Introduction

Extinctive prescription is a means of rendering various types of obligations and claims as extinguished or unenforceable by the effluxion of time. In this article, we provide a brief overview on without prejudice statements and prescription, in light of the recent judgment of KLD Residential CC v. Empire Earth Investments 17 (Pty) Ltd (1135/2016) [2017] ZASCA 98 (6 July 2017).

Without prejudice statements

It is a long-established rule in South Africa that, if parties are engaged in a civil dispute, communications with each other (or the communications between their legal representatives) that are made in an attempt to settle the matter are “without prejudice”, which means that those communications are not to be interpreted as admissions and are merely attempts at settlement. This is based on public policy, which dictates that people should be allowed to try to settle their disputes without the fear that what they have said will be held against them if the negotiations break down.

Prescription

In South Africa, the running of extinctive prescription is governed by the Prescription Act (the Act). A debt is normally extinguished by prescription after the lapse of three years. Prescription of such a debt begins to run as soon as the debt is due; however, the running of prescription does not commence until the creditor becomes aware of the existence of the debt and in certain instances the running of prescription is interrupted.

Interruption of prescription

Section 14 of the Act prescribes that the running of prescription shall be interrupted (and accordingly delayed) by an express or tacit acknowledgement of liability by the debtor.

In Mothupi v. Road Accident Fund 2000 (4) SA 38 (SCA) Nienaber JA quoted with approval the following passage from Petzer v. Radford (Pty) Ltd 1953 (4) SA 314 (N) at 317 and 318, where Broome J stated: “To interrupt prescription an acknowledgment by the debtor must amount to an admission that the debt is in existence and that he is liable therefore.”

KLD Residential v. Empire Earth Investments

Does prescription begin to run afresh if an acknowledgment of liability is made in “without prejudice” settlement negotiations?

This novel question of law came before the Western Cape High Court and was appealed to the Supreme Court of Appeal. The appellant, KLD Residential CC (KLD), in an action against the respondent, Empire Earth Investments 17 (Pty) Ltd (Empire Earth), alleged in its particulars of claim that it had been given a written mandate to market erven in a new property development and to receive commission on the resultant sales. Commission was alleged to be payable once transfer of each property was passed to the buyer. KLD alleged that it was the effective cause of 99 sales referred to in a schedule to its particulars of claim. It was entitled, it said, to R2,147,000 in commission, due on transfers registered on dates ranging between October 2008 and November 2009. KLD issued summons for payment of the commissions in June 2013.

Empire Earth raised a special plea in reply to the particulars of claim, alleging that, other than one sale after 2009, the registration dates were more than three years before the summons was served, and that the claims for commission had become prescribed. KLD replicated to the special plea, alleging that Empire Earth wrote to KLD in July 2011 acknowledging that it owed commissions in the sum of R2,105,960 and that prescription had begun to run afresh from the date of that letter of acknowledgement. KLD accepted that the letter of acknowledgement was without prejudice to the rights of the parties in the course of settlement negotiations.

The court stated that one of the principal reasons for extinctive prescription is to provide certainty to a debtor – after a period of time when the creditor has been inert, the debtor should have certainty as to whether or not a debt is still owed. The court also emphasised the vital role time limits play in bringing certainty and stability to social and legal affairs and maintaining the quality of adjudication. Without prescription periods, legal disputes would have the potential to be drawn out for indefinite periods of time bringing about prolonged uncertainty to the parties to the dispute.

In determining whether an exception to the without prejudice rule was possible, the court referred to the case of Absa Bank v. Hammerle Group 2015 (5) SA 215 (SCA), where, in response to a letter of demand written by the bank, Hammerle had stated in a letter that it “would like to make a settlement proposal” but that it was “struggling to turn the business around” and was “unable to make any meaningful profit in the business”. Mbha J found that the contents of the letter not only constituted an unequivocal acknowledgment of indebtedness but also showed that Hammerle was unable to pay its debts and was commercially insolvent. The court declared that any admission of such insolvency, whether made in confidence or otherwise, cannot be considered privileged.

The court found that, where acknowledgments of liability are made such that, by virtue of section 14 of the Act, they would interrupt the running of prescription, such acknowledgments could be admissible, even if made without prejudice during settlement negotiations, but solely for the purpose of interrupting prescription. The court also found that this exception is not absolute and will depend on the facts of each matter.

KLD’s appeal was therefore upheld with costs and the special plea of prescription was dismissed.

It can therefore be concluded that there are two exceptions to the without prejudice rule that can constitute admissible evidence to prove that prescription has been interrupted: first, an act of insolvency; and, second, an unequivocal admission of liability. Parties to settlement negotiations must therefore be wary of making such admissions under the cover of “without prejudice”.