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By writ dated 4 September 1979 the plaintiff, Oliver Alfred Sidney Cutts, sought injunctions and damages against the defendants, Albert Head and George Edward Head, in relation to the plaintiff's enjoyment of his right to fish from part of the River Test in Romsey and Shenfield English, Hampshire. The defendants counterclaimed for declarations in relation to the plaintiff's access to the fishery and for damages for trespass and nuisance. Foster J. by order dated 22 July 1981 granted declarations and injunctions relating to the access to and use of the plaintiff's fishery, awarded damages to the plaintiff of £2,500 and to the first defendant of £2,500 and ordered the first defendant to pay half of the plaintiff's costs of the action.

By notice of appeal dated 17 November 1981 the plaintiff appealed, inter alia, against the order as to costs on the grounds that (1) the judge erred in law in refusing to take into account an offer of settlement contained in a letter dated 15 December 1980 from the plaintiff's solicitors and the defendants' rejection of that offer and their express refusal to put forward any counter proposals; and (2) in the proper exercise of his discretion the judge ought to have ordered the first defendant to pay the whole of the plaintiff's costs from such time as he ought to have accepted the proposals contained in the letter dated 15 December 1980.

The facts are stated in the judgment of Oliver L.J.

Michael Mark for the plaintiff. The main point arising on the appeal concerns the costs of the action. The plaintiff's case is that because of an offer of settlement made by him in a letter from his solicitors he ought to have his costs from the date when that offer might reasonably have been accepted. Although the letter was headed "without prejudice" the solicitors expressly reserved the right to bring the letter to the notice of the judge on the question of costs.

The offer was in a form approved by the Court of Appeal in Calderbank v. Calderbank [1976] Fam. 93 , 106 and McDonnell v. McDonnell [1977] 1 W.L.R. 34 in Family Division proceedings.

The first question is whether one can write a "without prejudice" letter which reserves the right to use it on the issue of costs. There cannot be anything special about such a practice in the Family Division; the basis on which it was approved did not depend on any peculiarity of that division. Further, it would be most undesirable if different rules applied to such letters in other divisions.

The second question is the effect to be given to such a letter. [Reference was made to The Supreme Court Practice 1982, note 62/2/73 and R.S.C., Ord. 22, rr. 2, 6 and A. Martin French v. Kingswood Hill Ltd. [1961] 1 Q.B. 96, 103-104.]

Payment into court is not available where at the end of the day damages on the claim and counterclaim cancel each other out. The plaintiff ought not to be worse off on the question of costs because he offered the defendants £500 more than they received after trial. Further, the plaintiff's letter contained in effect two offers in order to dispose of the whole action and the proposal in relation to undertakings was not something which could have been dealt with by a payment into court.

Both the offer as to damages and the offer of overall settlement were more favourable to the defendants than the order eventually made and were offers which ought reasonably to have been accepted by them. In the proper exercise of his discretion the judge ought to have awarded the plaintiff his costs in full from 1 January 1981 which would allow a reasonable period for the defendants to consider the offer: see McDonnell v. McDonnell [1977] 1 W.L.R. 34, 38.

J. H. L. Leckie for the first defendant. There is no reference to Calderbank v. Calderbank [1976] Fam. 93 or to McDonnell v. McDonnell [1977] 1 W.L.R. 34 in The Supreme Court Practice 1982 in relation to payment into court or offers of settlement. The only reference, which is in paragraph 1554 of vol. 2, is irrelevant.

A letter is either written "without prejudice" or it is not and it requires the agreement of both parties to allow a "without prejudice" letter to be put before the court. [Reference was made to Phipson on Evidence, 13th ed. (1982), p. 373 and Walker v. Wilsher (1889) 23 Q.B.D. 335.]

The observations in Calderbank [1976] Fam. 93 and McDonnell [1977] 1 W.L.R. 34were per incuriam, and were, in any event, expressly made in the context of section 25 of the Matrimonial Causes Act 1973.

The law as stated in Phipson is made good by the authorities: see In re Daintrey, Ex parte Holt [1893] 2 Q.B. 116; Stotesbury v. Turner [1943] K.B. 370, 373; Tomlin v. Standard Telephones and Cables Ltd. [1969] 1 W.L.R. 1378, 1384 and In re Jessopp [1910] W.N. 128.

In Calderbank [1976] Fam. 93 the observations as to reserving the right to use a "without prejudice" letter in relation to costs were in fact obiter. In the Family Division and in litigation under the Matrimonial Causes Act 1973 there is no way in which the court could ever be made aware that one party had put forward an offer which ought to have been accepted. In McDonnell [1977] 1 W.L.R. 34, 37-38 the Court of Appeal drew a distinction between Family Division proceedings and ordinary 293 litigation. No objection appears to have been taken to the admission of the letter and the court made the assumption that the letter was admissible.

But even if the defendant is wrong and the judge should have taken the plaintiff's letter into account on costs, it should not be equated with a payment into court or an open offer. The question is whether the offeree should reasonably have accepted the offer, and, in deciding that, one has to take into account not only the offer but all the surrounding circumstances including the fact that the offer was made without prejudice which showed that the offeror was not sufficiently sure of himself to make an open offer. The plaintiff's offer, in the form in which it was made, was not one which the defendants ought reasonably to have accepted.

Mark in reply. In Calderbank [1976] Fam. 93a without prejudice letter had been written and, applying well established principles, the court refused to look at it. So it is clear that the court had those principles well in mind when taking the view, albeit obiter, that it was possible for a litigant to make an offer expressed to be without prejudice except on the question of costs. It is also clear that the court did not regard such a possibility as being peculiar to the type of proceedings with which it was concerned, since it was influenced by analogies with procedures in the Lands Tribunal and the Admiralty Court.

The practice in the Admiralty Court shows approval of a procedure by which offers are made on the basis that they are only to be referred to in relation to costs. [Reference was made to R.S.C., Ord. 62, r. 2, note 14 in The Supreme Court Practice 1982, p. 981.]

The only way the plaintiff could initiate a settlement was to make an offer. In Calderbank v. Calderbank [1976] Fam. 93 and McDonnell v. McDonnell [1977] 1 W.L.R. 34 the Court of Appeal took the view that there was a formula whereby an offer could be put forward so as not to affect the parties' positions in relation to the action but so that it might in relation to costs. That practice has now become established and either it is correct or it is not. The admissibility of such a letter is not a matter which should turn on the type of proceedings.

The "without prejudice" rule is really a shorthand way of saying that the correspondence is on the basis that nothing said by either party will interfere with their rights if they fail to reach agreement. With a letter of the present type the offeror is clearly saying what he intends to do. But as long as the position on which the correspondence is being conducted is made clear the precise formula ought not to matter.

The early cases were concerned only with the consequence of letters simply expressed to be "without prejudice." It does not follow that the use of the words "without prejudice except as regards costs" should be construed in the same way.

As a matter of principle there is no reason why one should not make an offer of settlement on the basis that it will only be referred to on costs. That is how payments into court are treated and similar procedures are already available in Admiralty cases, the Lands Tribunal and matrimonial cases. [Reference was made to Halsbury's Laws of England, 4th ed., vol. 1 (1973), para. 438.]

October 21. Further argument was heard at the request of the court, see post, pp. 296F - 298F.

Michael Mark for the plaintiff. The observations of Sir Robert Megarry V.-C. in Computer Machinery Co. Ltd. v. Drescher [1983] 1 W.L.R. 1379, 1382-1383 were made as a result of his own research.

It is and has been for many years the policy of the courts and of those making the rules of court that offers ought not normally to be referred to except on the question of costs because of the risk that knowledge of the offer might prejudicially affect the hearing. Thus in an ordinary money claim the only offer of settlement which would normally be relevant on the question of costs is payment into court. The rules do not merely permit this to be done on terms that the payment in should not be disclosed except on the question of costs; they direct that it should be done in this way.

Even when there was no rule, as in the case of appeals to the Court of Appeal until 1976, the court itself directed that so far as practicable references to payments into court should not be drawn to the court's attention to avoid the possibility of prejudice. [Reference was made to Mason v. Mason [1966] 1 W.L.R. 767; Thornton v. Swan Hunter (Shipbuilders) Ltd. [1971] 1 W.L.R. 1759 ; R.S.C., Ord. 59, r. 12A; Williams v. Goose [1897] 1 Q.B. 471, 473; Millensted v. Grosvenor House (Park Lane) Ltd. [1937] 1 K.B. 717, 723, 727 and rule 50 of the Matrimonial Causes Rules 1968.]

