On 6 July 2017, the Supreme Court of Appeal (“SCA”) issued a judgment which waters down the rule that without prejudice communication between lawyers, aimed at settling a litigious dispute, enjoys protection from evidential disclosure.
Without prejudice correspondence, popularly referred to as “off the record” communications, often plays an important role in litigious matters. The principle is underpinned by the rationale that during settlement negotiations one may have to “give something away” in order to close the gap between what can often be an intractable, expensive and hostile dispute. Shielding such correspondence from the formal arena, more particularly potential admissions made in such correspondence, acts as a necessary incentive to the parties who would otherwise not engage in such communication. The non-binding nature of such correspondence has long been recognised under English law and was duly imported into South African law.
The issue came into sharp focus in KLD Residential v Empire Earth Investments (1135/2016)  SCA 98. The facts which gave rise to the action can be summarised as follows:
- KLD Residential (“KLD”) instituted an action against Empire Earth, alleging that the latter owed KLD commission in respect of sales made in a new property development, as per a written mandate. Commission was alleged to be payable upon transfer of the property to the buyer, which occurred between October 2008 and November 2009. Summons was issued in June 2013.
- Empire Earth raised a special plea of prescription (i.e. had become time-barred), to which KLD replicated on the strength of a letter written by Empire Earth's erstwhile attorneys, which served to acknowledge that it owed KLD commission. This, it submitted, had the effect of interrupting the running of prescription.
- Empire Earth contended that the letter was written "without prejudice", in the course of settlement negotiations and that it was inadmissible for the purpose of proving the existence of a debt.
The court a quo, and the SCA, therefore had to consider whether the common law should recognise an exception to the rule that an acknowledgment of indebtedness by a debtor, embodied in a letter written on a “without prejudice” basis, may be admitted into evidence for the limited purpose of interrupting prescription.
Rogers J, sitting in the court a quo, held that there were no compelling reasons of public policy to recognise such an exception.
On appeal, the majority of the SCA was careful to reinforce the principles set out in Naidoo v Marine & Trade Insurance Co Ltd 1978 (3) SA 666 (A) (which the court a quo considered itself bound to), in which Trollip JA acknowledged that the origin of the without prejudice principle was embedded in public policy and was aimed at encouraging parties to avoid the expense, delay and inconvenience caused by litigation and which is achieved through engaging in frank discussions.
It also reiterated the principle set out in Murray & Roberts Construction (Cape) (Pty) Ltd v Upington Municipality 1984 (1) SA 571 (A), in which the same court suggested that extinctive prescription serves the practical purpose of providing certainty for a debtor by imposing a time limit on the existence of a debt and which simultaneously improves the quality of adjudication by courts (which tend to suffer when too much time passes).
However, the court considered itself obliged to weigh these considerations against that of fairness to the creditor. In this regard, the court pointed to the uncontroversial right catered for under the Prescription Act i.e. the interruption of prescription where a party admits liability in "open" correspondence. It reasoned that a failure to extend the exception to without prejudice correspondence would open the rule to abuse and that carving out an exception would not be novel (having previously carved out an insolvency exception where a party concedes insolvency in an offer made ‘without prejudice’).
It therefore carved out a remedy for KLD and concluded that without prejudice correspondence acknowledging liability may be admitted into evidence for the specific purpose of overcoming a defence of prescription. The court was however careful to point out that the parties could, during the course of their engagements, exclude reliance on the correspondence.
Schippers AJ, dissented with the majority of the SCA and reasoned that the rule should not be relaxed for, inter alia, the following reasons:
- Allowing the exception would seriously hamper the freedom of the parties when negotiating;
- Correspondence aimed at settling a matter typically extends beyond a mere acknowledgement of liability and it therefore has the potential to create practical challenges around what aspects of the correspondence should and should not be admitted into evidence;
- Besides the public policy rationale for the rule, another justification for the rule is posited on an implied agreement theory which is posited on the understanding that they will not use the correspondence against one another in the future;
- The Prescription Act is generous in providing 3 years within which to bring one's claim, which in the context of the KLD case was sufficient (there was, in other words, no risk of abuse as contended for by the majority);
- The Prescription Act itself does not cater for correspondence written without prejudice and had the legislature intended to include such correspondence, it would have done so;
- The insolvency exception is distinguishable because an act of insolvency affects all parties who have dealings with the insolvent company.
The judgment by the majority is, surprisingly, strongly grounded in equity and has the potential to create a degree of legal and factual uncertainty. More significantly, it may have the unintended consequence of reducing the settlement of disputes as between parties. All of that said, parties to litigious disputes (particularly debtors) would do well to include standard wording in their without prejudice exchanges in which they confirm that by doing so, they do not give up their right to rely on prescription.