The Hospital Pass: “Without Prejudice” Exercise of Contractual Rights?
“Good evening, I’m from Bob’s Your Uncle Legal. I called one of your colleagues just now about an urgent advice. He is unavailable but he referred me to you because you’ve done something like this before.”
“Thanks for your call. What is it about?”
“There’s a joint venture. The contract’s formula for expenses is hopeless. The other side has consistently short paid its share. Our client has had enough and wants out. There’s a termination clause that allows it to buy out the other side’s interest. They’ve found a new partner but its offer expires COB tomorrow. We’ve given preliminary advice but we’d be grateful for your written opinion by tomorrow morning.”
“I understand. Send me the contract for now and the rest as soon as you can. We’ll talk tomorrow.“
“Thanks! And afterwards, it’d be great if you could glance over the client’s draft market announcement. Oh and I almost forgot, the other side has told us that they will seek urgent relief if we terminate, so we may need you to appear.”
You immediately check your call history and diary to figure out the identity of the sadistic colleague who referred you. You then parse through the contract’s formula for calculating expenses and despair because you chose law to avoid maths. (In any event, it doesn’t matter because it seems that the formula’s drafters are also numerically challenged.) You consult the textbooks but apart from telling you that “it depends upon the particular facts” these oracles don’t assist. Having read the rest of the material that was sent in the wee hours, you start writing your opinion. You arrive at the conclusion that your client probably can terminate but that it’s as clear as mud, and the consequences of repudiation are severe.
Most practitioners have been on the receiving end of a similar kind of hospital pass. To continue the analogy, there is a temptation to goose step the problem that you have been asked to solve by deploying that venerable phrase in the legal vernacular, “without prejudice”. This article explores whether doing so is a good idea.
The key message is that parties cannot exercise rights on a without prejudice basis in order to preserve competing rights. This is explained by the principle of election. A party must choose between inconsistent courses of action. To constitute an election, an act must be unequivocal in the sense that it is consistent with only one course of action. An election is final: the other course of action is abandoned.
This article is limited to perhaps the most notorious instance of election: whether to affirm or terminate a contract. The observations below are, however, instructive in respect of other situations requiring an election.
Affirming and terminating a contract “without prejudice”
The Australian authorities start with Haynes v Hirst. The purchaser under a contract for the sale of land identified an apparent defect in title and enquired, “without prejudice to purchaser’s rights under the contract”, how the vendor proposed to remedy the defect. A week later, the purchaser’s solicitor made 39 additional requisitions that were, again, “without prejudice to purchaser’s rights under the contract”. The parties quarrelled until, four months later, the purchaser’s solicitor gave a notice of termination. Long Innes J declared that the purchaser had not terminated the contract. In lucid fashion, his Honour reasoned:
“A party cannot, except in a strictly limited class of cases, protect himself against the legal consequences of his acts by stating that he does them without prejudice…
In plain language a man can only elect once, and when once he has elected he is bound by his election and cannot again avail himself of his former option, merely because he claimed in the first instance to exercise his election without prejudice. A man, having eaten his cake, does not still have it, even though he professed to eat it without prejudice.”
Long Innes J’s exposition of principle is broad and although it has been subsequently approved, the principle has been confined to the particular facts in that case. The purchaser’s solicitor’s superficial references to the correspondence being without prejudice could not overcome a pattern of conduct over months that plainly represented to the vendor that the contract remained on foot.
The outcome will be different where the apparent affirmatory conduct (for example, enquiring about an extension to the settlement date) is specifically stated to be without prejudice to a right to terminate and is duly followed by a notice of termination. The distinction can be explained on the basis that a party faced with an election is entitled to a reasonable opportunity to assess its options. In this circumstance, the use of the phrase “without prejudice” can be effective in signalling postponement of that election, and indeed it may be necessary to avoid conveying the otherwise unequivocal message sent by an affirmatory piece of conduct.
An extreme illustration of this are the facts in K & K Real Estate Pty Ltd v Adellos Pty Ltd. The contract of sale required completion by 25 January. The purchaser intimated that it could not complete by then. On 27 January, the vendor gave a notice to complete on 12 February. The purchaser’s solicitor challenged the notice but simultaneously sought an extension of time on a without prejudice basis. 12 February passed without a notice of termination. The parties’ solicitors exchanged proposals marked “without prejudice”. Thereafter, the negotiations proceeded at “a very leisurely pace” until, on 8 July, the vendor’s solicitors served a notice of termination. The purchaser disputed the notice. The NSW Court of Appeal held that the vendor was entitled to terminate when it did. Young JA described as inappropriate the use of the endorsement “without prejudice”, citing Long Innes J’s derision of that phrase in Haynes v Hirst. However, his Honour acknowledged it signalled that the ensuing negotiations were not to affect the parties’ rights.