This policy has been carried even further by R.S.C., Ord. 16, r. 10 which provides for offers of contribution and states that even if a party expressly provides in an offer that he reserves the right to draw it to the court's attention at the trial, he may not do so except on the question of costs.

In other cases where payment in cannot be made the courts have devised or approved methods of making offers which may only be referred to on the question of costs, thereby averting the risk that they may be used to the prejudice of one party or the other at the hearing. In the Court of Appeal offers are frequently written proposing a compromise of an appeal and reserving the right to draw the proposals to the court's attention on the question of costs. These letters are sometimes headed "without prejudice" and sometimes not but are always regarded as being without prejudice except on the question of costs and are referred to on the question of costs where appropriate.

There are a number of unreported cases in which Calderbank v. Calderbank [1976] Fam. 93has been referred to, and see also Potter v. Potter [1982] 3 All E.R. 321 , 327 and Morrish v. Morrish, The Times, 30 July 1983. In addition there are at least two Chancery Division cases where Calderbank letters have been relied on without objection: see In re D. (J.) [1982] Ch. 237, 255 and Computer Machinery Co. Ltd. v. Drescher [1983] 1 W.L.R. 1379.

Another example of an offer referred to only on costs is the sealed offer in arbitration proceedings: see Tramountana Armadora S.A. v. Atlantic Shipping Co. S.A. [1978] 1 Lloyd's Rep. 391, 396-398 and Archital Luxfer Ltd. v. Henry Boot (Construction) Ltd. [1981] 1 Lloyd's Rep. 642, 654-655. It should be noted that an arbitrator has the same discretion as to costs as a High Court judge: see Stotesbury v. Turner [1943] K.B. 370, 371-372.

As for the practice in the Admiralty Court, British Shipping Laws, vol. 1 (1964), para. 717 shows that the so-called open offer must not be disclosed to the court except on the issue of costs.

The Lands Tribunal procedure referred to earlier should also be noted.

It follows that it is desirable in the interests of justice and of encouraging compromises, shortening litigation and saving costs, that there should be a form of offer in relation to settlement proposals not capable of being the subject of a payment into court which can be referred to only on costs.

In so far as Walker v. Wilsher, 23 Q.B.D. 335and In re Daintrey [1893] 2 Q.B. 116 are authorities for the proposition that one cannot make an offer on the footing that it can only be referred to on costs, they are wrong and are inconsistent with numerous other cases including cases in the Court of Appeal. There is nothing in those two cases which, properly understood, conflicts with the Calderbankapproach, and the passages relied on are dicta not ratio: see Tomlin v. Standard Telephones and Cables Ltd. [1969] 1 W.L.R. 1378, 1382. In any event the cases were concerned only with "without prejudice" letters containing no reservation in relation to costs and were not therefore directed to letters which do contain such a qualification.

On the difficulties of applying the reasoning in one case to different facts which were not in the contemplation of the court: see Quinn v. Leathem [1901] A.C. 495, 506. Calderbank letters are now in common use throughout the Chancery and Queen's Bench Divisions and have been for the past three or four years.

J. H. L. Leckie for the first defendant. The practice and rules in relation to payment into court have no direct relevance; nor have the special rule about contribution notices and the procedure under rule 50 of the Matrimonial Causes Rules 1968 relating to damages against corespondents. [Reference was made to The Supreme Court Practice 1982, vol. 2, p. 454.]

It must be borne in mind that Calderbank v. Calderbank [1976] Fam. 93 was obiter on the present issue. The court is bound by Walker v. Wilsher, 23 Q.B.D. 335, which was a decision that the court is not entitled to look at correspondence marked "without prejudice" for any purpose including costs.

There is nothing which demonstrates any agreement by the defendants that the correspondence was to be treated as anything other than without prejudice. To hold that, without such agreement, the plaintiff is entitled to use the letter on costs makes a nonsense of without prejudice correspondence and puts the person to whom such a letter is addressed in an impossible situation.

The law as laid down in Walker v. Wilsher, 23 Q.B.D. 335, ought not to be lightly departed from by a sidewind. The suggestion made in Calderbank v. Calderbank [1976] Fam. 93 was formulated specifically for use in matrimonial causes by a court aware that the procedure in such causes is not as formal as that in other divisions. But in a case such as the present it is contrary to the whole principle behind Walker v. Wilsher to allow parties to conduct without prejudice correspondence and then place a gloss on it. The words "without prejudice" have acquired a hallowed 296 meaning, so that the legal consequence which flows from putting those words at the top of a letter is that it cannot be put before the judge. A party cannot have it both ways.

It may be that a recipient of a Calderbankletter is entitled to elect to regard the offer it contains as open; and, if he does not do so and the maker of the offer continues to treat the documentation as being without prejudice throughout the trial, the maker cannot then withdraw the without prejudice veil and refer to the offer on costs. [Reference was made to Tomlin v. Standard Telephones and Cables Ltd. [1969] 1 W.L.R. 1378, 1384.] Once advantage has been taken of the without prejudice rule a party cannot put in evidence any of the correspondence in any context.

The rules of public policy require that where parties resort to without prejudice negotiations those negotiations should not be disclosed in any circumstances. The whole essence of such negotiations is that parties should be free to explore all avenues of compromise without either side feeling threatened.

The "sealed" offer procedure used in arbitrations has evolved in a special jurisdiction where parties voluntarily submit to the forum and consent to the practice therein.

A one-side privilege is something unknown to the law. The reservation as to costs in a "without prejudice" letter is a condition subsequent which is repugnant to the basic premise on which the letter is written. It is not something which can be the subject of tacit agreement. The fact that a practice has grown up does not mean that it is in fact a proper way of proceeding. Had the matter been fully argued in Calderbank v. Calderbank [1976] Fam. 93 Cairns L.J. would not perhaps have suggested that it was open to a party to write a "without prejudice" letter which contained a reservation in relation to costs.

Mark in reply. A party can put forward an offer to compromise on whatever basis he likes so long as it does not offend public policy and he makes the basis of the offer clear.

Cur. adv. vult.

This appeal has taken a very unusual course. It is an appeal from an order of Foster J. made on the trial of the action on 22 July 1981 and it first came before us on 12 October 1983, when we delivered judgment allowing the appeal in part but dismissing it on the point with which we have been concerned today. The action was one which concerned the plaintiff's rights of access over the first defendant's land to the plaintiff's fishery. He claimed certain declarations and injunctions and damages and there was a counterclaim for various negative declarations and for damages for trespass. After a very lengthy hearing the judge found generally in the plaintiff's favour, save that he also found that the defendant had two sustainable claims for damages. He therefore granted the plaintiff certain injunctions but he also inserted in the order certain declarations purporting to limit the plaintiff's enjoyment of his rights of access and a mandatory order upon him to carry out certain 297 repairs. He also awarded the plaintiff damages in a sum which precisely equalled the damages awarded to the defendant so that, in this respect, the claim and the counterclaim cancelled out. The defendant did not appeal against this, but the plaintiff appealed against the imposition of the restrictions placed by the judge on the exercise of his rights and also against the order to carry out repairs. That was the substance of the appeal, although there were subsidiary points on costs.

Before the appeal came on, however, the defendant, no doubt on advice, conceded (and, I think, clearly rightly conceded) that the declarations and order appealed against were made without any jurisdiction and that the judge's order must therefore be varied accordingly. The result of that was that, but for the subsidiary questions on costs, there would have been nothing left in the appeal. The plaintiff, however, had obtained the judge's leave to appeal against the order made as regards the costs of the action, and the notice of appeal also challenged the correctness of the judge's order as regards the costs of a hearing before him when, as a result of their failure to agree on the form of the order to be made, counsel found it necessary to speak to the minutes. Accordingly, the appeal was brought on these two points. The parties were anxious to have the appeal heard without delay and, having been offered a convenient date upon which only two Lords Justices could be available, they agreed to the appeal being heard by a court so constituted, notwithstanding that the appeal was, in fact, a final appeal.

