The High Court in Field v Commissioner for Railways (NSW) (1957) held:
The law relating to communications without prejudice is of course familiar. As a matter of policy the law has long excluded from evidence admissions by words or conduct made by parties in the course of negotiations to settle litigation. The purpose is to enable parties engaged in an attempt to compromise litigation to communicate with one another freely and without the embarrassment which the liability of their communications to be put in evidence subsequently might impose upon them. The law relieves them of this embarrassment so that their negotiations to avoid litigation or to settle it may go on unhampered. This form of privilege, however, is directed against the admission in evidence of express or implied admissions. It covers admissions by words or conduct. For example, neither party can use the readiness of the other to negotiate as an implied admission. It is not concerned with objective facts which may be ascertained during the course of negotiations. These may be proved by direct evidence. But it is concerned with the use of the negotiations or what is said in the course of them as evidence by way of admission. For some centuries almost it has been recognised that parties may properly give definition to the occasions when they are communicating in this manner by the use of the words "without prejudice" and to some extent the area of protection may be enlarged by the tacit acceptance by one side of the use by the other side of these words
The purpose of making without prejudice negotiations of course is to try and negotiate without having the words thrown back at you, especially in the heat of cross-examination.
It therefore enables people to negotiate frankly, while at the same time they can run the matter strongly in case it doesn't settle. You don't need to have started a court case to make a without prejudice offer.
There's no point sticking without prejudice on every letter - because the privilege only applies to settlement negotiations, not other types of communications. The court can always say that a letter that has the tag "without prejudice" is not really a without prejudice" communication.
Of course, the privilege is not limited to letters, but also includes some phone calls and all communications between parties that involve settlement negotiations.
Without prejudice in family law
Family law has some unique features.
The first is that in family law there are many more self-represented litigants. It is important that if communications with self-represented litigants are without prejudice, they are clearly stated to be so.
The second is that family law stretches across the nation but different rules can apply. In proceedings relating to child support, under the Family Law Act or in NSW or Victoria, the provisions of the Evidence Act apply. The NSW, Victorian and Commonwealth Evidence Acts are almost identical. In the other States, their own, different, Evidence Acts apply. For example, de facto property proceedings in Queensland are dealt with under that State's Evidence Act.
The difference is significant, because the NSW, Victorian and Commonwealth Acts seek to define the without prejudice privilege. The other States do not - and rely on the common law rules.
The third is that in children's litigation, different rules can apply. The Family and Federal Magistrates Courts can now ignore the rules of evidence in children's proceedings. The logic, of course, is because things should not be hidden when the best interests of children are at stake.
In Hutchings and Clarke (1993) the father was found to have said during a phone call to the mother that he would not pursue custody of their son if he did not have to pay child support. The trial judge held that the phone call was without prejudice, but that the rights of the child overrode that of the privilege as it clearly showed that the father was prepared to trade the rights of his son for money. The trial judge's reasons were upheld on appeal.
How the NSW, Victorian and Commonwealth Evidence acts change the common law
Section 131 of the Commonwealth Act provides (and similar provisions in NSW and Victoria):
(1) Evidence is not to be adduced of:
(a) a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or
(b) a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.
(2) Subsection (1) does not apply if:
(a) the persons in dispute consent to the evidence being adduced in the proceeding concerned or, if any of those persons has tendered the communication or document in evidence in another Australian or overseas proceeding, all the other persons so consent; or
(b) the substance of the evidence has been disclosed with the express or implied consent of all the persons in dispute; or
(c) the substance of the evidence has been partly disclosed with the express or implied consent of the persons in dispute, and full disclosure of the evidence is reasonably necessary to enable a proper understanding of the other evidence that has already been adduced; or
(d) the communication or document included a statement to the effect that it was not to be treated as confidential; or
(e) the evidence tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute; or
(f) the proceeding in which it is sought to adduce the evidence is a proceeding to enforce an agreement between the persons in dispute to settle the dispute, or a proceeding in which the making of such an agreement is in issue; or
(g) evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence; or
(h) the communication or document is relevant to determining liability for costs; or
(i) making the communication, or preparing the document, affects a right of a person; or
(j) the communication was made, or the document was prepared, in furtherance of the commission of a fraud or an offence or the commission of an act that renders a person liable to a civil penalty; or
(k) one of the persons in dispute, or an employee or agent of such a person, knew or ought reasonably to have known that the communication was made, or the document was prepared, in furtherance of a deliberate abuse of a power.
(3) For the purposes of paragraph (2)(j), if commission of the fraud, offence or act is a fact in issue and there are reasonable grounds for finding that:
(a) the fraud, offence or act was committed; and
(b) a communication was made or a document was prepared in furtherance of the commission of the fraud, offence or act;
the court may find that the communication was so made or the document so prepared.
(4) For the purposes of paragraph (2)(k), if:
(a) the abuse of power is a fact in issue; and
(b) there are reasonable grounds for finding that a communication was made or a document was prepared in furtherance of the abuse of power;
the court may find that the communication was so made or the document was so prepared.
(5) In this section:
(a) a reference to a dispute is a reference to a dispute of a kind in respect of which relief may be given in an Australian or overseas proceeding; and
(b) a reference to an attempt to negotiate the settlement of a dispute does not include a reference to an attempt to negotiate the settlement of a criminal proceeding or an anticipated criminal proceeding; and
(c) a reference to a communication made by a person in dispute includes a reference to a communication made by an employee or agent of such a person; and
(d) a reference to the consent of a person in dispute includes a reference to the consent of an employee or agent of such a person, being an employee or agent who is authorised so to consent; and
(e) a reference to commission of an act includes a reference to a failure to act.
(6) In this section:
"power" means a power conferred by or under an Australian law.
As can be seen, the rules are now highly technical.
One of the key provisions is s.131(2)(h)- so that offers made in without prejudice negotiations can be relevant on costs. In property settlement proceedings, for example, if you make a without prejudice offer that was more generous than the other side was awarded, you might get an order for costs from the day that you served the offer.
The Full Court of the Family Court has held that that offer can be oral, so although the offer might be made without prejudice, it might be necessary to be very careful as to any offer that is made.