Can without prejudice privilege attach to contractual variation communications?
What is “without prejudice”?
In general, the term “without prejudice” refers to the privilege attached to communications in genuine attempt to settle a dispute. Subject to certain exceptions, without prejudice communications are not admissible as evidence in court. The policy reason is to encourage settlement of disputes without the fear that such communications will be taken as admission of liability if negotiation breaks down subsequently.
Position in Hong Kong
The legal principles in relation to without prejudice privilege were summarized in the case of Re Jinro (HK) International Ltd  4 HKC 90:
1. A party claiming without prejudice privilege on communication would have to show that the communication was made:
a. at a time when there was an existing dispute between the parties, in that legal proceedings in relation to the dispute had commenced or were contemplated;
b. in a genuine attempt to settle the dispute; and
c. with the intention that, if negotiations failed, it could not be disclosed without the consent of the parties
2. Importantly, it was not necessary for a “without prejudice” stamp to be expressly applied to the negotiation if it was clear from the surrounding circumstances that the parties were genuinely seeking to compromise the dispute.
Contractual variation: A recent Privy Council case
Due to the complexity and fluidity of construction work, variation to the original scope of work is very common in construction projects. However, since the exact variations cannot be contemplated at the beginning of the project., the extent and value of the variation will have to be determined by subsequent communications between the contracting parties.
If a contractual provision expressly requires parties to agree in writing on the value of the variations, can the relevant correspondence still be privileged?
This question has recently been addressed in the Privy Council case A & A Mechanical Contractors and Company Ltd (Appellant) v Petroleum Company of Trinidad and Tobago (Respondent) (Trinidad and Tobago)  UKPC 39.
The Respondent was a state-owned oil company in Trinidad and Tobago. In 2004, the Appellant, a construction company, entered into contract (the “Contract”) with the Respondent to carry out steelworks (the “Work”) for the Respondent. The Contract contains express terms in respect of variation of the Work:
1. The Respondent may make alterations or additions to or omissions from the Work.
2. If the Respondent gives notice in writing to the Appellant, the Appellant shall alter, add to or omit from the Work accordingly.
3. The value of such extras, alterations, additions or omissions shall in all cases be agreed between the Respondent and the Appellant.
The Appellant and Respondent were unable to agree on the value of the variations. The Appellant commenced an action against the Respondent and sought to adduce a letter (the “Letter”) from the Respondent recording the matters agreed between the parties at a meeting regarding the value of the variations. The Letter was not marked “without prejudice”. The Respondent argued that the Letter was part of without prejudice negotiations and therefore inadmissible.
The Privy Council’s decision
The Privy Council nevertheless held that the Letter was admissible, on inter alia the following grounds:
1. The Contract expressly imposes an obligation on the parties to be involved in a process in which they state and revise their respective positions in relation to whether the Work has been varied and if so the value of the variation, with a view to agreeing on the same.
2. It is an ongoing process distinct from negotiations between parties in contemplation of litigation seeking to settle their differences. There is no policy reason why the contractual process should be conducted on a without prejudice basis.
3. A reasonable person would understand the parties’ joint intention to be that the process of reaching agreement should be an open process.
4. It is possible to have two parallel processes: one the open contractual process and the other separate “without prejudice” negotiation conducted in correspondence in which a party makes an offer to compromise the position adopted in open correspondence.
5. Alternatively, even if the Letter forms part of without prejudice negotiations, the Letter recorded concluded agreements as to certain variations and value of such variations and falls within the exception that without prejudice correspondence can be admitted to determine whether an agreement has been concluded.
Whilst the same question has not been considered by the Hong Kong court, this case provides important guidance as to the application of without prejudice privilege to the variation process common in construction contracts. It is also in line with the well-established test of whether the communication is made in genuine attempt to settle disputes.
It may be prudent for parties to have parallel processes of both open contractual process and separate without prejudice correspondence clearly stating to offer a compromised position.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2022