I do not think that anybody at that stage appreciated the far-reaching importance of the point which, in fact, has occupied most of the time taken in hearing the appeal and, indeed, Mr. Leckie had not originally, I think, thought that it would be necessary to refer the court to any authority on the point. With hindsight, it can be seen that it would have been preferable for the appeal to have been heard by a full court of three, but the general importance of the point at issue did not fully emerge until the second day of the hearing by which time it was, for practical purposes too late to interrupt the hearing and start the whole appeal again before a reconstituted court. We, accordingly, proceeded to hear the appeal, which we allowed as regards the costs of speaking to the minutes. No further question arises as to that.

The main part of the argument, however, was taken up with the other point at issue, namely the general costs of the action. The judge evidently took the view that, since the defendant had succeeded in establishing a claim to damages, albeit one which was equalled by the plaintiff's claim, the plaintiff, notwithstanding that he had in the main succeeded in the action, ought not to have the whole of his costs against the defendant. He accordingly ordered that the defendant pay to the plaintiff only half of the plaintiff's taxed costs of the action. That, of course, was an exercise of the judge's discretion which it would not ordinarily be easy for an appellant to challenge successfully, but the point at issue in the appeal - which I will elaborate more fully in a few moments - was whether he had exercised his discretion on a wrong principle in as much as he had declined to look at and take into consideration an offer of compromise made by the plaintiff before the trial, which was contained in a letter written in a form suggested by this court as being appropriate in matrimonial proceedings relating to 298 financial provision. Mr. Leckie succeeded in persuading us that, whatever may be the appropriate procedure adopted without argument by this court in matrimonial proceedings, we were bound by the authority of a powerful decision of this court (consisting of Lord Esher M.R., Lindley and Bowen L.JJ.) to hold that it was not one which was generally available and that the judge was, therefore, right in principle in declining to take the offer into account when determining the question of costs. We accordingly dismissed the appeal on this point.

After the hearing, however, and before the order was drawn up, two things emerged. In the first place, it emerged that the question in issue had in fact been very recently considered by Sir Robert Megarry V.-C. in a case to which we had not been referred, but which plainly would have influenced our decision if it had been known to us. Let me make it quite clear that I am not in the least blaming counsel for not drawing this decision to our attention. They could not, any more than could the court, have known of it because it was not in fact reported until the issue of the All England Reports published on the Friday (14 October 1983) following our decision. The second thing that emerged, both as a result of counsel's inquiries and of discussion with some of our colleagues more familiar than we with practice in the Queen's Bench and Family Divisions, was that the use of the Family Division procedure, both in the Queen's Bench and Family Divisions (and, as it now appears, in the Chancery Division) was, in fact, very much more widespread than we had supposed and that it has been frequently sanctioned in this court in proceedings other than matrimonial proceedings although, apparently, without any challenge having been offered to it.

As a result of the publication of the report referred to, Mr. Mark was very properly prompted to draw it to the court's attention and to inquire whether the court would require further argument and, in the circumstances, we thought it right to direct that the order should not be drawn up until the matter had been restored and consideration given to the question of whether the judgments delivered on 12 October 1983 should be withdrawn. As a result, we have now had the benefit of a much fuller argument than we had when the matter was first before us, and our attention has been directed to a number of authorities not previously cited which, it is argued, whilst they do not directly bear on the point in issue, should cause us to re-examine the view which we previously formed that we were bound by authority to come to the conclusion that we did. Having heard that fuller argument, we thought it right to direct that the judgments which we delivered on 12 October should, so far as this point is concerned, be withdrawn in any event, and we accordingly reserved judgment.

I turn, therefore, to a rather more detailed consideration of the relevant facts. The trial, which lasted some 33 days, took place in the summer of 1981 and, as already indicated, resulted in the plaintiff successfully establishing the rights of access which he claimed in the action. At an earlier stage of the matter, that is to say in July 1979, there had been a motion (which in fact came before Fox L.J.) the result of which was a consent order under which undertakings were given on the part of the defendant not to obstruct the access claimed by the plaintiff 299 and undertakings were given on the part of the plaintiff with regard to the use of the access - undertakings which limited that use in a manner more favourable to the defendant than he has, in the event, been found to be entitled to demand. On 15 December 1980 with the trial impending, the plaintiff's solicitors wrote to the defendant's solicitors a letter in which they suggested that the action be compromised on terms which they there set out. This letter was headed "without prejudice" and indicated that, after the failure of previous negotiations, their client had "now instructed that we write without prejudice with further proposals." It then set out a series of proposals for the settlement of the action and those proposals undoubtedly would in fact have been more beneficial to the defendant than the order which was finally made on the determination of the action. In particular, it suggested that the access as limited by the undertakings in the consent order should continue, that the plaintiff should pay the defendant a sum of £ 500 in respect of one of his claims to damages and that, subject to this, all other claims to damages on each side should be treated as cancelling each other out. Each side was to pay its own costs.

In effect, the plaintiff was offering to the defendant everything that the defendant got out of the action and, in fact, a little bit more, because, on the total sum of damages, the defendant was being offered £500 more than he actually got out of the action in which, as has been seen, the two sums of damages precisely cancel out. That letter goes on, after the setting out of the terms:

"Should the above proposals, as a whole, not recommend themselves to your clients we would respectfully suggest that they give further consideration to those relating to damages. These are put forward to enable the real issue, that of access, to be dealt with more effectively, and in the event of this being unacceptable to your clients, we reserve the right to bring this letter to the notice of the judge on the issue of costs."

When, after judgment, the judge came to deal with the question of costs, Mr. Mark sought to refer to this letter for the purpose of showing that, at least from the date at which the offer in the letter could reasonably have been accepted (which he put at 31 December 1980), this expensive action was totally unnecessary, since the defendant could then have got everything to which he was entitled without a contest. If the letter was admissible that argument was, I think, unanswerable. We have heard Mr. Leckie's submissions to the contrary but, speaking for myself, I have no doubt at all that, on that hypothesis, it almost inevitably followed that the plaintiff was entitled to his costs of the action from the date suggested. The judge, however, declined to look at the letter on the ground that, since it was marked "without prejudice," he was precluded from taking it into consideration. It is that refusal which Mr. Mark relies upon as showing that the judge erred in principle in exercising his discretion as to costs in the way in which he did. In support of his contention that the correspondence could be referred to, he drew the judge's attention to two decisions of this court in matrimonial cases which have undoubtedly established the admissibility on questions of costs of letters in the form of the letter in this case in matrimonial proceedings concerned with financial 300 provision for parties to and issue of marriage. It seems, however, that neither counsel was able to draw the judge's attention to any reported case in which the point had been dealt with in proceedings of any other type and the judge accepted the submission of Mr. Leckie that the practice was peculiar to the Family Division.

The first case upon which Mr. Mark relied was a decision of this court in Calderbank v. Calderbank [1976] Fam. 93 . That was a matrimonial dispute about what provision should be made for the parties under the provisions of sections 23 and 24 of the Matrimonial Causes Act 1973. There was also a summons before the court under section 17 of the Married Women's Property Act 1882. In an affidavit which was sworn on 10 August 1974 the wife had offered to transfer to the husband a house which was occupied by the husband's mother, which was then worth about £12,000, in return for his vacating the matrimonial home which she wanted to sell. He had refused the offer on the ground that it was not adequate for his needs. Heilbron J. granted a declaration sought by the wife and ordered a lump sum payment of £10,000 for the husband out of the proceeds of sale of the matrimonial home. So it will be seen that, in fact, the husband got rather less out of this than he had been offered by the offer of 10 August 1974 which would have been worth £12,000 to him. The question of costs came before this court and was dealt with in a judgment of Cairns L.J. in which he said, at p. 105:

"Before Heilbron J. the wife's application for costs was based upon a letter which had been written by the wife's solicitors to the husband's solicitors offering something substantially more than £10,000. Heilbron J., despite that letter being drawn to her attention, made no order as to costs. Immediately after the hearing before her it was discovered that that was a 'without prejudice' letter and very properly at the opening of this part of the appeal Mr. Hordern asked for the court's guidance as to whether in those circumstances he was entitled to rely upon that letter. We formed the opinion that he was not. The letter was written without prejudice. The 'without prejudice' bar had not been withdrawn and therefore we took the view that it was a letter which could not be relied upon either before the judge at first instance or before this court. Mr. Hordern then indicated the difficulty that a party might be in in proceedings of this kind when he or she was willing to accede to some extent to an application that was made and desired to obtain the advantages that could be obtained in an ordinary action for debt or damages by a payment into court, that not being a course which would be appropriate in proceedings of this kind."

