September 21, 2017

Can an admission of indebtedness made by a debtor at genuine and without prejudice settlement negotiations be admissible to interrupt the running of prescription?

As a rule of thumb, genuine and bona fide negotiations, be they oral or in writing, between parties aimed at and undertaken with a view to a settlement of their disputes are privileged from disclosure as evidence whether or not the negotiations have been stipulated to be without prejudice.

The without prejudice rule of English Law origin has for some time been part of our common law. It derives its rationale from and is rooted in public policy. Parties to disputes are encouraged to settle their disputes without resort to litigation (which is as it has come to be known expensive, hostile and inconvenient) by resolving their disputes amicably in frank discussions without fear that if negotiations fail, admissions made by them in the course of negotiating may be used against them in the ensuing litigation.

In the absence of the without prejudice rule, parties to a dispute would not speak freely at settlement negotiations as they would constantly have to monitor every word or sentence they say, or gesture they make, with lawyers close by and on their shoulders as minders.

It must also be readily admitted that the whole point of public policy will be defeated were it to be that the without prejudice rule was itself immutable, because with considerations of public policy, there will always invariably be considerations that are more worthy of protection than others depending on the circumstances of each case. This would be the case for example where a party concedes insolvency/bankruptcy even on a without prejudice basis as happened in ABSA v HAMMERLE. Here, public policy, particularly the public interest dictates that such disclosures cannot be protected. One thinks here of the impact of the debtor’s insolvency on all other creditors and not only this particular creditor to whom the acknowledgement of liability is made.

The same applies to admissions unconnected with or irrelevant to settlement negotiations or an admission of an independent fact that is in no way connected with the merits of the dispute even if such is made in the course of settlement negotiations. Equally, there are several other instances where it would be appropriate to restrict operation of the without prejudice rule, as in where evidence of what the parties said or wrote resulted in a contract, an estoppel, or a misrepresentation, or where they are invoked as a cloak for perjury, blackmail or other unambiguous impropriety, or an explanation for delay”.

Similarly, it would be against public policy and untenable not to restrict the without prejudice rule where a debtor acknowledges his debt, and in the process induces his creditor not to have immediate resort to litigation and then later claims prescription in circumstances where such acknowledgement made the creditor to keep in abeyance his resolve to proceed with instituting litigation against the debtor (in other words, where the creditor, on the strength of the inducement held his hand).

The question whether or not an acknowledgement of indebtedness by the debtor, made during bona fide and without prejudice negotiations should operate to interrupt prescription as contemplated in section 14 of the Prescription Act came before the Supreme Court of Appeal in the KLD RESIDENTIAL CC v EMPIRE EARTH INVESTMENTS 17 (PTY) LTD decision that was delivered on 6th July 2017. The majority decision delivered by Lewis JA held that, notwithstanding that an admission of liability was made in a genuine and without prejudice letter in an attempt to settle the dispute between the parties, such admission of liability, even while such did not induce the creditor to hold back on litigation, must nevertheless be admitted as evidence of the debtor’s liability for purposes of interrupting the running of prescription at the eventual trial. Yes, an admission of liability by a debtor in bona fide, genuine and without prejudice negotiations serves to interrupt prescription.

For reasons set out immediately hereunder, I find myself in respectful agreement with the dissenting minority judgment delivered by Schippers AJA.

The Prescription Act, much like the without prejudice rule is rooted and has its rational in public policy. The three year period over which extinctive prescription runs is regarded for practicable purposes as being generous, fair and promotes certainty in the ordinary affairs of people. While section 11 lays down periods of prescription and primarily protects the debtor and to provide certainty in the affairs of the debtor, section 14[1] is geared at protecting the creditor in that, latter provides that interruption of prescription is interrupted by an express or tacit acknowledgement of liability by the debtor. It must follow therefore that there can never be uncertainty if the debtor, notwithstanding the expiry of the three year time within which the creditor can prosecute his claim, voluntarily acknowledges his indebtedness to the creditor.

When Empire Earth Investments dispatched its without prejudice letter wherein it acknowledged its indebtedness to KLD, latter’s claim had not prescribed. There is also nothing to suggest that KLD’s delay in prosecuting its claim before the debt prescribed was related to or was because Empire Erath Investments had acknowledged its liability to KLD. Concomitant hereto, nothing prevented the parties from expressly agreeing that the running of prescription would be suspended while KLD meanwhile considered the compromise (in the form of Set off) contained in the letter.

At all material times relevant, KLD was at large to institute and prosecute its claim – contemporaneously with considering Empire Earth Investments’ offer to settle. There is nothing in section 14 of the Prescription Act, its construction, wording or purpose which suggests that when a creditor is faced with an offer to settle from a debtor, the creditor is automatically excused or barred from prosecuting its claim. This is even more so if one considers the presumption that the legislature does not intend to alter the common law (without prejudice rule) unless it appears expressly in the statute (section 14 of the Prescription Act in this case) that the object of the statute is to alter or modify the common law. The position remains unchanged even with our Constitution.

I cannot see why KLD would want to restrict the operation of the without prejudice rule by having the court admit evidence that was made with the sole purpose of settling the dispute while it failed to prosecute its claim within the three years provided for under the Prescription Act, especially if the Prescription Act itself is devoid of any semblance of a purpose to explicitly alter or modify the without prejudice rule (the Common Law). The without prejudice rule should not be restricted unless justice unambiguously demands it. The without prejudice letter to KLD was without doubt aimed at settling the dispute and the restriction of the without prejudice rule in this instance would serve to needlessly whittle down the rule and bring uncertainty and doubt.

With respect, regard had to this decision, there would be no point in attempting to settle a dispute if one knows that what may be admitted at without prejudice negotiations will be used as evidence to interrupt the running of prescription as contemplated in section 14 of the Prescription Act. One can imagine the shock that engulfs an unsophisticated party that discovers that bona fide admissions made with intentions to settle the dispute are admissible at the eventual trial. The only alternative would be negotiating without full and frank discussions and monitor every word uttered at the negotiations, or even negotiate hypothetically. It would not be far-fetched for one party at the negotiations to be heard saying:

“In the event that I admit that I owe you, which I am not admitting to, would you be prepared to accept half the amount you have quoted/invoiced me for building my house, seeing that you have not completed the house in compliance with the building regulations or to my satisfaction……”

It is for this reason that I find myself in total agreement with Lord Hoffmann in Brandford when he said “It has frequently been said that the purpose of the without prejudice rule is to encourage parties engaged in settlement negotiations to express themselves freely and without inhibition. It is well established that the rule applies to any genuine attempt at negotiation, whether or not the communication are expressly said to be without prejudice, and I think it would be most unfortunate if the law introduced a new requirement that the parties should preface anything they say with the standard disclaimer that any admissions of fact were to be taken to be hypothetical and solely for the purposes of the negotiation.” 

[1] Section 14 Interruption of prescription by acknowledgement of liability

  • The running of prescription shall be interrupted by an express or tacit acknowledgement of liability by the debtor.

Author: Frank Setati

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