The term 'Without Prejudice' is often added to letters and communications when people are negotiating to settle a dispute of some kind. By adding the phrase as a heading to a letter or mentioning that a conversation is 'Without Prejudice' you are indicating that the communication cannot be later tendered as evidence in a court.
Why does this matter? Let's illustrate it by way of an example.
Imagine you have supplied goods to a customer. You checked them out as a credit risk and decided to offer them a credit account. They signed and returned your Terms and Conditions of supply, in which they committed to pay within 30 days of the delivery of the goods.
They didn't pay, and now you're after them for the money. You've sent them letters, and what's more you've added interest and compensation to the amount - as is your legal right to do. You've heard every excuse for not paying in the book from them.
Then the customer writes back and says they'll pay you, but only if you agree to drop the interest and compensation. You're a busy person and would really prefer to be getting on with more constructive things (so why not give your overdue invoices to our debt collection service next time?) So you decide to accept the money without the interest payments in the hope of resolving things quickly.
If you write back to accept the offer, and then they don't pay after all and you later on end up in court, then the letter you sent could be used in court as evidence. The debtor could argue that they only need to pay you the original amount because you've already indicated that you don't need the interest.
By putting 'WITHOUT PREJUDICE' at the top of your letter you prevent this from happening. The phrase indicates that the concessions are being made only for the purpose of trying to reach a settlement and not being conceded in law. It allows you to make a compromise while still pursuing your claim for its full value later if needs be.
A conversation will be treated in the same way if someone says that it is 'without prejudice'. For example, when calling to discuss a dispute, if you say, “This conversation should be considered as being without prejudice”, then the rule will apply to the conversation too.
Another option sometimes seen is to write 'Without Prejudice Save as to Costs', which means that the communication cannot be used in court to determine damages, but once damages have been awarded and the court moves on to considering whether to make the losing side pay the legal costs of the other sides then the without prejudice offer can be taken into account.
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