"There are various other types of proceedings well known to the court where protection had been able to be afforded to a party who wants to make a compromise of that kind and where payment in is 301 not an appropriate method. One is in proceedings before the Lands Tribunal where the amount of compensation is in issue and where the method that is adopted is that of a sealed offer which is not made without prejudice but which remains concealed from the tribunal until the decision on the substantive issue has been made and the offer is then opened when the discussion as to costs takes place. Another example is in the Admiralty Division where there is commonly a dispute between the owners of two vessels that have been in collision as to the apportionment of blame between them. It is common practice for an offer to be made by one party to another of a certain apportionment. If that is not accepted no reference is made to that offer in the course of the hearing until it comes to costs, and then if the court's apportionment is as favourable to the party who made the offer as what was offered, or more favourable to him, then costs will be awarded on the same basis as if there had been a payment in. "I see no reason why some similar practice should not be adopted in relation to such matrimonial proceedings in relation to finances as we have been concerned with. "Mr. Millar drew our attention to a provision in the Matrimonial Causes Rules 1968 with reference to damages which were then payable by a co-respondent, provision to the effect that an offer might be made in the form that it was without prejudice to the issue as to damages but reserving the right of the co-respondent to refer to it on the issue of costs. It appears to me that it would be equally appropriate that it should be permissible to make an offer of that kind in such proceedings as we have been dealing with and I think that that would be an appropriate way in which a party who was willing to make a compromise could put it forward. I do not consider that any amendment of the Rules of the Supreme Court is necessary to enable this to be done."

Now, in fact, the letter in the Calderbankcase was not in the form suggested by Cairns L.J. and, indeed, the court did not take it into consideration. What had happened there was that the "without prejudice" offer had been repeated as an open offer in the affidavit referred to above (ante, p. 300B) and the costs were dealt with on the footing that the husband ought to have accepted that open offer. Thus, Cairns L.J.'s suggested procedure was dictum only and, as Mr. Leckie has observed, dictum without any argument in opposition. The procedure suggested is obviously a sensible and convenient one in a case where payment into court is not appropriate, and it is not, therefore, surprising to find that practitioners were quick to adopt it. In McDonnell v. McDonnell [1977] 1 W.L.R. 34 a letter had been written in the suggested form - it has since become dignified by the title "a Calderbank letter" - and this court, again without any argument on the matter, accepted and endorsed the practice suggested by Cairns L.J.

I do not think that I need refer to that case in any detail. Ormrod L.J. said, at pp. 37-38: 302

"The important factor which distinguishes this case is the fact that the appellant husband's solicitors took advantage of a recent decision of this court in Calderbank v. Calderbank [1976] Fam. 93 . On 16 December 1975, shortly after serving the notice of appeal, they wrote a letter to the wife's solicitors offering to withdraw the appeal altogether if the wife would agree to a modification of Lane J.'s order in respect of the house. In accordance with the procedure suggested in Calderbank , they headed the letter 'without prejudice' but reserved the right to bring it to the attention of the court after judgment on the question of costs."

Then he considers the significance of the letter and says:

"Clearly this is a very important consideration in exercising the court's discretion with regard to costs. It would be wrong, in my judgment, to equate an offer of compromise in proceedings such as these precisely to a payment into court. I see no advantage in the court surrendering its discretion in these matters as it has to all intents and purposes done where a payment into court has been made. A Calderbank offer should influence but not govern the exercise of the discretion. The question to my mind is whether, on the basis of the facts known to the wife and her advisers and without the advantage of hindsight, she ought reasonably to have accepted the proposals in the letter of 16 December, bearing always in mind the difficulty of making accurate forecasts in cases such as this. On the other hand parties who are exposed to the full impact of costs need some protection against those who can continue to litigate with impunity under a civil aid certificate."

Since the first hearing of this appeal a Lexis search has been carried out, from which it emerges that the procedure has been resorted or referred to in a number of other reported cases, but always in relation to proceedings for financial provision in the Family Division (see, for instance, Potter v. Potter [1982] 1 W.L.R. 1255); and Mr. Leckie draws particular attention to Cairns L.J.'s reference in Calderbank [1976] Fam. 93, 106 to the desirability of such a procedure in "such proceedings as we have been dealing with" as indicating that he, at any rate, never envisaged the suggested procedure as having any wider application. He points out that the current editions of Cross on Evidence, 5th ed. (1979), and Phipson on Evidence , 13th ed. (1982), contain no mention of Calderbank at all, whilst Halsbury's Laws of England, 4th ed., vol. 17 (1976), para. 213, states the general rule that a "without prejudice" letter cannot be referred to on a question of costs and then qualifies it by a footnote which suggests that the Calderbank letter is an exception restricted to "matrimonial proceedings relating to finance."

What Mr. Leckie particularly relies on, however, is the decision of this court in Walker v. Wilsher (1889) 23 Q.B.D. 335. This was an appeal from Huddleston B., who had, on the question of costs after trial, looked at some "without prejudice" correspondence and made his order accordingly. That was attacked in the Court of Appeal, Lord Esher M.R. saying, at pp. 336- 337: 303

"The letters and the interview were without prejudice, and the question is whether under such circumstances they could be considered in order to determine whether there was good cause or not for depriving the plaintiff of costs. It is, I think, a good rule to say that nothing which is written or said without prejudice should be looked at without the consent of both parties, otherwise the whole object of the limitation would be destroyed. I am, therefore, of opinion that the judge should not have taken these matters into consideration ..."

"What is the meaning of the words 'without prejudice'? I think they mean without prejudice to the position of the writer of the letter if the terms he proposes are not accepted. If the terms proposed in the letter are accepted a complete contract is established, and the letter, although written without prejudice, operates to alter the old state of things and to establish a new one. A contract is constituted in respect of which relief by way of damages or specific performance would be given. Supposing that a letter is written without prejudice then, according both to authority and to good sense, the answer also must be treated as made without prejudice."

A little further on Lindley L.J. said, at p. 338:

"No doubt there are cases where letters written without prejudice may be taken into consideration, as was done the other day in a case in which a question of laches was raised. The fact that such letters have been written and the dates at which they were written may be regarded, and in so doing the rule to which I have adverted would not be infringed. The facts may, I think, be given in evidence, but the offer made and the mode in which that offer was dealt with - the material matters, that is to say, of the letters - must not be looked at without consent."

Bowen L.J. was equally adamant. He said, at p. 339:

"The precise question now before us, as to the admissibility of such evidence for the purpose of deciding as to the costs of an action, could not have arisen before the Common Law Procedure Act 1852. Up to then costs at common law always followed the event, and it naturally follows that there is no authority before that time on the point. Then comes the case before Kindersley V.-C. who did precisely what Huddleston B. has done here. I think there was a confusion of thought and reasoning in the judgment of the Vice-Chancellor which we ought not to hesitate to point out. The use that the defendant sought in that case to make of the offer which had been made without prejudice was to attract the attention of the court to the conduct of the plaintiff upon receiving it. In my opinion it would be a bad thing and lead to serious consequences if the courts allowed the action of litigants, on letters written to them without prejudice, to be given in evidence against them or to be used as material for depriving them of costs. It is most important that the door should not be shut against compromises, as would certainly be the case if letters written without 304 prejudice and suggesting methods of compromise were liable to be read when a question of costs arose. The agreement that the letter is without prejudice ought, I think, to be carried out in its full integrity."

This, Mr. Leckie submits, is a clear authority, which is binding upon this court, for the proposition that "without prejudice" means "without prejudice for all purposes" and that a letter once so marked cannot be referred to at any stage of the proceedings without the consent of both parties. Costs are, he submits, as much an issue in the proceedings as in anything else, and indeed the proposed compromise almost invariably relates to the costs of the proceedings as much as the other matters in issue.