The scenario where a party terminates on a without prejudice basis and then maintains that it did not elect to terminate does not appear to have been subject to judicial analysis. Perhaps this is because such a position is simply untenable. A party who expressly states that it is terminating a contract is sending a clear message even if it prefaces that its action is without prejudice to its other rights. In such a situation, the expression “without prejudice” only clarifies that the party is preserving all rights that are consistent with termination.
A related issue is what happens when a notice of termination turns out to be wrongful. Does a prefatory statement of “without prejudice” save it from being repudiatory? Gloxinia Investments Ltd v Low suggests a negative answer. In Gloxinia, completion under a contract for sale did not occur on the date for completion. In due course the vendor’s solicitors gave a notice entitled “Notice of termination of contract for the sale of land” that was stated to be “without prejudice to any of the rights of the Vendor”. Young AJ found that the vendor was unable to complete, concluding that the purchasers were entitled to treat the notice as a repudiation.
To avoid repudiation, one might be tempted to dilute the notice further by using conditional language that is in addition to a disclaimer that the notice is without prejudice. However, the obvious difficulty in doing so is that any purported termination is likely to be equivocal and thus ineffective. For example, it would be manifestly unfair to a counterparty to issue a notice of termination on the proviso that the notice did not take effect if a court subsequently found that there was no underlying right to terminate. There would be no election at all.
Distilling the above, the general rule seems to be that parties cannot unequivocally purport to affirm or terminate and preserve the other course of action by glibly stating that they are acting without prejudice to other rights. Similarly, the severe consequences of a wrongful termination cannot be avoided merely because it is expressed to be without prejudice. And far from helping, using further conditional language is likely to deprive an attempted termination of any effect, meaning that a party will not have achieved what it set out to do. Returning to the hypothetical at the start, the prudent approach might be to nail one’s colours to the mast and give a direct answer to whether the client can terminate and, if so, a clear statement of the risks involved.
Finally, the foregoing should not be understood as criticising the use of the phrase “without prejudice” (and similar verbal formulae) in correspondence, so long as its use is properly informed. First and foremost, it is necessary in order to claim privilege over communications that are genuinely aimed at resolving a dispute. And used in a wider sense, it can signal the preservation of an election for a future date, as well as clarify the preservation of rights that are consistent with a party’s stated position.
 Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634 at 646 (Stephen J).
 Freshmark Ltd v Mercantile Mutual Insurance (Australia) Ltd  2 Qd R 390 at 403 (Dowsett J, McPherson JA agreeing).
 (1927) 27 SR (NSW) 480.
 (1927) 27 SR (NSW) 480 at 489.
 Ashenden v Stewarts & Lloyds (Australia) Ltd  2 NSWLR 484; Re Wilcox; ex parte Venture Industries Pty Ltd (1996) 137 ALR 47; Ashington Holdings Pty Ltd v Wipema Services Pty Ltd (1998) NSW ConvR 55-855; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1.
 Champtaloup v Thomas  2 NSWLR 264 at 269 (Glass JA); Alleyn v Thurecht  2 Qd R 706; K & K Real Estate Pty Ltd v Adellos Pty Ltd & Anor (2010) 15 BPR 28,679.
 Alleyn v Thurecht  2 Qd R 706 at 707 (DM Campbell J).
 Alleyn v Thurecht  2 Qd R 706 at 713 (McPherson J).
 (2010) 15 BPR 28,679.
 At 28,687 . Giles JA made a similar observation at 28,683 .
 (2013) 17 BPR 32,379.
 At  32,387: This can be contrasted with putative repudiatory conduct that is contained in communications that are subject to a valid claim of without prejudice privilege: Alan Ramsey Sales & Marketing Ltd v Typhoo Tea Ltd  4 WLR 59.
 A similar situation was considered in Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 where a joint venturer purported to exercise “conditionally” a right of first refusal on the basis of its interpretation of the right of first refusal clause.