By Justin Bagwandeen, Partner in the Litigation department
The incessant words “without prejudice” used between litigants during settlement discussions protect the debtor if the settlement negotiations fail. This is because admissions made by the debtor are inadmissible during subsequent legal proceedings. The rule is based on public policy and encourages parties to avoid litigation and rather resolve their disputes amicably.
The recent judgment of KLD Residential CC v Empire Earth Investments 17 (PTY) LTD 1135/2016)  ZASCA 98 is ground-breaking, as the court took an exception to the “without prejudice” rule. On appeal from the Western Cape division of the High Court, the issue before the Supreme Court of Appeal (“SCA”) was whether an acknowledgment of indebtedness by a debtor, embodied in a letter written for the purpose of settling the dispute, and thus marked as “without prejudice”, may be admitted in evidence for the limited purpose of showing that the period of prescription has begun to run afresh in terms of section 14 of the Prescription Act 68 of 1969.
KLD Residential CC (“KLD”) alleged that it had been given a written mandate in November 2006 to market erven in a new property development and to receive commission on sales of which it was the effective cause. Commission was alleged to be payable once the transfer of each property was passed to the buyer. KLD alleged that it was the cause of 99 sales and therefore entitled to R2 147 million in commission, due on transfers registered on dates ranging between October 2008 and November 2009. KLD issued summons against Empire Earth Investments 17 (Pty) Ltd (“Empire Earth”) for payment of commission in June 2013.
Empire Earth raised a special plea alleging that, save for one sale after 2009, the registration dates of the transfer of the properties were more than three years before summons was served and therefore the claims for commission had prescribed.
KLD then submitted that on 29 July 2011, Empire Earth’s attorneys had written to KLD’s legal representatives and had acknowledged that Empire Earth owed commissions in the sum of R2 105 960 to KLD. This acknowledgment had interrupted the running of prescription and the prescription period had begun to run afresh on the date of the letter.
The court a quo found that there were no compelling grounds of public policy to limit the protection afforded by the “without prejudice rule” to allow it to interrupt the running of prescription.
Section 14 of the Prescription Act provides that the running of prescription shall be interrupted by an acknowledgment of liability by the debtor. If prescription is interrupted, it shall run afresh from the day on which the interruption takes place, or if at any time thereafter the parties postpone the due date of the debt, it shall run from the date upon which the debt again becomes due.
Without a time-frame to prescribe, legal disputes would have the potential to be drawn out indefinitely, leading to prolonged uncertainty between parties to the dispute. Evidence also has the potential to get lost and with the passage of time, witnesses may no longer be able to testify due to death or relocation and further that the witnesses’ memories may fade with time.
However, it is in the public interest that a debtor who acknowledges his debt, and so induces his creditor not to immediately resort to the courts for relief, should not be able to claim that the debt has prescribed. Thus, the SCA applied this reasoning to uphold the exception to the “without prejudice” rule.
Acknowledgments of liability, even if made during without prejudice settlement negotiations are admissible solely for the interruption of prescription. This exception however is not absolute and will depend on the facts of each case. There is nothing to prevent parties from expressly or impliedly ousting the exception to the without prejudice rule in their discussions.
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