protected by the privilege.

If authority were needed for this proposition, there is plenty of it. In a well-known passage in Cutts v Head in which Oliver LJ made clear that the privilege protected all communications, which included ‘of course, as much the failure to reply to an offer as an actual reply’. If it covers the failure to reply to an offer, it obviously must include the rejection of an offer. In Walker v Wilsher Bowen LJ stated that ‘it would be a bad thing, and lead to serious consequences if the Courts allowed the action of litigants, on letters written to them without prejudice to be given in evidence against them or to be used as material for depriving them of costs’ [my emphasis]. In Reed the Defendants were seeking to open up without prejudice correspondence to demonstrate that the Claimants had unreasonably rejected out of hand a proposal to go to ADR. The Court of Appeal refused to allow this, noting at [34] that it was a necessary consequence of the without prejudice rule that ‘in some cases the Court when it comes to the question of costs cannot decide whether one side or the other was unreasonable in refusing mediation.’

Even without this authority, it is in my view plain from first principles that a rejection of a without prejudice offer (without making a counter-offer) is not admissible in evidence. No such rejection could be given in evidence in isolation, that is to say without also providing the initial offer as well (indeed the entire chain of correspondence). See for example Somatra v Sinclair Roche [2000] 1 WLR 2453. So in this case, the Defendants could never have put in evidence Fieldfisher’s letter of 16 January 2012 without also putting in evidence their own letters of 10 November 2011 and 3 January 2012. Mr Wilson accepted this proposition. Yet the letters of 10 November and 3 January are on the Defendants’ own case plainly privileged under the ‘without prejudice’ rule, a privilege which cannot itself be waived without the consent of both parties. See Lord Esher MR in Walker v Wilsher (1889) 23 QBD 335. It logically follows that it can never be open to one party who has made a genuinely ‘without prejudice’ offer to disclose the response to that offer without the consent of the offeree.

Mr Wilson sought to deal with this point by arguing that an initial ‘without prejudice’ offer was not in fact subject to joint privilege at all, but rather to a unilateral privilege belonging to the writer of the letter. He suggested that the joint privilege only crystallised once a positive response making a genuine counter-offer had been received. This imaginative suggestion is not supported by any authority. Indeed it is in my view flat contrary to what Oliver LJ said in Cutts v Head in the passage quoted in paragraph 32 above, that the ‘failure to reply to an offer’ was as much protected as an actual reply. If Mr Wilson were right, a failure to reply would never be protected, because the writer of the original letter would always be able to waive his privilege. Furthermore, his approach contradicts the definitive statement of Lord Esher in Walker v Wilsher that ‘nothing which is written or said without prejudice should be looked at without the consent of both parties, otherwise the whole object of the limitation would be destroyed.’

I therefore reject Mr Wilson’s first argument.

His second argument was that the Claimants had impliedly waived the privilege which would otherwise attach to the correspondence by a combination of two things: (i) making a claim to indemnity costs in the proceedings, which necessarily opened up the conduct of the parties; (ii) asserting in the skeleton argument on costs that their own conduct ‘was not to be criticised.’

I do not consider that there has been any waiver of privilege in these circumstances. So far as the claim by the Claimant to indemnity costs is concerned, that must be based on an allegation that the Defendants’ conduct in the litigation is worthy of criticism in some way. I cannot see how this can be said to be inconsistent with the Claimants continuing to assert privilege in without prejudice communications. The position would obviously be different if the Claimants were seeking to rely on some aspect of the Defendants’ conduct in the without prejudice discussions, but they are not.

As for the statement that their own conduct was ‘not to be criticised’, this is simply Counsel’s summary of the finding he would like the Court to make based on the evidence it has heard and seen. Since the Court has heard and seen no evidence about the ‘without prejudice’ negotiations, this statement therefore cannot be taken as making any assertion about the Claimants’ conduct in those negotiations. It is thus impossible to see how it can have implicitly waived the privilege attaching to those negotiations.

I therefore reject Mr Wilson’s second argument.

Mr Wilson accepted that if his first and second arguments were rejected, then the whole of the paragraphs and sections of the 22^nd witness statement of Mr Tackley identified in the Notice of Application should be struck out, save for a single sentence which (he said) did not amount to the disclosure of privileged material and could remain. This was the statement in paragraph 17 that the Claimants had never made any offer to settle. I think this is a small point, but in my view that sentence should be removed along with everything else. Mr Moody-Stuart cited the words attributed to Caliph Omar justifying the destruction of the books stored at the Library of Alexandria in 642AD: ‘either they contradict the Koran in which case they are heretical, or they are in agreement with the Koran in which case they are not necessary.’ Here, either the statement is simply saying no more than is already obvious, namely that the Claimants never made any open or otherwise admissible offer to settle (in which case it is unnecessary), or it is seeking to inform the Court about the attitude taken by the Claimants in without prejudice communications (in which case it is not admissible, if not heretical).

It follows that the passages in Mr Tackley’s 22^nd witness statement referring to the ‘without prejudice’ correspondence and the exhibits insofar as they contain that correspondence (as identified in the application notice before me) should be struck out, and I shall make an Order accordingly. I consider that it would be disproportionate to go further and grant injunctive relief against the Defendants, as the Claimants have sought in their Application Notice.