Negotiation or Obligation? Analyzing “Without Prejudice” in Indian Legal Landscape

[Pragya is a student at Dharmashastra National Law University.]

Growing legal complexities have brought creative ways to protect interests during negotiations and dispute resolutions. One such mechanism is the use of “without prejudice” clauses in agreements. These clauses bar the admissibility of communications in courts as evidence and are protected under Section 23 of the Indian Evidence Act 1872, and now Section 21 of Bhartiya Sakshya Adhiniyam 2023. Such non admissibility brings multiple legal complexities. First, can the “without prejudice” clause be introduced as a term to bypass legal enforceability of a valid agreement vis-à-vis its non-admissibility as evidence before the courts? Second, does an agreement with “without prejudice” clause replace or amend the original contract? Third, can such agreements be covered under the concept of estoppel and lastly, is it a legal way to unjust enrichment? The article shall address these questions in light of laws and precedent. 

Understanding “Without Prejudice” and its Complex Legal Implications

The phrase “without prejudice” can have multiple meanings and varied implications depending upon the usage. According to the Wharton’s law lexicon, the term includes all communications between litigants, before or after the cause of action, but necessarily prior to trial or judgement. However, if negotiation fails between the parties, no advantage shall be taken thereafter. Deciphering from the same definition, the Supreme Court in the judgement of NTPC Limited v. Reshmi Constructions, Builders & Contractors analyzed two characteristic implications of “without prejudice” clauses. First, the matter has not been decided on merits, and second, fresh proceedings are not barred for such settlements in accordance with law. However, these understandings do not address a situation when the parties reach at agreeable solution. In other words, if both parties agree on solutions provided under a “without prejudice” clause, should the contract become binding or should it remain inadmissible as evidence is an unanswered question. 

The apex court also mentioned that consent of both parties is sine qua non for consideration by the court of all the communications written or said under the “without prejudice” clause. This situation may give rise to unjust enrichment of either party through a withheld consent which leads to inadmissibility of agreement before a court. The situation becomes even more tangled as the judges are barred from allowing admission of such communications at their discretion. Therefore, the “without prejudice” privilege brings certain legal complexities to be addressed. 

Admissibility, Enforceability, and the Effect of “Without Prejudice” Settlements on Existing Contracts

To understand the admissibility of “without prejudice” clause, the Supreme Court in the case of  NTPC Limited v. Reshmi Constructions, Builders & Contractors (NTPC case) referred to the case of Cutts v. Head and Another, where Lord Justice Oliver, deciphered that the meaning of “without prejudice” can be interpreted in different ways. It depends partly on public policy and partly on the agreement between parties. Furthermore, in the case of Superintendent (Tech. I) Central Excise, IDD Jabalpur and Others v. Pratap Rai, two situations were dissected by the Supreme Court. First, when the negotiations fail between the parties. In such circumstances the offers made without prejudice cannot be admitted in the court without the consent of both parties. Moreover, these offers cannot be admitted before the court later or used to prove that the party owed some liability. For example, if one party agrees to make half payment without prejudice, then plaintiff cannot later use that statement to prove that the defendant admitted owing some money.

The second situation particularly invites complexities, i.e. circumstances when negotiation between the parties succeeds. For the same the Apex Court in the NTPC case referred to the case of Rush & Tompkins Ltd. Vs. Greater London Council and Another, where it was held that once the negotiations between the parties conclude successfully, then the protection under without prejudice clause lapses. Hence, agreement becomes binding and consequently becomes admissible before the court of law. Therefore, the “without prejudice” clause cannot be introduced as a term to bypass legal enforceability of a valid agreement vis-a-vis its non-admissibility as evidence before the courts, if negotiation between the parties succeeds. Hence, the answer to our first question is in a negative.

This leads to the second question related to the amendment and replacement of original contract. Another important aspect is the amendment of original contract through a “without prejudice” clause agreement. To answer this, the Supreme Court in the NTPC case, referred to Walker v. Wilsher. It was agreed that a “without prejudice” settlement can amend or supersede the original contract if it is accepted and intended as a final settlement. Therefore, it can be concluded that contract stands amended if two conditions are fulfilled - first, in situations where consensus ad idem exists, and second, if negotiation succeeds. 

The Illusion of Immunity: Estoppel and Unjust Enrichment in “Without Prejudice” Settlements

It is now clear that the “without prejudice” clauses are introduced to enhance free negotiations between the parties. Parties are protected from the use of failed offers against them. Without prejudice clauses are not covered under the concept of promissory estoppel. The Supreme Court in the case of M/S Motilal Padampat Sugar Mills Company (Private) Limited v. State of Uttar Pradesh and Others held that promissory estoppel applies when the representation is clear and  unequivocal with an intention to be relied upon. However, without prejudice communications are, by nature, tentative as they portray a conditional intent. Therefore, these clauses are not covered under the concept of promissory estoppel. 

Inapplicability of promissory estoppel along with the non-admissibility before the courts creates an illusion of total immunity. This illusion may lead to a wrong belief of unjust enrichment being legally justified when “without prejudice” clause is used. The Supreme Court in the case of Mafatlal Industries Limited, Ahmedabad v. Union of India held that unjust enrichment happens when one party is unfairly benefitted at the expense of other party. Moreover, allowing the beneficiary to retain the benefit would be unjust. 

When analyzing contracts with “without prejudice” clauses, a situation may arise where partial performance is done. Furthermore, for admission of “without prejudice” agreement, it is vital that both parties agree to such submission before the court. Hence, one party may deny submission even after partial performance by another. One may wrongly presume that the inadmissibility extends to such situations as well, which may result in unjust enrichment. However, it is vital to understand that without prejudice clauses protect the negotiations and not the results. Therefore, the agreement itself does not become legally invisible. A backing to this also lies in the judgement delivered by the Supreme Court in the case of Superintendent (Tech. I) Central Excise IDD Jabalpur v. Pratap Rai. In this case, the Hon’ble court held that “without prejudice” protection is waived or lost when expressly conceded or decided. Therefore, once parties agree on the terms of settlement, it becomes binding and admissible before the court of law. Hence use of the clause is not a legal way to unjust enrichment.

Conclusion

The "without prejudice" clauses act as a legal way to protect negotiations between the parties. They are inadmissible before the court, unless agreed by both parties. However, it is important to understand that the protection of “without prejudice” clauses cease to exist when an amicable settlement is agreed by the parties - then, such agreement becomes binding. Also, the “without prejudice” clauses are not unequivocal representation, therefore are not covered under the concept of promissory estoppel. Nonetheless, it is not a legal way to unjust enrichment as it protects only the negotiations and not the results. Therefore, the agreement itself does not become legally invisible, and once agreed becomes binding on both parties. Hence, the use of "without prejudice" clauses merges effectively with other legal protections like unjust enrichment, and promissory estoppel while at the same time protects negotiations. This enhances free and transparent communication between the parties.