In the recent decision of AZ v BY  EWHC 2388 (TCC), the Technology and Construction Court has, for what is thought to be the first time in England and Wales, declared an adjudicator’s decision unenforceable for apparent bias due to his erroneous consideration of without prejudice materials.
The Court concluded that: “an error as to the admissibility of without prejudice material is an error of law that could potentially impact the fairness of the decision-making process in accordance with the rule of natural justice”.
The Court judgment is a helpful summary of “without prejudice” privilege and apparent bias in an adjudication setting.
As the judgment concerned the question of “without prejudice” negotiations, the judgment redacted certain information, including the names of the parties. Thus the pseudonyms AZ (claimant) and BY (defendant) were adopted throughout.
The parties had referred a contract dispute for adjudication. In the adjudication, AZ presented to the adjudicator materials which BY said were protected by without prejudice privilege. The adjudicator disagreed and considered the materials in his decision. BY then challenged enforcement of the adjudicator’s decision.
The TCC was faced with three key questions:
- Whether the communications in question were subject to without prejudice privilege;
- Whether the documents were, as a result of without prejudice privilege, inadmissible; and
- Whether, as a result, the adjudicator’s decision was unenforceable.
Without Prejudice Privilege Principle
In reviewing the documents to consider whether without prejudice privilege applied, the Court noted that the privilege applies to all negotiations between parties, whether written or oral, genuinely aimed at achieving settlement from being presented as evidence. This approach is intended to encourage parties to settle their differences outside Court.
The Court noted that the rationale behind this is not only a matter of public policy, but also to uphold parties’ expressed or implied agreement to treat such communications as confidential. As such, “once a communication is covered by without prejudice privilege, the court is slow to lift the cloak of that privilege unless the case for making an exception is absolutely plain”.
In this case, the Court concluded that the materials (which were not referred to in the judgment, for obvious reasons) were “without prejudice”.
The Court noted that without prejudice materials are, as a general rule, inadmissible.
An exception is where the materials are required to establish that a settlement on the underlying dispute has been reached “because it contains the offer and acceptance forming a contract which has replaced the cause of action previously in dispute”. In those circumstances, the parties can show that a binding settlement has been reached.
In this case, the Court noted that the material was deployed in order to highlight an inconsistency in BY’s position at the adjudication. This was not within the exception and the material was therefore inadmissible. The adjudicator was mistaken in his view that the underlying dispute had not been settled in this case.
Enforcement: Adjudicator Bias
The final question before the Court was whether the adjudicator’s review of the without prejudice material made his decision unenforceable. The Court noted that disclosure of inadmissible material created an “inevitable question mark” as to whether “however inadvertently or sub-consciously” they had shaped the outcome of the adjudication.
The test for apparent bias is whether a “fair-minded and informed observer would conclude there was a real possibility” of bias as a result of the adjudicator having seen and reviewed the inadmissible materials.
The Court provided the following reasons for drawing a conclusion of apparent bias:
- The material was placed “front and centre within the adjudication”;
- The material played a “significant role” in AZ’s case;
- The material contained “implicit admissions by BY that were plainly inconsistent with its open … and contractual position”;
- The material was “prejudicial and adverse to [BY’s] interests”;
- The material was “related to central issues in dispute”; and
- The adjudicator was of the erroneous view that these matters had been agreed between the parties.
The Court drew a distinction between the position here, and a case where the adjudicator is aware that a without prejudice offer had been made, or that without prejudice negotiations have taken place between the parties, but not the substance of the offers or negotiations.
The Court noted that, whilst errors in law found in adjudications do not typically form grounds for challenge, in this case the apparent bias was such that it had the potential to impact fair decision-making and was therefore “one of the few cases” where there was a breach of natural justice. The outcome of the adjudication was therefore unenforceable.
This case clearly highlights the importance of the careful handling of without prejudice material:
- Whilst the application of the “without prejudice” rule does not wholly depend on material being labelled as such, it is a “strong pointer”. Parties should therefore be advised to ensure that without prejudice material is labelled accordingly. This is especially important where parties are running parallel communications, where some communications will want to be drawn to the attention of a Court or adjudicator, but where simultaneous negotiations are taking place.
- If a party is involved in an adjudication and the other side submits without prejudice materials to adjudicator and there is a legitimate fear of bias, then they should immediately notify the other side and the adjudicator that the material is without prejudice and should not be reviewed. Reserving the right to challenge the adjudication decision is critical, as the right to challenge can be lost if this critical step is not taken.
This article was co-written by trainee, Alice Scadden.