In terms of South African law, it is common practice for Debtors and Creditors to negotiate debt and terms of payment on a “without prejudice” basis. In general, parties feel liberated to negotiate without prejudice, due to the fact that these settlement negotiations are usually inadmissible in litigation.
The primary object of settlement negotiations is to avoid litigation and to ultimately settle the matter amicably.
In terms of the Prescription Act 68 of 1969, a claim (debt) will prescribe within a period of three years if the Creditor failed to claim or institute legal proceedings to collect the outstanding amount. The three–year period commences to run from the time that the claim (or debt) comes into existence.
The legal question that arises is whether an AOD should intercept the running of time with regards to prescription? Or should the Debtor’s admission to liability remain “without prejudice” and not be taken into account with regards to litigation? These legal questions were addressed in the matter of KLD Residential v Empire Earth Investments 2017.
In the abovementioned case, the Creditor (Plaintiff) served the Debtor with a summons(during 2013) in an attempt to collect the outstanding payment which was long overdue. The Debtor (Defendant) in response filed a special plea – making the averment that the Creditor’s claim has already prescribed. The effect of a special plea of prescription is that the Creditor’s claim has expired – thus he will have no leg to stand on. However, the Creditor replicated the special plea by alleging that the Debtor’s attorneys had written to the Creditor’s attorneys during July of 2011, which contained an acknowledgement of the debt owing to the Creditor – interrupting the running of prescription.
The Creditor relied on Section 14 of the Prescription Act:
“(1) The running of Prescription shall be interrupted by an express or tacit acknowledgement of liability by the debtor.
(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.”
Although section 14 of the Prescription Act is clear, the question before the Court was whether or not an acknowledgement of debt can (or should) be admissible in terms of litigation, when the admission to liability was made in correspondence that was without prejudice? The Debtor contended that the acknowledgement of debt was made without prejudice and cannot be considered as interrupting the running of prescription. The Creditor was opined that prescription had started to run afresh as contemplated in section 14 of the Prescription Act.
The Court found that an exception to the without prejudice-rule should be applied when determining the prescription. The Court concurred with section 14 of the Prescription Act – the acknowledgement of debt did indeed interrupt the running of prescription and prescription started to run anew from the date of the acknowledgement of the debt – which in essence meant that the Creditor’s claim did not prescribe and that the Debtor’s special plea of prescription could not succeed.
The above judgement is groundbreaking – Debtors can no longer rely on the without prejudice-rule when pleading prescription, due to the fact that an exception to the rule exists. Debtors should be weary when entering settlement negotiations on a without prejudice basis, especially because the admission of liability of a debt interjects the running of prescription. With each acknowledgement of debt, prescription starts to run once more and the Creditor will remain entitled to pursue legal proceedings if the Debtor does not make payment as agreed. The Creditor’s claim will only prescribe after the period of three years have lapsed from the date of the acknowledgement of debt, even if the debt was admitted without prejudice.
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