The specific dispute in this case revolved around the correct interpretation of a compromise agreement between the parties. While the respondent sought to place extensive reliance on statements made by the appellant in the course of settlement negotiations, the appellant argued that the negotiations were expressly ‘without prejudice’ and consequently, barred from consideration.

The court began its analysis by tracing the historic development and expansion in scope of the rule excluding ‘without prejudice’ statements. In one of the earliest decisions on this point, Lord Lindley explained the scope of the ‘without prejudice’ rule in these words:

“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.” [Walker v Wilsher (1889) 23 QBD 335 at 337].

However, the scope of the rule was considerably expanded in course of time. Hence in Unilever plc. v. Procter & Gamble Co. [2000] 1 WLR 2436 for instance, it was held that the exclusionary rule makes inadmissible in any subsequent litigation connected with the same subject matter, proof of any admissions made with a genuine intention to reach a settlement. Admissions made to reach a settlement with a different party within the same litigation were also held inadmissible, whether or not settlement was actually reached with that party. However, the court also went on to recognise a set of exceptions to the application of the ‘without prejudice’ rule. Some of them are as follows:

(1) … when the issue is whether without prejudice communications have resulted in a concluded compromise agreement, those communications are admissible. …

(2) Evidence of the negotiations is also admissible to show that an agreement apparently concluded between the parties during the negotiations should be set aside on the ground of misrepresentation, fraud or undue influence.

(3) Even if there is no concluded compromise, a clear statement which is made by one party to negotiations and on which the other party is intended to act and does in fact act may be admissible as giving rise to an estoppel.

(4) Apart from any concluded contract or estoppel, one party may be allowed to give evidence of what the other said or wrote in without prejudice negotiations if the exclusion of the evidence would act as a cloak for perjury, blackmail or other ‘unambiguous impropriety’ …

(5) Evidence of negotiations may be given (for instance, on an application to strike out proceedings for want of prosecution) in order to explain delay or apparent acquiescence.

(7) The exception (or apparent exception) for an offer expressly made ‘without prejudice except as to costs’ was clearly recognised by this court in Cutts v Head, and by the House of Lords in Rush & Tompkins, as based on an express or implied agreement between the parties.

While the decision in Unilever permitted reference to without prejudice statements only for the purpose of determining whether a contract was concluded or not, [the first exception above] later decisions in Pearlman v. National Life Assurance Co of Canada, (1917) 39 OLR 141 and in New Zealand in Butler v. Countrywide Finance Ltd., (1992) 5 PRNZ 447 recognised a further exception. They held that reference to ‘without prejudice’ statements were permissible for rectification of the compromise agreement. The court in Ocean Bulk Shipping goes a step further – holding in favour of admissibility of statements made during ‘without prejudice negotiations’ for the purpose of a compromise agreement between the parties.

The reasoning of the court was based on two prongs – the first, drawing support from the first exception in Unilever and the second, from the decisions in Pearlman and New Zealand in Butler. On the first ground, the court reasoned that “no sensible line can be drawn between admitting without prejudice communications in order to resolve the issue of whether they have resulted in a concluded compromise agreement [the first exception in Unilever] and admitting them in order to resolve the issue of what that agreement was.” The second ground of reasoning was based on the fact that a distinction between this case and a case of rectification (where ‘without prejudice’ statements were admissible as per Pearlman and New Zealand in Butler) would be “unprincipled”.

The Indian law on this point is governed by s. 23 of the Indian Evidence Act, 1872. It reads:

23. Admission in Civil cases, when relevant – In civil cases no admission is relevant, if it is made either upon an express condition that evidence of it is not to be given, or under circumstances from which the court can infer that the parties agreed together that evidence of it should not be given.

A bare reading of this provision indicates that the statutory ‘without prejudice’ rule in India has not undergone the vast expansion in scope that the judicially evolved rule in England had gone through, culminating in the decision in Unilever. The exclusionary rule in India is hence, confined to ‘admissions’ alone. A mere statement made, even in the course of a ‘without prejudice’ negotiation would hence, not be barred from consideration at all in India as per s. 23.

Gwembe Valley involved the plaintiff company’s claim against an alleged breach of fiduciary duty by the defendant director. The company claimed inter alia that the director, in breach of his duties towards the plaintiff company, had entered into transactions on behalf of the plaintiff with another company within his de facto control. The company claimed two reliefs against such breach: (1) to hold the director liable to account for profits made in this secret deal (2) to compensate the plaintiff company for the loss occasioned thereby.

