Usually when parties commence settlement negotiations, their attorneys will include the phrase “Without Prejudice”. Whether it is in writing or oral. But what does the phrase “Without Prejudice” mean?

The without prejudice rule

Without prejudice means that when a party participates in settlement negotiations in an attempt to resolve a dispute, and certain admissions were made, these admissions will not be used as evidence of its/their liability in court. “The rationale of the rule is public policy: parties to disputes are to be encouraged to avoid litigation and all the expenses, delays, hostility, and inconvenience it usually entails, by resolving their differences amicably in full and frank discussions without the fear that, if negotiations fail, any admissions made by them during such discussions will be used against them in the ensuing litigation.”^[1]

There are, however, exceptions to this rule, where certain admissions are not protected by the rule. One of these exceptions is an admission of insolvency. The reason for the exception is that liquidation or insolvency proceedings are matters which, by its very nature, involves the public interest.^[2]

In a recent Supreme Court of Appeal case ^[3] the court had to decide on the issue of whether an acknowledgement of liability, made without prejudice in a written offer of settlement, may be admitted as evidence for the purpose of interrupting prescription within the meaning of section 14 of the Prescription Act.^[4]

The law of prescription

Section 10 of the Prescription Act ^[5] determines that a debt shall be extinguished by prescription after the lapse of a certain period. One of the main reasons for the extinctive prescription is to provide certainty to a debtor as to whether or not a debt is still owed.^[6]

On the other hand, Section 14 of the Prescription Act ^[7] protects the creditor. It deals with the interruption of prescription and reads:

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

If the running of prescription is interrupted as contemplated above, prescription shall commence to run afresh from the day of the interruption.^[8]

If a debtor acknowledges liability, there is no uncertainty about the debt. The creditor is thus protected against extinctive prescription where the debtor removes all uncertainty by acknowledging liability, or the creditor does so by instituting legal proceedings.^[9]

Factual background of the case ^[10] that changed the law

KLD Residential CC, also trading as Seeff Properties (hereinafter “Seeff”) alleged that it was entitled to commission on the grounds of a written mandate given to it by the developer, Empire Earth Investments 17 (Pty) Ltd (hereinafter the “Developer”).

The Developer also alleged that Seeff owed money for marketing and administration purposes for the development, as per the agreement between the parties. The Developer instituted action against Seeff for the latter. To avoid further litigation and future claims from Seeff, the Developer entered into settlement negotiations with Seeff. The Developer’s attorneys wrote a “Without Prejudice” letter to Seeff, admitting that Seeff was entitled to certain commissions, which have now become due and payable to Seeff by the Developer and offered a set-off amount (the commissions owed to Seeff less monies owed to the Developer) as full and final settlement. Seeff did not accept the offer and instituted action against the Developer for the full amount of the commission. However, action was instituted after the claim had prescribed. Subsequently, the Developer filed a special plea of prescription. The Western Cape Division of the High Court, Cape Town found that the claim did indeed prescribe according to the Prescription Act, but granted leave to appeal to the Supreme Court of Appeal.

Supreme Court of Appeal of South Africa (SCA) – Ruling and rationale

There are two competing public interests that need to be protected: the without prejudice principle and the law of prescription (section 14 of the Prescription Act).

Parties have to feel free to participate in settlements negotiation without the need to monitor every sentence to guard against admissions, but also, a creditor has to be protected against a debtor in the case of an acknowledgment of liability, where the debtor is certain as to the existence of the debt and his or her liability, and the debtor should not be permitted to escape the obligation because the admission was made in the course of negotiations to settle a dispute. ^[11]

For the SCA it was a question of recognising that both section 14 of the Prescription Act and the without prejudice rule protect policy interests, and to recognise an exception will mean both interests are properly served.

After considering all facts, relevant law and authority, the court ruled that where acknowledgements of liability are made such that, by virtue of section 14 of the Prescription Act, they would interrupt the running of prescription, such acknowledgments should be admissible, even if made without prejudice during settlement negotiations, but solely for the purpose of interrupting prescription. ^[12]

According to Lewis JA ^[13] the exception allows for the prevention of abuse of the without prejudice rule, and the protection of a creditor. The admission remains protected in so far as proving the existence and the quantum of the debt is concerned.

Conclusion

This ruling will have an immense effect on creditors and debtors alike. If you are a creditor, do not simply assume that your claim has prescribed, an acknowledgement of liability in ‘without prejudice’ settlement negotiations can still interrupt prescription. If you are a debtor, be cautious to make any admissions during settlement negotiations – these words might save you: “This is not an acknowledgement of my indebtedness”.

^[1] Trollip JA, Naidoo v Marine & Trade Insurance Co Ltd 1978 (3) SA 666 (A) at 677B-D.

^[2] Mbha JA ABSA Bank v Hammerle Group [2015] ZASCA 43; 2015 (5) SA 215 (SCA) at para 13.

^[3] KLD Residential CC v Empire Earth Investments 17 (Pty) Ltd [2017] ZASCA 98.

^[4] Act 68 of 1969.

^[5] Supra.

^[6] Lewis JA, KLD Residential CC v Empire Earth Investments (1135/2016) [2017] ZASCA 98 at para 13.

^[7] Act 68 of 1969.

^[8] Section 14(2) of the Prescription Act – “(2) If the running of prescription is interrupted as contemplated in subsection (1), prescription shall commence to run a fresh from the day on which the interruption takes place or, if at the time of the interruption or at any time thereafter the parties postpone the due date of the debt, from the date upon which the debt again becomes due.”

^[9] Murray & Roberts Construction (Cape) (Pty) Ltd v Upington Municipality 1984 (1) SA 571 (A) at 578H-5789A.

^[10] KLD Residential CC v Empire Earth Investments 17 (Pty) Ltd [2017] ZASCA 98.

^[11] KLD Residential CC v Empire Earth Investments 17 (Pty) Ltd [2017] ZASCA 98 at para 39.

^[12] Supra.

^[13] See note 11.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.