It is common for a debtor (defendant) to submit correspondence to its creditor (plaintiff) and mark it as "without prejudice", wherein the debtor acknowledges its indebtedness to the creditor and further proposes a settlement offer to the creditor.

Although not stipulated in any specific statute, it is a general practice in South African Law that "without prejudice" correspondence made by one party to another in an attempt to negotiate settlement of a dispute or a debt is inadmissible in a court room and therefore a party to the proceedings cannot use such correspondence as evidence. Our courts have, however, recognised limited exceptional circumstances in terms of which the courts may allow without prejudice correspondence or statements which are made during settlement negotiations to be admissible as evidence- these include acts of insolvency, limited instances of estoppel, fraudulent misrepresentation and threats.

The SCA in the case of KLD Residential CC v Empire Earth Investments 17 (Pty) (1135/2016) [2017] ZASCA 98 3 All 739 SCA; 2017 (6) SA (6 July 2017), introduced prescription as a further limited exceptional circumstance in terms of which it would be acceptable for the Court to allow without prejudice negotiations to be admitted as evidence in a court room. The SCA stated as follows: "Where an acknowledgement of indebtedness is made by a debtor to a creditor, even in without prejudice settlement negotiations, the acknowledgement may be admitted in evidence for the sole purpose of interrupting the running of the prescription period in terms of section 14 of the Prescription Act 68 of 1969."

Section 14(1) of the Prescription Act 68 of 1969 provides that that running of prescription shall be interrupted by an express or tacit acknowledgement by the debtor. Section 14(2) provides that if the running of prescription is interrupted as contemplated in subsection (1), prescription shall continue to run afresh from the day on which the interruption takes place.

The SCA in KLD Residential CC v Empire Earth Investments stated that the "rationale underlying section 14 of the Prescription Act is that where there is an acknowledgement of liability, there is no uncertainty on the part of the debtor as to the existence of the debt." The Court furthermore referenced statements made by other Judges in the following cases:

  • In Murray & Roberts Construction (Cape) (Pty) Ltd v Upington Municipality 1984 (A) Grosskopf AJA said that "where the debtor removes uncertainty by admitting liability, the running of prescription is 'suitably adapted'.
  • In the foreign law case of Bradford & Bingley plc v Rashid [2006] UKHL 37; [2006] 4 All ER 705, Lord Walker stated that "it is in the public interest that a debtor who acknowledges his debt, 'and so induces his creditor not to have immediate resort to litigation', should not be able to claim that the debt has prescribed because 'the creditor held his hand'.

The SCA consequently 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 acknowledgements should be admissible, even if made without prejudice during settlement negotiations, but solely for the purpose of interrupting prescription. The exception itself is not absolute and will depend on the facts of each matter. And there is nothing to prevent the parties from expressly or impliedly ousting it in their discussions. What the exceptions allows for, is the prevention 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 concerned."

The above ruling specifically indicates that without prejudice acknowledgements of liability are admissible solely for the purpose of interrupting prescription. The effect of such ruling would inherently render the remaining content of the letter or correspondence inadmissible in court, such as acknowledgement of the quantum of the debt. The Court does however state that the exception is not absolute and will depend on the facts of each case. The question that remains is, what are these facts which may alter this exception?

The general practice relating to "without prejudice" correspondence for purpose of settlement negotiations seems to be, to a wide extent, misused by debtors in South Africa. Many times debtors try to seek protection from the without prejudice rule by rendering settlement proposals to their creditors with the mala fide intention of evading litigation, and with no intention of discharging the debt in question. This is an issue which needs to be addressed by the South African Courts. In my opinion, the aforementioned rule laid down by the SCA in KLD Residential CC v Empire Earth Investments should be extended: where a debtor acknowledges liability of a debt during settlement negotiations and enters into a settlement agreement with its creditor, be it verbal or written, and if the said debtor breaches the settlement agreement, the debtor's acknowledgement of debt (including the entire agreement) should be admissible as evidence in court proceedings. A debtor should not be allowed to hide behind the without prejudice rule to the detriment of its creditor merely because the creditor put its trust in the hands of such debtor and afforded it an indulgence on payment of the debt.

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