The court upheld the claim for profits made by the director. However, on the claim for equitable compensation, the court held:

147. However, when determining whether any compensation, and, if so, how much compensation, should be paid for loss claimed to have been caused by actionable non-disclosure, the court is not precluded by authority or by principle from considering what would have happened if the material facts had been disclosed. If the commission of the wrong has not caused loss to the company, why should the company be entitled to elect to recover compensation, as distinct from rescinding the transaction and stripping the director of the unauthorised profits made by him? There is no sufficient causal link between the non-disclosure of an interest by Mr Koshy and the loss suffered by GVDC, if it is probable that, even if he had made the required disclosure of his interest in the transaction, GVDC would nevertheless have entered into it. In our judgment, a director is not legally responsible for loss, which the company would probably have suffered, even if the director had complied with the fiduciary-dealing rules on disclosure of interests.

While the decision in Gwembe Valley seems to indicate that damages can be recovered only for losses bearing a causal link to the alleged breach, a contrary view was taken by the court in Murad v. Al-Saraj. The plaintiff and the defendant in that case entered into a joint venture agreement to purchase a hotel together. The claim of the plaintiff was that the defendant fraudulently represented that the total price for the hotel would be £4.1 million and that his contribution of £500,000 while in actuality, the price of the hotel was £3.6 million. Existence of a fiduciary relationship between the parties was also established. The defendant argued that even if the set off had been disclosed to the plaintiffs, they would have agreed to go ahead with the acquisition of the hotel, perhaps, demanding a higher profit share. It was argued hence, that the quantum of profits claimed ought to be restricted to only what resulted directly from the non-disclosure of the director – a lesser amount than the plaintiff’s claim. Rejecting the defendant’s argument, the court held:

The fact that the fiduciary can show that that party would not have made a loss is, on the authority of the Regal case, an irrelevant consideration so far as an account of profits is concerned. Likewise, it follows in my judgment from the Regal case that it is no defence for a fiduciary to say that he would have made the profit even if there had been no breach of fiduciary duty.

While prima facie contradictory, these decisions could be reconciled on the ground that while in Gwembe Valley, the claim was one for damages and hence it was necessary to establish the causal link, in Murad, establishing causation was held irrelevant since the claim was one to hold the director liable to account for profits. In the latter category of cases, the claim of the company is that the profits rightly belong to the company rendering remoteness a redundant criterion. The landmark decision of the House of Lords in Regal Hastings v. Gulliver, [1942] UKHL 1 supports the position on the latter category by holding that the only condition necessary to establish a claim to account for profits is that the benefit accrued to the director by virtue of his position in the company. An excellent analysis of the law in this area is provided by this article in the Singapore Journal of Legal Studies.

Prof. Gower, for instance remarks [Gower, Principles of Modern Company Law, 6^th edn., p. 599-600]:

This however, does not mean that directors can never stand in a fiduciary relationship to the members; they well may if they are authorised by the latter to negotiate on their behalf with, for example, a potential takeover bidder. And something far less than the establishment of an agency relationship may suffice, particularly, as an important New Zealand decision illustrates, in the case of a family company, “depending upon all the surrounding circumstances and the nature of the responsibility which in a real and practical sense the director had assumed towards the shareholder”.

Courts have however not been able to precisely enumerate the circumstances when such a relationship may exist between the directors and shareholders. The decision of the Supreme Court in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [AIR 2005 SC 809] offers some guidance. The court in that case held:

A Director of a Company indisputably stands in a fiduciary capacity vis-à-vis the Company. He must act for the paramount interest of the company. He does not have any statutory duty to perform so far as individual shareholders are concerned subject of course to any special arrangement which may be entered into or a special circumstance that may arise in a particular case. Each case, thus, is required to be considered having regard to the fact situation obtaining therein and having regard to the existence of any special arrangement or special circumstance. [Paragraph 44]

Though the court conceded that “it is impossible to lay down a law which will have universal application”, it went on to enumerate at least two instances where the directors owe a direct duty to the shareholders. The first is when the directors take it upon themselves to advice shareholders and the shareholders act on such advice. This arises especially in cases where the shareholders are faced with the choice of accepting or rejecting a take-over bid. [Paragraph 79] The second is in a case of “transaction of sale and purchase of shares between the director and the shareholder”. [Paragraph 75] However, this was clearly not meant to be an exhaustive enumeration. Consequently, the Supreme Court ruling in Dale and Carrington v. P.K. Prathapan [(2005) 1 SCC 212] seems to add a third category of cases to this list. The court in that case opined:

It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company.