Mr. Mark accepts that this court is bound by Walker v. Wilsher, 23 Q.B.D. 335, so far as it constitutes decision, although he categorises the wide remarks of the court as to the meaning of the words "without prejudice" as dicta, but he submits that the case establishes no more than that, where a letter is headed "without prejudice" simpliciter and no reservation is made by the writer similar to that suggested in the Calderbankcase [1976] Fam. 93, it cannot be referred to on the question of costs. That, indeed, was accepted by the court in Calderbank v. Calderbank. Walker v. Wilsher, 23 Q.B.D. 335, he submits, tells us nothing about a letter of the Calderbank type which was not there in issue and indeed was not even contemplated in that case.

Mr. Leckie's answer to this - and it was one which appealed to us when we first heard the matter - is that it is altogether too restricted a construction of the decision in Walker v. Wilsher, 23 Q.B.D. 335. The court was concerned with the question of whether the contents of a letter headed "without prejudice " could be looked at at all, and the court decided that it could not - in other words, the "without prejudice" heading cast a veil, not over the date on which the letter was written or over the fact that it was written, but over the whole of the contents, which would, of course, include the purported unilateral reservation of the right to treat the letter as "with prejudice" in a certain event. If you cannot refer to the letter at all, you cannot refer to and rely on a reservation contained in it, for that is a reservation which is, in terms, repugnant to the expressed nature of the letter itself. He refers particularly to the statement of Lord Esher M.R., 23 Q.B.D. 335, 337, that to look at something written without prejudice would be to destroy "the whole object of the limitation" and to Lindley L.J.'s clear opinion, at p. 338, that:

"the offer made and the mode in which that offer was dealt with - the material matters, that is to say, of the letters - must not be looked at without consent."

Support for Mr. Leckie's view of the matter is, I think, to be gained from dicta in In re Daintrey [1893] 2 Q.B. 116, a decision of a Divisional Court in bankruptcy. The question at issue there was whether a particular letter could be relied upon as an act of bankruptcy. The letter was one sent by a debtor to a creditor at a time when there was no dispute, headed "without prejudice" and containing an offer of composition but threatening that payment would be suspended unless the offer was accepted. The court, in holding that the letter was admissible, relied upon the fact that 305 there was no dispute and no offer of compromise, so that the sender could not destroy the admissibility of the letter as evidence simply by heading the letter "without prejudice," the protection afforded by that phrase being limited to negotiations for compromise. In giving the judgment of the court, however, Vaughan Williams J. went on to observe obiter, at p. 120:

"Moreover, we think that the rule has no application to a document which, in its nature, may prejudice the person to whom it is addressed. It may be that the words 'without prejudice' are intended to mean without prejudice to the writer if the offer is rejected; but, in our opinion, the writer is not entitled to make this reservation in respect of a document which, from its character, may prejudice the person to whom it is addressed if he should reject the offer, and for this reason also we think the judge is entitled to look at the document to determine its character."

Thus, Mr. Leckie argues, the plaintiff here is not only in a dilemma himself, but he puts the other party in a dilemma, for he says in one breath "this is without prejudice" and in the next threatens to use the letter to the prejudice of the other if the offer is not accepted. The two stances are contradictory and, if what Vaughan Williams J. said in In re Daintreyis right, the recipient of the letter is entitled to write back and say:

"This is not without prejudice at all. If you want to negotiate without prejudice, by all means let us do so, but you cannot have it both ways. If you wish to use your letter prejudicially against me, you must take your courage in both hands and treat the correspondence as open throughout."

This argument was one from which, on the material before us at the first hearing of this appeal, I found it very difficult to escape, although Mr. Leckie had frankly to admit that Calderbank v. Calderbank [1976] Fam. 93 (which he has to say is contrary to previous authority) had created an anomaly in the Family Division for which it was very difficult to account. However, he took his stand upon the "sacred" nature of "without prejudice" negotiation (see Hoghton v. Hoghton (1852) 15 Beav. 278, per Sir John Romilly M.R. at p. 321) and the oft-reiterated statements that such negotiations are, as a matter of public policy, to be protected from disclosure to the court seised of the dispute: see Stotesbury v. Turner [1943] K.B. 370 following Walker v. Wilsher, 23 Q.B.D. 335, and see also Tomlin v. Standard Telephones and Cables Ltd. [1969] 1 W.L.R. 1378, per Ormrod J. at p. 1385.

Now, it is certainly the case - and the contrary is not argued - that the use of the words "without prejudice" as a cover for negotiations and with no reservation of the sort suggested in Calderbank v. Calderbank [1976] Fam. 93, 106 has today the same consequences as it had in 1889 when Walker v. Wilsher, 23 Q.B.D. 335, was decided. Thus, it cannot be 306 contended that the meaning of the expression has changed. The answer to the question whether, accepting that meaning, it is yet open to a party taking advantage of the protection afforded by the use of the formula to qualify its operation must, I think, therefore be sought in an analysis of the underlying basis for the protection and the practice of the courts generally in relation to its application. As to this Mr. Mark's argument may, I think, be summarised conveniently in three propositions. (1) The protection from disclosure of without prejudice negotiations rests in part upon public policy and in part upon convention (i.e. an express or implied agreement that the negotiations shall be so protected). (2) There is no public policy which precludes a conventional modification of the protection to the extent suggested in Calderbank v. Calderbank [1976] Fam. 93 , 106. (3) The actual practice adopted in all divisions of the High Court shows that this conventional modification has been generally accepted and is recognised by the courts and to that extent at least public policy has been modified.

That the rule rests, at least in part, upon public policy is clear from many authorities, and the convenient starting point of the inquiry is the nature of the underlying policy. It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceedings. They should, as it was expressed by Clauson J. in Scott Paper Co. v. Drayton Paper Works Ltd. (1927) 44 R.P.C. 151, 156, be encouraged fully and frankly to put their cards on the table. If, however, the protection against disclosure rested solely upon a public policy to encourage out-of-court settlement of disputes, Walker v. Wilsher, 23 Q.B.D. 335is not readily intelligible, for, although the court - and in particular Bowen L.J. - seem to have been prepared to assume that an inability to refer to the correspondence on a question of costs, after judgment, would encourage settlement, it is difficult to see, if one thinks about it practically, how that could do so. As a practical matter, a consciousness of a risk as to costs if reasonable offers are refused can only encourage settlement whilst, on the other hand, it is hard to imagine anything more calculated to encourage obstinacy and unreasonableness than the comfortable knowledge that a litigant can refuse with impunity whatever may be offered to him even if it is as much as or more than everything to which he is entitled in the action. The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability.

It was expressed thus by Romilly M.R. in Jones v. Foxall (1852) 15 Beav. 388, 396:

"... I find that the offers were in fact made without prejudice to the rights of the parties; and I shall, as far as I am able, in all cases, endeavour to repress a practice which, when I was first acquainted with the profession, was never ventured upon, but which, according to my experience in this place, has become common of late - namely, 307 that of attempting to convert offers of compromise into admissions of acts prejudicial to the person making them. If this were permitted, the effect would be, that no attempt to compromise a dispute could ever be made."

Once, however, the trial of the issues in the action is at an end and the matter of costs comes to be argued, this can have no further application for there are no further issues of fact to be determined upon which admissions could be relevant. One is, therefore, compelled to seek some additional basis for the decision in Walker v. Wilsher, 23 Q.B.D. 335and it is, as it seems to me, to be found in an implied agreement imported from the marking of a letter "without prejudice" that it shall not be referred to at all. This certainly derives some support from the judgment of Bowen L.J. where he says, at p. 339, that "The agreement that the letter is without prejudice ought, I think, to be carried out in its full integrity" and it accords with the view expressed by Denning L.J. in Rabin v. Mendoza & Co. [1954] 1 W.L.R. 271, 273:

"It is said, however, that, apart from legal professional privilege, there is a separate head of privilege on the ground that the documents came into existence on the understanding that they were not to be used to the prejudice of either party. 'Without prejudice' does not appear as a head of privilege in the White Book; but in Bray on Discovery at p. 308 it is stated: 'The right to discovery may under very special circumstances be lost by contract as where correspondence passed between the parties' solicitors with a view to an amicable arrangement of the question at issue in the suit on a stipulation that it should not be referred to or used to the defendant's prejudice in case of a failure to come to an arrangement.' That proposition is founded on Whiffen v. Hartwright (1848) 11 Beav. 111 , 112, where Lord Langdale M.R. refused to order the production of letters which passed 'without prejudice,' observing that he 'did not see how the plaintiff could get over this express agreement, though he by no means agreed, that the right of discovery was limited to the use which could be made of it in evidence.' The Master of the Rolls there affirms the undoubted proposition that production can be ordered of documents even though they may not be admissible in evidence. Nevertheless, if documents come into being under an express, or, I would add, a tacit, agreement that they should not be used to the prejudice of either party, an order for production will not be made."

