Important developments regarding the "without prejudice" rule

by Jan-Hendrik Gous on 11 June 2018
The "without prejudice" rule has the effect that statements made by one party to another during settlement negotiations are not admissible as evidence in later formal proceedings, should negotiations between the parties fail.  Until recently our courts had recognised limited exceptions to the rule, which included the admission of commercial insolvency and the making of fraudulent misrepresentations. 

In the recent case of KLD Residential v Empire Earth Investments (1135/2016) [2017] SCA 98, the Supreme Court of Appeal had to consider whether another exception to this rule should be allowed, namely whether an acknowledgement of indebtedness made by a debtor to a creditor during settlement negotiations should be admissible for purposes of interrupting the prescription period on the debt. 

In terms of the Prescription Act, 68 of 1969, a debt is extinguished by prescription three years after the date that the debt became due.  Section 14 of the Act however provides for this period to be interrupted and to start afresh should the debtor make an acknowledgement of liability.  

In the KLD Residential case the appellant instituted action in 2013 against the respondent for debts which originated during 2008 and 2009.  The respondent subsequently raised a special plea of prescription, given that the claims arose more than three years before the summons was served.  A letter containing a settlement offer was, however, sent by the respondent's attorneys to the appellant in 2011.  In this letter the respondent acknowledged that it owed certain amounts to the appellant.  The appellant did not accept the settlement offer and the matter proceeded to litigation.  

The court had to consider and weigh up competing policy considerations underlying the without prejudice rule and the law of prescription respectively.  Central to the without prejudice rule is the need to encourage parties to resolve their disputes amicably through frank discussions, without the need to resort to litigation, which can be expensive and drawn-out.  Parties should however not be fearful that should negotiations fail, admissions made by them could be used against them during ensuing litigation proceedings. 

The law of prescription is based on the consideration that the debtor should be provided with certainty regarding the debt.  Where a creditor lays claim to a debt which has been due for a long time, doubts may arise as to whether a valid debt ever existed, or if it did, whether it has been discharged.  The alleged debtor may have come to assume that no claim would be made, witnesses may have died, or documents or receipts may have been lost.  These sources of uncertainty are reduced by imposing a time limit on the existence of the debt.  

As already mentioned, prescription is interrupted should a debtor make an admission of liability.  The reasoning behind this exception is based on the idea that should the debtor acknowledge indebtedness to the creditor, then uncertainty with regards to the debt is removed.  The pressure that the creditor may feel to institute legal action to prevent the debt from prescribing is alleviated.  As the court in KLD Residential so fittingly quoted from an English case: "…a creditor, negotiating on the basis that his debt has been acknowledged, can proceed with the negotiations and give time to pay without being distracted by the sound of time's winged chariot behind him". 

The court in KLD Residential found that it is in the public interest that the debtor who acknowledges debt, so comforting the creditor into believing that there is no need for immediate resort to litigation, should not be able to later claim that the debt has prescribed, notwithstanding the fact that the acknowledgement was made in a without prejudice context.  The court emphasised the need to prevent abuse of the without prejudice rule, which would occur if the debtor merely used the settlement negotiations to buy time.   

The court's decision is understandable if one looks at the rationale behind the without prejudice rule.  The rule is aimed at encouraging informal settlement negotiations.  The judgement removes fears that a creditor may have that failed settlement negotiations will have adverse prescription consequences.  The creditor is able to enter into the negotiations free from the fear that the debtor is merely buying time.  It can be argued that the judgement represents a positive development for the advancement of informal settlement negotiations, even though it recognises an exception to the without prejudice rule.    

In summary, the court in KLD Residential found that another, important exception to the without prejudice rule exists.  The court pointed out that the exception is not absolute and will depend on the facts of each matter.  The court also importantly stated that nothing precludes parties from expressly or impliedly ousting the exception during their discussions.  It is accordingly advisable for parties to include wording in their without prejudice exchanges recording that the right to rely on prescription is not waived by an acknowledgement of debt.  


Please note that the legal topics informally discussed here are general discussions of certain aspects and therefore certainly not intended as legal advice.  We look forward to discussing your particular case with you.

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