Civil and criminal proceedings: settlement discussions

Key points

• Threats of criminal proceedings during discussions to settle a civil dispute can backfire badly.
• “Without Prejudice” status of communications will be lost if “unambiguous impropriety” can be shown.
• Threats of disclosing criminal conduct unless the case is settled may be blackmail, a serious crime in its own right.

Wrongdoing as a pressure point

Any mediator will tell you that in discussions to settle a civil dispute, it is often something apparently quite unrelated to the dispute that unlocks matters. There may be pressure points relating to publicity, a witness’s fear of giving evidence or the impact of the dispute on a separate business transaction. It is therefore common for correspondence aimed at settling disputes to make reference, subtle or otherwise, to collateral benefits of settling the dispute.

But what if you know something about the other party that could give rise to criminal proceedings? Perhaps evidence of fraud has emerged in the documents disclosed during the proceedings, a witness has given an account that points to a bribe having been paid, or evidence emerges that a party has attempted to pervert the course of justice. It is obviously tempting to view such a discovery as a weapon to be used in the settlement discussions.

That temptation is increased by the fact that settlement discussions, and associated correspondence, are protected by Without Prejudice privilege. This means that they may not be referred to in court, nor in pleadings or witness evidence. A threat made in such correspondence to shine a light on the other side’s apparent wrongdoing would therefore seem an attractive way of increasing the pressure to settle.

Family fortunes

There is much that can go wrong here, however, as illustrated by the case of Ferster v Ferster. This case related to a dispute between shareholders in a family owned business, where two directors had caused the company to bring an action against a third, Jonathan Ferster, for breach of fiduciary duty. The ultimate aim of the two directors in launching the action was to force Jonathan to buy out their shares. A mediation took place, at which an offer was made to Jonathan for him to purchase the shares.

Following the mediation, a new offer was sent by email, via the mediator. However, rather than reducing the price demanded for the shares, it increased it because, as the letter stated, “we have become aware of further wrongdoings by Jonathan”. The letter went on to suggest that “It is clearly in everyone’s (and particularly Jonathan’s) interest to wrap this up speedily and quietly” and that “a settlement will obviate the need of further steps such as committal proceedings being issued.” Furthermore, it suggested that Jonathan was likely to face charges of perjury, perverting the course of justice and contempt of court and would likely be imprisoned.

Jonathan sought to refer to this email in the proceedings, in which he was arguing that the behaviour of the other directors amounted to unfair prejudice against him as a shareholder. Inevitably the senders of the email objected to this, claiming that it was covered by Without Prejudice privilege.

The limits of Without Prejudice

The judge at first instance held that Jonathan was entitled to refer to the email, but this decision was appealed. The Court of Appeal upheld the decision though, finding that the threats in the email amounted to an unambiguous impropriety, which is an established exception to Without Prejudice privilege. The Court noted that “The impropriety arises from the fact that the increase in price is tied, and tied only, to the threats affecting Jonathan's liberty, family and reputation”. The threats in the letter amounted to an attempted abuse of the Without Prejudice nature of settlement discussions which entitled the other party to refer to the correspondence in open court.

Blackmail

The Court emphasised that it was unnecessary for threats to fulfil the formal definition of blackmail in order to show unambiguous impropriety. However, this is a real risk for a commercial party that seeks to leverage knowledge of impropriety to improve the terms of a settlement. Under section 21 of the Theft Act 1968, blackmail is defined as making an “unwarranted demand with menaces”. It was established in Thorne v Motor Trade Association that the threat may be to do something that the blackmailer is perfectly entitled to do, such as report wrongdoing to the authorities: it is an accompanying demand for a financial reward, without a reasonable basis, for not doing so that makes it an offence.

Civil courts may be slow to categorise threats made during settlement discussions as blackmail, though the judge at first instance in Ferster v Ferster did just that. Nonetheless, a misjudged attempt to introduce a criminal dimension to commercial settlement discussions can very easily become a crime in its own right. At best this will undermine the position of the party that hoped to take advantage, at worst it could lead to criminal proceedings for an offence with a maximum sentence of 14 years’ imprisonment.