If you’re an individual, or an employer, who has been involved in an employment dispute then you will have heard the words “without prejudice”. The phrase is commonly used by parties or employment specialists in settlement negotiations to promote open and honest discussions. But what does the phrase really mean, and what are its limits?
The general idea
Without prejudice is a legal label you can put on written or verbal communications — such as emails, letters, or conversations — to protect them from being used as evidence if the dispute goes to the Employment Relations Authority (Authority) or Employment Court (Court).
The rule encourages parties to negotiate settlements freely, knowing that anything said in those negotiations will remain confidential.
A recent example
The recent case of Jin v Precision NZ Ltd provides some helpful insight to the inadmissibility of without prejudice communications.
The communications in question occurred when Mr Zhang, the sole director of the employer, Precision NZ Limited, visited employee, Mr Jin, at his home to discuss a resolution to their employment dispute.
A draft record of settlement was prepared and signed by Mr Zhang, marked “Without prejudice until signed by both parties”. It also recorded that the terms of settlement and negotiations leading up to the preparation of the document were strictly confidential. However, no settlement was reached.
Mr Jin says that the visits to his home were uninvited, made him feel uncomfortable and unsafe, and that Mr Zhang did not explain that the settlement negotiations were confidential. Mr Jin wanted the communications included as evidence in the substantive hearing. His key argument was that without prejudice privilege requires both parties to intend that the discussions be kept confidential.
The Court considered this argument but concluded the communications and draft record of settlement were made in connection with attempts by the parties to resolve the dispute, making them privileged communications. It preferred the evidence of Mr Zhang that there was a common intention for the communications to be confidential. While Mr Jin was entitled to reject the offer of settlement, the ‘without prejudice’ privilege attached to the settlement negotiations in his home remained, which meant they could not be referred to as evidence in the substantive hearing.
What about communications on the fringe of employment disputes?
For a communication to be without prejudice, it must relate to an existing dispute between the parties, and it must include an offer to settle that dispute. There is no magic wording required — what matters is intention.
Use of the words “without prejudice” are helpful, but they must be attached to “frank exchanges that are ‘off the record’ to lubricate the machinery of employment dispute resolution”.
Communications labelled without prejudice that are unconnected to a dispute, or that predate a dispute, will be admissible as evidence in later proceedings. Employers must be careful not to use this label as a tool to avoid or shut down a potential dispute before it arises — doing so could constitute unjustified disadvantage (treating an employee unfairly) or constructive dismissal (where an employee feels they have no choice but to resign because of the employer’s conduct).
How does a without prejudice offer impact costs?
At the end of an employment dispute, once the Authority or Employment Court has made its decision, it may also decide who should contribute to the other party’s legal costs (referred to as an award of costs).
Generally, if the party who brought the proceedings loses, they will be ordered to make a contribution to other party’s legal costs. However, the Court has flexibility in how it awards costs, and may take into account:
- any conduct of the parties tending to increase or contain costs; and
- any offer made by either party to the other, a reasonable time before the hearing, to settle all or some of the matters at issue between the parties.
The second point refers to a special type of settlement offer known as a Calderbank offer. A Calderbank offer is made by one party to the other and marked “without prejudice except as to costs.” Unlike a standard without prejudice offer, a Calderbank offer can be shown to the Court after the hearing when it is deciding costs.
If one party makes a reasonable Calderbank offer during settlement discussions and the other party unreasonably rejects it — choosing instead to take the matter to a full hearing — the Court can take that rejection into account when deciding costs. In practice, this means the rejecting party could end up paying a greater contribution to the other side’s legal costs than they ordinarily would.
The reasoning is that the rejection caused both parties to unnecessarily incur greater legal costs.
Importantly, any offer that is made solely on a without prejudice basis is not a Calderbank offer and therefore cannot be considered in relation to costs, unless the parties agree otherwise – the words “except as to costs” must be expressly written in the offer.
Key takeaways
Employers and individuals facing employment disputes should ensure that they genuinely consider every offer of settlement they receive. If making a Calderbank offer, it is important to ensure the offer, or rejection, is reasonable as it may be examined by the Authority or Court later. If you reject a reasonable offer, then you may be ordered to contribute to the other party’s legal costs.
If you are dealing with an employment relationship problem and need help with settlement negotiations, contact our Employment Law experts.
