When without prejudice isn’t
The without prejudice rule has long been part of South African law. This rule provides that statements, including admissions of liability, made in an attempt to settle litigation between parties, are not admissible in subsequent litigation between them. Underpinning the rule is that the parties should be encouraged to avoid litigation by resolving their disputes amicably in frank discussions, without the fear that if negotiations fail, admissions made in the course of their negotiations may be used against them in subsequent litigation.
Until very recently, there was one exception to this rule – admissions of insolvency made on a without prejudice basis may be admissible. However, the Supreme Court of Appeal (“SCA”) has now confirmed a second exception – where an acknowledgment of indebtedness is made by a debtor to a creditor, even on a without prejudice basis for the purposes of settling litigation, the acknowledgment may be admissible for the purpose of interrupting the prescription period in terms of section 14 of the Prescription Act, 1969. Section 14 provides for prescription to be interrupted by an acknowledgment of liability by the debtor and, if interrupted, to start running afresh from the date of interruption.
This confirmation of a second exception was made in the case of KLD Residential v Empire Earth Investments, in which the SCA handed down its judgment on 6 July 2017. The case has its origins in 2013, when KLD Residential CC (“KLD”) instituted action against Empire Earth Investments 17 (Pty) Ltd (“Empire”) for payment of commissions due from the sale of properties in a property development. The commissions were payable upon registration of transfer of each property, with the dates of registration ranging from October 2008 to November 2009. Empire raised a special plea of prescription, alleging that, except for one sale after 2009, the registration dates were more than three years before the summons was served and KLD’s claims for payment of commission had therefore prescribed. KLD responded that, in July 2011, Empire’s attorneys had acknowledged, in writing, that Empire owed KLD commissions amounting to ZAR2 105 960. Empire had also commenced action against KLD in respect of various claims. Importantly, the acknowledgment by Empire’s attorneys was made on a without prejudice basis, which proposed that an amount due by KLD to Empire be set off against the amount admitted to be due by Empire to KLD in respect of commissions, leaving a net amount of ZAR1 082 334.55 payable by Empire to KLD. A cheque for this amount was attached to the letter. KLD did not, however, accept the settlement offer.
By agreement, the parties’ claims were consolidated in September 2013 and it was agreed that they would approach the High Court to consider the novel question of whether prescription could be interrupted in such circumstances.
The High Court found that there was no such exception, but granted KLD leave to appeal to the SCA. In reaching its decision, the SCA considered, and balanced, competing policy considerations underlying the without prejudice rule and prescription, which, in summary, are as follows:
- one of the primary reasons for prescription is to provide a debtor with certainty. The three-year period over which prescription runs is regarded as being enough time for the creditor to enforce the obligation. Conversely, if it is not enforced within that time, the debtor may be certain that the obligation has ended. Generally, the debtor is protected except where the protection of the creditor is justified.
- the SCA, relying on a previous judgment, Murray & Roberts Construction (Pty) Ltd v Upington Municipality, opined that section 14 of the Prescription Act protects the creditor, and the same considerations that justify prescription also suggest that the time limit should not be absolute. To this end, section 14 provides that the running of prescription is interrupted by an acknowledgment of liability by the debtor. The reason for this is clear – if the debtor acknowledges liability, there is no uncertainty about the debt.
- underlying the without prejudice rule is the promotion of settling disputes parties without resorting to litigation.
- where there is an acknowledgment of liability, there is no uncertainty on the part of the debtor as to the existence of the debt and where the debtor removes uncertainty by admitting liability, the running of prescription should be suitably adapted. It is in the public interest that the debtor who acknowledges debt and induces the creditor not to have immediate resort to litigation, should not be able to claim that the debt has prescribed, notwithstanding that the acknowledgment is made in a without prejudice context.
The SCA therefore overturned the High Court’s decision, finding that the exception to inadmissibility contended for by KLD was well-founded. The SCA considered that where acknowledgments of liability are made such that, by virtue of section 14, they would interrupt prescription, they should be admissible, even if made without prejudice during settlement negotiations. However, the SCA cautioned that the exception is not absolute and will depend on the facts of each matter, and is limited to the circumstances relating to the interruption of prescription. Importantly, the SCA found that a without prejudice admission of liability remains protected insofar as proving the existence and amount of debt is concerned. The SCA further opined that it was not a question of the without prejudice rule trumping prescription, but rather a question of recognising that both section 14 and the without prejudice rule protect policy interests, and recognising that an exception protects both interests.
From this judgment, it is clear that there are at least two exceptions to the without prejudice rule; namely, the existing insolvency exception and now the exception that admissions of liability in without prejudice negotiations are admissible to show that prescription has been interrupted. Contracting parties in commercial transactions should take note of the new exception and ensure that they do not make admissions during settlement negotiations that they may later regret.
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