Whatever may have been the position in 1889, it is, I think, clear that there can now no longer be said to be any reason in public policy why, where offers have been made and refused of everything which could be obtained by the proceedings, that fact should not be brought to the court's attention in the argument as to costs. I say that in the light of the matters which are referred to below. If this is right, then is there any logical reason why, in appropriate circumstances, the conventional meaning of the phrase should not be modified so long as this intended modification is clearly expressed and brought to the attention of the recipient? Is there, to put it another way, any policy of the law which prevents a party to litigation from putting forward an offer of compromise on the footing that 308 it shall be treated as "without prejudice" on the issue of liability only? Mr. Mark submits that there clearly is not and he draws attention to numerous examples of closely analogous procedures which have been sanctioned and recognised in proceedings where no payment into court is appropriate. To begin with, the procedure established by the Rules of the Supreme Court since 1933 for payment into court in the case of actions for debt or damages, where the fact of payment in is withheld from the court until after liability, is no more nor less than a "without prejudice " offer of settlement subject to a reservation that the offer will be brought to the court's attention when the issue of liability has been determined. The only essential difference is that it is backed up by a deposit with the court of the amount offered. Thus, Mr. Mark submits, it is really unarguable that there is any public policy which prevents exactly the same thing being done, in a case where a money payment is not, or is not alone, the relief claimed in the proceedings. and one finds that, in fact, similar procedures have been adopted in many cases where the defendant is not able to protect his position by a payment in or where a payment in is not appropriate. Perhaps the most striking example is that of the sealed offer in arbitration proceedings. Mr. Mark has referred us to the decision of Donaldson J. yn Tramountana Armadora S.A. v. Atlantic Shipping Co. S.A. [1978] 1 Lloyd's Rep. 391 and, in particular, to the following passage, at p. 396:

"Although the respondents' offer of settlement has been referred to as an 'open offer,' this is a misnomer. Offers of settlement in arbitral proceedings can be of three kinds, namely, 'without prejudice,' ' sealed' and 'open.' A 'without prejudice' offer can never be referred to by either party at any stage of the proceedings, because it is in the public interest that there should be a procedure whereby the parties can discuss their differences freely and frankly and make offers of settlement without fear of being embarrassed by these exchanges if, unhappily, they do not lead to a settlement. A 'sealed offer' is the arbitral equivalent of making a payment into court in settlement of the litigation or of particular causes of action in that litigation. Neither the fact, nor the amount, of such a payment into court can be revealed to the judge trying the case until he has given judgment on all matters other than costs. As it is customary for an award to deal at one and the same time both with the parties' claims and with the question of costs, the existence of a sealed offer has to be brought to the attention of the arbitrator before he has reached a decision. However, it should remain sealed at that stage and it would be wholly improper for the arbitrator to look at it before he has reached a final decision on the matters in dispute other than as to costs, or to revise that decision in the light of the terms of the sealed offer when he sees them."

That case is a striking one because the sealed offer there made was in fact preceded by a correspondence containing the same offer, so that the sealed offer served precisely the same effect as a Calderbank letter. This case was followed and applied by Gibson J. in Archital Luxfer Ltd. v. Henry Boot Construction Ltd. [1981] 1 Lloyd's Rep. 642, 654-655.

Now, an arbitrator has the same discretion as to costs as a High Court judge (see Stotesbury v. Turner [1943] K.B. 370) and Mr. Mark asks rhetorically why, if this procedure is unexceptionable in arbitrations, should it be incapable of application in proceedings in the High Court. In fact, the "arbitration letter" or sealed offer dates back at least to compulsory arbitrations under the Lands Clauses Acts and has been formally recognised as appropriate in compensation cases under the Lands Tribunal Rules.

Again, a procedure almost identical to the Calderbank letter has, for a considerable time, been recognised and accepted in Admiralty cases, and our attention has been drawn to the following passage in British Shipping Laws, vol. 1 (1964), paras. 717 and 718:

"Where a claim is for an unliquidated sum, negotiations for settlement are based not on tender but on offers to pay. Offers to pay must not be disclosed or pleaded, even if the amount offered has been paid into court" - there follows a reference to R.S.C., Ord. 22, r. 7-"Another form of offer which is often made is directed to proportions of blame and not to amounts in money, this being confined to collisions and similar actions where proportions of blame are at stake. At the conclusion of the trial of liability, the offer is brought to the attention of the judge if the offerer has been as successful or more successful than foreshadowed by his offer."

Yet another example of a similar procedure - again where payment into court is inappropriate - is to be found in R.S.C., Ord. 16, r. 10, where a third party or joint tortfeasor makes an offer of contribution to a particular extent. Even if he reserves the right to bring the offer to the attention of the court, he is not permitted to do so until the question of liability has been determined.

Finally, Mr. Mark draws attention to the former provision referred to by Cairns L.J. in Calderbank v. Calderbank [1976] Fam. 93, namely that of rule 50 of the Matrimonial Causes Rules 1968 (S.I. 1968 No. 219 (L.4)) which empowered a corespondent in effect to make a Calderbank offer in respect of damages on the footing that it would be referred to only on the question of costs.

Now, all this shows, Mr. Mark submits - and, I am bound to say, I think rightly submits - that there is no reason in principle why the Calderbank procedure should be treated as restricted only to matrimonial proceedings or why it should be held to be ineffective or unavailable when it differs in form only, though not at all in substance, from similar procedures long recognised and accepted in relation to other types of proceedings. If, he argues, the only impediment is what has come to be regarded as the conventional effect of the use of the words "without prejudice," the result of the practice of all divisions of the court since Calderbank v. Calderbank [1976] Fam. 93 has been that that conventional 310 effect is accepted and recognised as modified to the extent that an offeror is, by the express terms of his offer, entitled to reserve his position after the issue of liability has been determined. It is here, I think, that the actual practice of the courts over the years which have elapsed since Calderbank becomes of importance. It has been brought to our attention that letters in this form have been in frequent use in the Queen's Bench Division in cases where a payment into court would not be appropriate, for instance where what is in issue is not liability but the proportions of contribution to liability - for instance in cases where a defence of contributory negligence is raised - and, in the Court of Appeal, where what is in issue is whether a judgment for damages in the court below was excessive. Although we have not been referred to any reported case in this court (other than a matrimonial case) where the procedure has been approved, we understand that its use in proceedings other than matrimonial proceedings has, in at least one case in this court, received the approval of Lord Denning M.R., and Mr. Mark has been good enough to tell us that inquiry of practitioners in both the Queen's Bench and Chancery Divisions indicates that the procedure is frequently resorted to there. Mr. Leckie does not quarrel with this, but takes his stand on Walker v. Wilsher, 23 Q.B.D. 335, and submits that the mere fact that a procedure has become common when it has been allowed to pass without argument cannot alter the fact that it is contrary to authority.

I do not, for my part, think that that is a conclusive answer for, if the protection of without prejudice correspondence as regards costs rests, as I believe that it does, on the conventional import of the words, a wide and continued practice adopted and recognised, albeit without challenge, in all divisions of the court may show - and, I think, does show - that the conventional meaning has become capable of modification where express reservation is made at the time of the offer without infringing the public policy which protects negotiations from disclosure whilst liability is still in issue.

