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Settlement negotiations[edit]
The term "without prejudice" is used in the course of negotiations to settle a lawsuit. It indicates that a particular conversation or letter cannot be tendered as evidence in court. It can be considered a form of privilege.[5] This usage flows from the primary meaning: concessions and representations made for purpose of settlement are simply being mooted for that purpose, and are not meant to actually concede those points in litigation.
Such correspondences must both be made in the course of negotiations and a genuine attempt to settle a dispute between the parties. A prohibition exists on documents marked "without prejudice" being used as a façade to conceal facts or evidence from the court. As a result, documents marked "without prejudice" that do not actually contain any offer of settlement may be used as evidence, should the matter proceed to court. Courts may also decide to exclude from evidence communications not marked "without prejudice" that do contain offers of settlement.[6][7]
The term "without prejudice save as to costs" is a change to the above and refers to a communication that cannot be exhibited in court until the end of the trial, when the court awards legal costs to the successful party. This is also called the Calderbank formula, from Calderbank v Calderbank (2 All E.R. 333 (1976)),[8] and exists because English courts have held that "without prejudice" includes for the purposes of costs, as in Court of Appeal, in Walker v. Wilshire (23 QBD 335 (1889)):
Letters or conversations written or declared to be "without prejudice" cannot be taken into consideration in determining whether there is a good cause for depriving a successful litigant of costs.

http://en.wikipedia.org/wiki/Prejudice_(legal_procedure)

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Note added at 2 hrs (2014-08-15 10:00:04 GMT)
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Without Prejudice Save as to Costs.

Because the Courts cannot order disclosure of “Without Prejudice” negotiations (or documents) against the wishes of one of the parties of those negotiations, this obviously will mean that in some instances the Court, when it comes to the question of costs, cannot decide whether one side or the other was unreasonable in its actions.

Although, as noted in Unilever v Proctor & Gamble [2000] WLR 2436 at p2445, there are exceptions to the general rule of non-admissibility of “Without Prejudice” documents, there is no general exception of non-admissibility when it comes to the question of costs.

However, the application of the non-admissibility rule in respect of “Without Prejudice” documents can easily be avoided in the arbitration context by the simple expedient of using the Calderbank formula (Calderbank v Calderbank [1976] Fam 93) of negotiating “Without Prejudice Save as to Costs”.

In respect of litigation, where a Defendant believes that there is some merit in the Claimant’s claim, but not as much as the Claimant claims, then the Defendant can make a payment into Court of the amount he thinks the claim is genuinely worth, and must notify the Claimant of this action. If the Defendant sets the payment into court at the right level, this gives him some protection from liability for the Claimant’s legal costs assuming that the amount eventually awarded to the Claimant by the Court does not exceed the amount paid into Court.

It is not possible to pay money into Court in Arbitration, however in the Arbitration context, the Defendant (known in Arbitration as the Respondent) writes to the Claimant offering the amount he thinks is properly due, marking the letter “Without Prejudice Save as to Costs”. This letter is otherwise known as a “Calderbank” offer letter.

The Arbitrator will not be told about this offer until after he has made his decision on liability. If the amount he awards the Claimant is less than or equal to the amount included in the Respondent’s “Without Prejudice Save as to Costs” (Calderbank) offer, then the general rule is that the Claimant should pay the Respondent’s legal costs (and his own) from the date the offer is made. The logic behind this is that the Respondent has correctly assessed the justified level of the Claimant’s claim, and the Arbitration from that date on was a waste of time and money.

http://www.alway-associates.co.uk/legal-update/article.asp?i...

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Note added at 2 hrs (2014-08-15 10:00:59 GMT)
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Without Prejudice Save as to Costs

These documents also relate to negotiations with a view to settlement and are also “privileged”. However, correspondence marked as such can be disclosed to the court but only after a decision on liability has been made and when the court then has to make a decision on legal costs i.e. which party should pay which party's legal costs and how much. A “Without Prejudice Save as to Costs” offer of settlement if pitched at the right level, can provide cost protection for the party making it. The court can take such offers into account as to whether the paying party has been reasonable in rejecting a previous "without prejudice save as to costs" offer made by the receiving party. If the court deems the paying party to have acted unreasonably by rejecting that offer then the receiving party will have an improved chance of recovering a higher proportion of their legal costs from the other side.

http://www.kjplaw.co.uk/content/CaseStudies/CaseStudies12/ar...

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Note added at 2 hrs (2014-08-15 10:02:15 GMT)
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https://uk.answers.yahoo.com/question/index?qid=200610270729...

http://www.bakermckenzie.com/files/Publication/abd07c8e-7a35...