In a 1882 decision, Re Leite, Leite v. Ferreira (72 LTJ 97), Justice Fry wrote:
"The words ‘without prejudice’ when added to letters, only mean that in the event of the negotiations carried on by those letters not resulting in any agreement, nothing in them is to be taken as an admission. Where letters written ‘without prejudice’ contained an undertaking on certain terms which were agreed to by the other side, and afterwards the parties giving the undertaking wished to introduce a fresh condition, the original undertaking was enforced."
In Colin Tapper's Cross & Tapper on Evidence (10th Edition, London: Lexis-Nexis, 2004, page 497), the authors wrote:
"As part of an attempt to settle a dispute, the parties frequently make statements 'without prejudice'. When this is done, the contents of the statement cannot be put in evidence without the consent of both parties.... The statements often relate to the offer of a compromise and, were it not for the privilege, they would constitute significant items of evidence on the ground that they were admissions. Obviously, it is in the public interest that disputes should be settled and litigation reduced to a minimum so the policy of the law has been in favour of enlarging the cloak under which negotiations may be concluded without prejudice."
In Halsbury's Laws of England, 4th Edition, Volume 17(1) (London: Butterworths LexisNexis, 2002) at page 401:
"Letters written and oral communications made during a dispute between parties which are written or made for the purpose of settling the dispute, and which are expressed or otherwise proved to have been made 'without prejudice' cannot generally be admitted in evidence. The rule does not apply to communications which have a purpose other than settlement of the dispute."
An attorney or a lawyer will often send a letter "without prejudice" in case the letter makes admissions which could later prove inconvenient to the client.
The privilege has been thoroughly over-used.
Without prejudice has become a customary addition to all attorney letters, almost as if it were a professional trade-mark, and designed more to intimidate than to settle or negotiate.
My experience has been that attorneys stick a without prejudice on every letter they write, more times than not, to add sting, as a badge of temerity or brashness, so much so that you will routinely see it stamped or printed on letters clearly intended to be with prejudice, such as a letter which purports to confirm a settlement.
If a letter is written without prejudice, the rule of thumb is that it is privileged and cannot be used in Court as evidence. However, in some jurisdictions, there has been so much abuse of this caution that no such privilege is extended to any letter marked "without prejudice" unless in fact the letter actually advances a settlement or otherwise is part of some such negotiation towards settling.