In most jurisdictions, it is public policy to encourage people and companies to resolve disputes between themselves, and, as a result, in many a principle of ‘without prejudice’ has grown up that provides that the content and sometimes even the existence of settlement discussions and correspondence is not usable as evidence against the other party. In some jurisdictions this rule is strictly applied to all settlement discussions, regardless or whether the term ‘without prejudice’ has been invoked. In other jurisdictions it is not automatically applicable, or barely applied at all. For this reason, all potential settlement discussions should be prominently marked (preferably on every page) “WITHOUT PREJUDICE—SETTLEMENT DISCUSSIONS” and may also invoke the relevant legal provision, for example Rule 408 of the Federal Rules of Evidence.
If there is no formal legal without prejudice rule in a jurisdiction relevant to the dispute (e.g., where events took place or a party is situated), if there are intended to be wide-ranging discussions encompassing litigation, or if the existence of a legal dispute sufficient to invoke the rule is unclear, it is wise to also negotiate and agree to a short “Without Prejudice Agreement,” committing the parties to treat the discussions as a settlement negotiations, not to be introduced in evidence, with all statements and proposals made without prejudice.
For a party, in particular a lawyer, to violate the without prejudice rule is, in most legal systems, usually considered a major transgression (although a court may, on motion, lift the without prejudice rule in certain circumstances.) Occasionally, a party may want to make a proposal to resolve a dispute, or a statement that it wants on the record, if it serves to undermine the other party’s future position. However, it may be problematic to succeed in putting such a statement outside the without prejudice rule. The without prejudice rule is formalized in the United States Federal Rules of Evidence as Rule 408.
The most common reasons for ignoring the without prejudice status is that the communication was not a genuine effort to resolve the case. Thus naked threats and unequivocal (i.e., outright) admissions are unlikely to be protected, even if they are made in negotiations. To take an example, if a debtor were to send a letter marked without prejudice, admitting the debt, but announcing “hell no I won’t pay” this would probably not be protected.
In jurisdictions with cost shifting rules a letter may also be sent “without prejudice save as to costs.” Such a letter is designed to allow a party to make an offer of settlement that they can, post-trial, introduce if a case goes to trial, to explain that an offer to settle was turned down. In such a situation the offeror, even if they lose the case, may use the letter to avoid payment of legal costs and indeed to claim its own costs; such an approach of course would depend heavily on the offer in the letter being a fair and complete remedy, and probably similar and indeed more than the damages recovered (to take a well known example, an offer of only monetary damages for libel by a newspaper, without a public apology and retraction, is not a complete remedy, even if the offer exceeds the monetary damages awarded by the court.)
Many jurisdictions, formally or informally, encourage parties in a legal proceeding to engage in settlement discussions – some even mandate that, under normal circumstances, an effort have been made before filing the case (by for example sending demand letter or letter before action a reasonable period before filing suit), to resolve the matter without litigation. One effect of this policy is that, in many jurisdictions, a failure on one party’s side to make any meaningful effort to resolve the matter by settlement may have a significant impact on any post-trial consideration of who should bear any legal expenses.