The duty of directors to exercise powers conferred on them only for the purpose for which such powers were conferred is a well-established principle. However, the decision in Dale and Carrington arguably supports the view that every breach of the ‘proper purpose’ doctrine is a violation of the directors’ duty to the company’s shareholders which gives rise to an independent cause of action to the shareholder.

Prof. Wedderburn in his article in the Modern Law Review in 1965 had argued that the shareholders “over and above their specific rights under the articles (to dividend, share certificates etc.)” have “a personal right to have the company administered according to the terms of the articles”. [K. W. Wedderburn, “Contractual Rights under Articles of Association: An Overlooked Principle Illustrated”, 28(3) Modern Law Review (1965)] Is the decision in Dale and Carrington not implicit judicial recognition, albeit in a limited sense (i.e. restricted to cases improper purpose) of Prof. Wedderburn’s much criticised view?

Though this ruling seems to go against the independent and separate legal personality of the defendant company and its subsidiary, the court in this case did not pause to consider whether the grounds for ‘lifting the veil’ were established. Instead, authority for this order was derived from the decision in E.I. DuPont de Nemours & Co. v. Phillips Petroleum Co. [621 F. Supp. 310]. This decision again, offers no reasoning for such a rule, but derives authority from two other decisions, one of the 5^th Circuit in General Long-shore workers Union v. Smith [301 F.2d 791 (5th Cir.1962)] and the second, a Delaware District Court decision – Pennwalt Corp. v. Plough Inc. [85 F.R.D. 257 (D.Del.1979)]. A close reading of the former case indicates that the order in that case was based on the factual finding that the officers of the holding company exercised control over the subsidiary. In the second case, interestingly, the court refused such an order expressly upholding the separate personality of the companies concerned. The court in that case held, “there is no evidence in the instant case however, that Plough and Schering have identical Boards of Directors, or that their respective business operations are so intertwined as to render meaningless their separate corporate identities.” While establishing effective control exercised by the holding company over its subsidiary might have justified the order in Dawson, none of the above decisions seem to lay down the rule in Dawson as a blanket rule applicable to all fully-owned subsidiaries.

The District Court of Maryland in Diana Lollar Hubbard v. Rubbermaid [78 F.R.D. 631], though supported by little reasoning took an entirely different view. The court held in that case that such an order does not amount to “piercing the corporate veil” at all. Scholarly authority on the principles governing lifting the corporate veil however, seem to indicate otherwise. For instance, the seminal work by Prof. S. Ottolenghi [“From Peeping behind the Corporate Veil, to Ignoring It Completely”, 53(3) Modern Law Review 338 (1990)] characterises the modes of lifting the veil as four; ‘peeping behind the veil’, ‘piercing the veil’, ‘extending the veil’ and ‘ignoring the veil’. While ‘peeping behind the veil’ looks behind the corporate form only for obtaining new information which might be relevant in deciding the matter at issue, ‘piercing the veil’ imposes liability on shareholders for acts of the company. ‘Extending the veil’ questions the separate existence of the corporation, independently from a group of companies while ‘ignoring the veil’ questions the very existence of the company, for instance, as being a sham or façade. The author further suggests that declaring an agency relationship between the shareholder and the company on the basis of ‘control’ is a special mode of ‘penetrating the veil’. This recognises the direct interest of the shareholders in the controlled company’s acts.

Seen in this light, the order of the court in Dawson in my view amounts to ‘piercing the veil’. Rule 34 contemplates ignoring the separate legal personality of the corporations only once the element of ‘control’ is established. It is well-accepted that mere quantum of shareholding is insufficient to establish such control. [See, Kahn-Freund, “Some Reflections of Company Law Reform”, 7 Modern Law Review 54 (1944); Kahn-Freund, “Corporate Entity”, 3 Modern Law Review 226 (1940).] Hence, regardless of the fact that the subsidiary in Dawson was wholly-owned by the defendant company, application of Rule 34 requires an additional finding of fact that the court paid no attention to – that of establishing actual control exercised by the holding company.