That brings me to the recently reported decision of Sir Robert Megarry V.-C. in Computer Machinery Co. Ltd. v. Drescher [1983] 1 W.L.R. 1379. Sir Robert Megarry V.-C. said, at pp. 1382-1383:

"For reasons that will appear, I think that I should pause in my recital of the facts in order to say something about these two cases. For a long while it has been settled law that if letters written ' without prejudice' do not result in an agreement, they cannot be looked at by the court even on the question of costs, unless both parties consent: see, for example, Walker v. Wilsher, 23 Q.B.D. 335; Stotesbury v. Turner [1943] K.B. 370. Thus if in 'without prejudice' correspondence a defendant offers less than the plaintiff is claiming but more than the plaintiff ultimately recovers at the trial, the defendant cannot use his offer in support of a contention that the plaintiff should receive no costs for the period subsequent to the offer. If the claim is purely a money claim, this causes no difficulty: the defendant may pay into court under R.S.C., Ord. 22 the sum that he is offering, and although knowledge of this will be withheld from the court until both liability and quantum have been decided, the fact of payment in is admissible, and usually highly relevant, in deciding what order for costs should 311 be made. If, however, the claim is not solely a money claim, but some other relief is sought, such as an injunction, there was formerly no comparable procedure. What was needed was some procedure whereby the defendant could make an offer to submit to an injunction, give an undertaking or afford other relief on the footing that the offer would be without prejudice until the case was decided but with prejudice when it came to costs."

"It was a procedure of this type which was suggested by Cairns L.J. in Calderbank v. Calderbank [1976] Fam. 93 , 106 and was acted on in McDonnell v. McDonnell [1977] 1 W.L.R. 34, 38. These were both matrimonial appeals from the Family Division, however, and there has been some uncertainty whether the procedure applies to other cases. Thus Halsbury's Laws of England, 4th ed., vol. 17 (1976), para. 213 cites Calderbank v. Calderbank for the proposition that 'in matrimonial proceedings relating to finance' a party may make this type of offer, and the 1983 cumulative supplement to that work leaves it there. Nor do the cases appear to have been given the prominence which they deserve. Thus leading books which discuss offers made 'without prejudice' still leave unamended statements based on Walker v. Wilsher, 23 Q.B.D. 335, without any mention of either Calderbank or McDonnell: see, for example, Phipson on Evidence, 13th ed. (1982), p. 374; Cross on Evidence, 5th ed. (1979), p. 301. Nor are the cases mentioned in The Supreme Court Practice 1982.

"In my view, the principle in question is one of perfectly general application which is in no way confined to matrimonial cases. Whether an offer is made 'without prejudice' or 'without prejudice save as to costs,' the courts ought to enforce the terms on which the offer is made so as to encourage compromises and shorten litigation. The latter form of offer has the added advantage of preventing the offer from being inadmissible on costs, thereby assisting the court towards justice in making the order as to costs. I should say at once that no point on this arises for decision, as the parties have very sensibly acted on this footing. What I have been saying is as obiter as what Cairns L.J. said (and Scarman L.J. and Sir Gordon Willmer concurred with) in Calderbank v. Calderbank [1976] Fam. 93 , 106, 107; but I hope that the attention of the profession (including authors and editors) will be more generally directed to what seems to me to be a valuable procedural process that is too little used."

That, of course, was dictum, not decision, and, Mr. Leckie submits, suffers from the same defect as Calderbank [1976] Fam. 93 itself, namely that it was dictum pronounced without there being before the court any argument against the proposition. Nevertheless, it is extremely powerful dictum and, moreover, dictum which embraces a consideration of Walker v. Wilsher, 23 Q.B.D. 335, which is Mr. Leckie's sheet anchor. It is, of course, not binding upon us, but it has, I think, the importance that it further confirms the width of the practice and general acceptance of the permissibility and effectiveness of the qualification upon the accepted 312 meaning of the "without prejudice " formula to which I have referred above.

That practice had, in fact, previously been recognised (although again without contest) in the Chancery Division in In re D. (J.) [1982] Ch. 237, 255 where a letter of offer was taken into account on the question of costs. Although it does not appear from the report, Mr. Mark was able to tell us that he had ascertained from counsel engaged in the case that it was, in fact, a Calderbankoffer. Although, as I have said, I was originally persuaded by Mr. Leckie's argument that Foster J. was right to reject the letter of offer in this case, the further argument which we have heard and the considerations to which I have adverted above have compelled me to the conclusion that that decision was wrong. I think that it must now be taken to be established that the Calderbank formula suggested by Cairns L.J. is not restricted to matrimonial proceedings but is available in all cases where what is in issue is something more than a simple money claim in respect of which a payment into court would be the appropriate way of proceeding. I have not, in saying this, overlooked Mr. Leckie's submission that, whatever may be the position today, Foster J. was right to reach the conclusion that he did in 1981, there being before him no suggestion that the practice had spread beyond the Family Division where, it must be accepted, there are considerations which make such a procedure particularly desirable and appropriate. In my judgment, however, quite apart from the dictum of Sir Robert Megarry V.-C. in Computer Machinery Co. Ltd. v. Drescher [1983] 1 W.L.R. 1379, the admissibility of the letter with which this appeal is concerned would have been justified at the time of the hearing before the judge if he had had addressed to him the arguments which have been addressed to us. In the circumstances, he should, in my judgment, have admitted the letter and his failure to do so entitles the plaintiff to succeed in this court.

I would, therefore, allow the appeal and vary the order as to costs below by providing that the plaintiff should have half his costs of the action up to 31 December 1980 and the whole of his costs thereafter. I would add only one word of caution. The qualification imposed on the without prejudice nature of the Calderbankletter is, as I have held, sufficient to enable it to be taken into account on the question of costs; but it should not be thought that this involves the consequence that such a letter can now be used as a substitute for a payment into court, where a payment into court is appropriate. In the case of the simple money claim, a defendant who wishes to avail himself of the protection afforded by an offer must, in the ordinary way, back his offer with cash by making a payment in and, speaking for myself, I should not, as at present advised, be disposed in such a case to treat a Calderbank offer as carrying the same consequences as payment in.

The issue is whether a letter of 15 December 1980 written by the plaintiff's solicitors to the defendant's solicitors and communicating suggested terms of compromise can, after judgment in the action, be referred to on the question of costs and against the wishes of the 313 defendant. The letter was headed "without prejudice." After stating the proposed terms, the letter added:

"and in the event of this being unacceptable to your clients, we reserve the right to bring this letter to the notice of the judge on the question of costs."

I start with Walker v. Wilsher, 23 Q.B.D. 335. It was decided in this court in 1889 and its authority has never been questioned. It was a straightforward case of an offer of terms of compromise made "without prejudice " and with no further qualification. The letters containing the offer were held not to be admissible on the question of costs. Lord Esher M.R. said, at p. 337:

"It is, I think, a good rule to say that nothing which is written or said without prejudice should be looked at without the consent of both parties, otherwise the whole object of the limitation would be destroyed."

And Bowen L.J. said, at p. 339:

"it would be a bad thing and lead to serious consequences if the courts allowed the action of litigants, on letters written to them without prejudice, to be given in evidence against them or to be used as material for depriving them of costs. It is most important that the door should not be shut against compromises, as would certainly be the case if letters written without prejudice and suggesting methods of compromise were liable to be read when a question of costs arose."

In re Daintrey [1893] 2 Q.B. 116was a bankruptcy case in which it was held that a "without prejudice" letter was admissible as evidence to prove an act of bankruptcy. Vaughan Williams J., giving the judgment of the Divisional Court, after observing that the "without prejudice" rule was a rule adopted to enable disputants "without prejudice" to engage in discussion for the purpose of arriving at terms of peace, went on to say, at p. 120:

"Moreover, we think that the rule has no application to a document which, in its nature, may prejudice the person to whom it is addressed. It may be that the words 'without prejudice' are intended to mean without prejudice to the writer if the offer is rejected; but, in our opinion, the writer is not entitled to make this reservation in respect of a document which, from its character, may prejudice the person to whom it is addressed if he should reject the offer ..."

Those cases, I think, emphasise two things. First, that the purpose of the rule is to facilitate a free discussion of compromise proposals by protecting the proposals and discussion from disclosure in the proceedings. The ultimate aim appears to be to facilitate compromise.

