Use of the tags "without prejudice" and "subject to contract" is common. Although they are often linked, however, they have quite different meanings and effects in law. Yet how many users properly understand what the words mean, and their legal impact?
The words "without prejudice" relate to the concepts of evidence and disclosure. Under the rules of evidence, no fact can be presented to the courts unless accepted by all parties or proven by its presenter. So, for instance, if a landlord serves a schedule of dilapidations, it will want to disclose it, and rely on it as well as service of it in any dilapidations claim. If the tenant contends that the schedule was improperly served, the landlord will have to prove otherwise.
Disclosure is a step taken by parties in the litigation process. It involves each of them listing documents in its possession on which it relies, such as the landlord’s schedule in this case; documents that adversely affect its case or that of another party; documents that support the case of another party; or documents that it is obliged to disclose under the court rules.
Once disclosed, the relevant document can be inspected by the court or another party and relied on in the proceedings. However, some documents are privileged from inspection because, for instance, they are covered by legal privilege – which essentially attaches to advice given by a lawyer – or are marked "without prejudice". Hence, use of the latter tag renders a document inadmissible in court proceedings.
This makes it an important, even vital tool in negotiations. It enables a party to make an admission to ease a settlement but which it would not want disclosed to the court. The tag can only be used if a party is genuinely involved in settlement negotiations and cannot be used when an adviser is writing to its own client. There are some exceptions to the rule of inadmissibility, such as that the tag was wrongly used, the parties agree that the tag should be removed, or the parties reach a final settlement, in which case the tag simply falls away.
If a party wishes to protect its position in relation to costs it can mark an offer "without prejudice save as to costs", and this is known commonly as a Calderbank offer. It may then be disclosed on the question of costs if the court makes a finding in line with the party’s offer. Much deployed in the area of rent reviews, it is insufficiently used in other forums such as, for example, dilapidations.
Unconnected with evidence or disclosure, the words "subject to contract" go the heart of the law of contract. Generally speaking, if one party makes an unconditional offer that is then unconditionally accepted by the other party and value is exchanged, the parties have a contract; no value is required if the contract is recorded by deed. However, if either the offer or acceptance is made conditional – for example an offer to buy a property is subject to the purchaser obtaining a satisfactory survey – then until the condition is satisfied, there is no contract.
Hence, if an offer or acceptance is marked "subject to contract", then there is no contract until the deal is recorded in a formal document signed by both parties, and either could walk away in the meantime. The tag must be used from the commencement of negotiations and cannot be added as an afterthought once the deal has been agreed. This enables, for instance, one party to conduct enquiries into the subject matter of the deal before it formally agrees to be bound.
There are some exceptions to the rule, which often relate to the tag being added too late in the day. For instance, once the hammer falls at an auction then the deal is done. Equally, if under an existing contract such as a lease the parties are bound to agree to, for instance, a reviewed rent, one party cannot insist that there is no agreement until recorded in formal documentation.
“If a party wishes to protect its position in relation to costs it can mark an offer "without prejudice save as to costs" and this is known commonly as a Calderbank offer”
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