Introduction
During settlement negotiations, a party indebted to another may make a settlement proposal to avoid litigation. Such proposals are usually made in writing and are “without prejudice”. The “without prejudice” principle affords a privilege for settlement or negotiation. The contents of the proposal may therefore not be used against the indebted party in a court of law. The purpose of this rule is to promote settlement of disputes without resorting to litigation. This is the general rule, but, as with most legal principles, there are exceptions.
Section 11 of the Prescription Act 68 of 1969 determines the periods of prescription. Most claims fall under Section 11(d), which stipulates that debt prescribes within three years. If a creditor institutes legal action after the debt has prescribed, the debtor can raise prescription as a defence in a special plea, and the claim can be dismissed on that ground alone.
Section 14 of the Prescription Act 68 of 1969, however, stipulates that the running of prescription can be interrupted by an express or tacit acknowledgement of liability by the debtor. The question is whether a letter written “without prejudice”, proposing payment of a debt that has prescribed, constitutes an admission as envisioned by Section 14? Further, whether such a “without prejudice” letter may be admitted in evidence to prove interruption of prescription?
Case Law
The aforementioned questions were considered by the Supreme Court of Appeal in the case of KLD Residential v Empire Earth Investments (1135/2016) [2017] ZASCA 98 (6 July 2017). The appellant, KLD Residential CC issued a summons in June 2013 in the Western Cape High Court against the respondent, Empire Earth Investments 17 (Pty) Ltd, claiming commission for property sales that became due on transfers registered between October 2008 and November 2009. The respondent filed a special plea claiming that the registration dates were more than three years prior to the service of the summons and that the claims for commission had become prescribed.
The appellant filed a replication to the special plea alleging that on 29 July 2011, the respondent’s attorneys wrote to the appellant’s attorneys, acknowledging that it owed commissions. This letter was central to the argument.
The appellant argued that where an acknowledgement of indebtedness is made in the course of without prejudice discussions, it should be admissible for the limited purpose of interrupting the running of prescription.
The court held that the principal reasons for extinctive prescription are to provide certainty to a debtor. On the other hand, Section 14 serves to protect the creditor. It was further held that a balance must be struck between the public interest in prolonging the prescription period when there has been an acknowledgement of liability, and the public interest in preventing statements made in the course of negotiations from being used at trial as admissions of liability.
The court was satisfied that the exception contended for by the appellant was well-founded and stated that where acknowledgements of liability are made such that, by virtue of s 14 of the Prescription Act, they would interrupt the running of prescription, such acknowledgements should be admissible, even if made without prejudice during settlement negotiations, but solely for the purpose of interrupting prescription.
Conclusion
The aforementioned case law makes it clear that an acknowledgement of debt, even when made during settlement negotiations, can interrupt prescription. Debtors should therefore be aware of when their debt prescribes and take care not to make an admission of debt in an instance where they can claim prescription. This case law also opens the door for creditors to institute a claim where a debtor has admitted liability during settlement negotiations, thereby interrupting prescription. It is important to seek legal advice from a professional to determine the status of your claim and whether the debt has prescribed.
For further assistance, consult an attorney at SchoemanLaw Inc.
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