Second, whilst the ordinary meaning of "without prejudice" is without prejudice to the position of the offeror if his offer is refused, it is not competent to one party to impose such terms on the other in respect of a document which, by its nature, is capable of being used to the disadvantage of that other. The expression must be read as creating a situation of mutuality which enables both sides to take advantage of the "without prejudice " protection. The juridical basis of that must, I think, in part derive from an implied agreement between the parties and in part from public policy. As to the former, Bowen L.J. in Walker v. Wilsher, 23 Q.B.D. 335, after the passage which I have already cited to the effect that it is important that the door should not be shut against compromises, went on to say, at p. 339:

"The agreement that the letter is without prejudice ought, I think, to be carried out in its full integrity."

As to public policy it obviously is desirable to facilitate compromise rather than forcing the parties to litigate to the end. But to achieve a compromise one of them has to make an offer. He might be apprehensive that his offer might be used against him if the negotiations failed. So he would make his offer without prejudice to his position if the offer was refused. But that was unfair to the other party. It was one-sided. So it was necessary to extend the "without prejudice" umbrella to cover both parties.

I come then to Calderbank v. Calderbank [1976] Fam. 93, the case which has given its name to the "Calderbank offer" (i.e., the kind of qualified "without prejudice" offer with which we are concerned in this case). In fact, one thing that was quite absent from Calderbank v. Calderbank was a Calderbank offer. There seem to have been two offers in the case as reported. The first was contained in a letter which was an unqualified "without prejudice" letter. The second was in an affidavit and was an open offer. The proposition that the letter could be referred to on the question of costs was no more capable of argument than the proposition that the affidavit could not. The Court of Appeal rejected the letter and decided the matter on the affidavit. Counsel, however, asked the court for some guidance as to the course to be followed in matrimonial proceedings for financial provision when a party decided to accede to some extent to proposals and desired to obtain the advantages that could be obtained in an ordinary action for debt or damages by a payment into court. It was in these circumstances that Cairns L.J., after referring to the Admiralty and Lands Tribunal procedure, said that it would be appropriate for the offer to be made in the form that it was without prejudice as to the issues but reserving the right to refer to it on costs. This statement was, however, entirely obiter. The question of the effect in law of a Calderbankoffer was not an issue in the case at all. The decision of the Court of Appeal in McDonnell v. McDonnell [1977] 1 W.L.R. 34takes the matter no further. The court, it is true, accepted an offer in the Calderbankform as being valid, but there is nothing to suggest that the matter was in issue or the subject of any argument.

We have not been referred to any case where the precise question with which we are concerned in this case has been an issue between the parties and has been adjudicated upon. We must, therefore, consider the matter on principle. The substantial difficulty in the defendant's way can 315 be put thus. Here is a letter headed "without prejudice." Walker v. Wilsher, 23 Q.B.D. 335, an authority binding upon the Court of Appeal, determines that, the offer having been refused, such a letter cannot be referred to on the question of costs after the trial. It is said, however, that the letter is not really "without prejudice" at all in the Walker v. Wilsher sense - it is only partially so because the plaintiff chose to restrict its operation by the concluding provision about reference to costs. But that gives rise to the question whether the plaintiff was entitled to pick and choose in that way. The rule is concerned with offers. The use of the formula protects both parties from reference to the offer if it is refused. The reason why the words "without prejudice" had to be given the extended meaning "without prejudice to the position of either party if the offer is refused" was because the offeror was not entitled to impose onesided terms which might prejudice the offeree if the offer was rejected. That, I think, is evident from the judgment in In re Daintrey [1893] 2 Q.B. 116 and also from the judgment of Lindley L.J. in Walker v. Wilsher, 23 Q.B.D. 335. The qualification that the offeror is to be quite free to refer to the offer on the question of costs so far from being without prejudice, however, may be highly prejudicial to the offeree. Certainly that could be so in a case like the present where we are concerned with the costs of a 33-day action in the High Court. It is said therefore that it was not competent to the plaintiff to make an offer in the terms which he did.

When the matter was first before us that approach seemed to me to be correct. We have now, however, had the advantage of much further argument and much more information about the practice in all divisions of the High Court and I think it is necessary to look at the matter afresh. I will consider first the question of policy. Walker v. Wilsher, 23 Q.B.D. 335, there is no doubt, proceeds upon a policy consideration, namely that the compromise of disputes should be facilitated. Now, an offer of compromise in the Calderbankform is not, so far as the substantive issues in the action are concerned, an inhibition upon compromise. Down to judgment, the proposal for compromise cannot be referred to. The matter only arises upon the question of costs after the issues have been decided. As to that, I am not convinced that the reservation as to costs would inhibit a reasonable compromise. If a party is exposed to a risk as to costs if a reasonable offer is refused, he is more rather than less likely to accept the terms and put an end to the litigation. On the other hand, if he can refuse reasonable offers with no additional risk as to costs, it is more rather than less likely to encourage mere stubborn resistance. Furthermore, the existing practice, both under the Rules of Court and other procedures, are difficult to reconcile with the existence of any public policy objection to the Calderbank type of offer.

Thus, the procedure under the Rules of Court for payment into court in cases where a debt or damages are claimed, is, in effect, a Calderbank procedure, since the fact of the payment into court cannot be referred to until the issue of liability has been determined. It then becomes material on the question of costs. Other examples are the "sealed offer" in arbitration proceedings (see Tramountana Armadora S.A. v. Atlantic Shipping Co. S.A. [1978] 1 Lloyd's Rep. 391) and in Lands Tribunal 316 proceedings (referred to by Cairns L.J. in Calderbank v. Calderbank [1976] Fam. 93) and also the Admiralty procedure in apportionment disputes in collision cases (also referred to by Cairns L.J. in Calderbank v. Calderbank). The sealed offer is not a new procedure; it seems to date back to practice adopted in compulsory arbitrations under the Lands Clauses Acts.

In the circumstances, I do not think that we would be justified in rejecting Calderbank offers on grounds of public policy. In principle, they are more likely to fulfil than to frustrate the public policy of facilitating compromises. and we have no reason to suppose that, in the various jurisdictions to which I have referred where something akin to the Calderbank offer has been operated over a substantial period, the practice has been found to be in any way unsatisfactory or that any criticism of it has developed.

There remains, however, the problem of the effect which, on the authority of Walker v. Wilsher, 23 Q.B.D. 335, attaches to the words "without prejudice. " That, as I have indicated, derives, in my view, from two sources, public policy and an implied agreement that the words are to have a particular effect. The question of public policy I have dealt with. As regards the conventional basis (i.e., agreement) that depends upon what, by implication, is to be attributed to the words "without prejudice." It appears from what we are now told by counsel that the practice of making offers in the Calderbank form is by no means limited to the Family Division (where it was adopted after the decision in Calderbank v. Calderbank [1976] Fam. 93) but is used in both the Queen's Bench and Chancery Divisions to a considerable extent. Mr. Mark, as I understood him, found upon inquiry that the practice in the Chancery Division was now more widespread than he had previously supposed. It seems also to be in use to some extent in the Court of Appeal where the dispute concerns the quantum of damages awarded in the court below. It is clear, therefore, that there has, over the years, developed a substantial body of practice adopting the Calderbankform or something very similar to it. It seems to me that, if the practice is valid, there is no reason for restricting it to the Family Division (though it was in relation to certain Family Division proceedings that Cairns L.J. recommended it in Calderbank v. Calderbank). Logically, it should then be of universal application, as was indeed the view of Sir Robert Megarry V.-C. in Computer Machinery Co. Ltd. v. Drescher [1983] 1 W.L.R. 1379.

In the end, I think that the question of what meaning is given to the words "without prejudice" is a matter of interpretation which is capable of variation according to usage in the profession. It seems to me that, no issue of public policy being involved, it would be wrong to say that the words were given a meaning in 1889 which is immutable ever after, bearing in mind that the precise question with which we are concerned in this case did not arise in Walker v. Wilsher, 23 Q.B.D. 335, and the court did not deal with it. I think that the wide body of practice which undoubtedly exists must be treated as indicating that the meaning to be given to the words is altered if the offer contains the reservation relating to the use of the offer in relation to costs.

On the further argument which we have now heard I would, for the above reasons, and contrary to my original view of the matter, allow the appeal and make the order proposed by Oliver L.J. I should add that I agree with the concluding observations in his judgment as to attempts to use the Calderbank form as a substitute for payment into court in the case of a simple money claim.