A ‘without prejudice’ letter breathes new life into prescribed matter

June 1st, 2018

By Herbert James David Robertson

According to South African law, and more specifically in the case of ABSA Bank Ltd v Hammerle Group 2015 (5) SA 215 (SCA), one exception to without prejudice communication being inadmissible to court is correspondence amounting to an acknowledgement of insolvency. The rationale behind the exception being, that such an admission, even if made in confidence, cannot be considered to be privileged as public policy dictates that liquidation or insolvency proceedings are a matter, which by its very nature, involve the public interest.

The question posted to the Supreme Court of Appeal (SCA), during May 2017, in KLD Residential CC v Empire Earth Investments 17 (Pty) Ltd (2017) 3 All SA 739 (SCA) was whether a second exception to without prejudice rule is recognised in South African law. The so-called second exception refers to where inadmissibility would not apply to without prejudice communication when the communication is solely relied on to prove an acknowledgement of liability, which would have the effect of interrupting prescription in terms of s 14 of the Prescription Act 68 of 1969.

I thus deal with two conflicting pieces of public policy. On the one hand there is the prescription principle, which has long been accepted in South African law, as it brings with it certainty to debtors in that a debtor can have confidence in the fact that a debt is no longer payable, as it has been extinguished by prescription.

On the other hand, the working of the without prejudice rule offers the opportunity to avoid litigation and resolve any difference amicably with full and frank discussion without the fear, that should negotiation fail, any admission made will not be used against said party in litigation. Already in 1978, Trollip JA quoted Lord Mansfield, in his judgment of Naidoo v Marine & Trade Insurance Co Ltd 1978 (3) SA 666 (A) stated the true purpose of the without prejudice letter is to ‘buy their peace’.

Foreign law

The case that best deals with this question of law is the matter of Bradford & Bingley PLC v Rashid UKHL [2006] 4 All ER 705. This matter concerns a respondent who had owed money, after mortgaging property to the appellant, writing a letter wherein he admitted that he could not settle the debt, but acknowledged that he indeed owed the money to the appellant. The court found that the admission was not made without prejudice to rights. Lewis JA in the KLD Residential case referred to the Bradford case where Lord Mance found that should the exception to the without prejudice rule be applied it would lead to parties not being able to speak freely as they would have to ‘monitor every sentence to avoid making an acknowledgment of liability that would subsequently be admissible in litigation.’

It is noteworthy to mention that the court in Bradford referred to the South African decision of Kapeller v Rondalia Versekeringskorporasie van Suid-Afria Bpk 1964 (4) SA 722 (T) wherein the court clearly distinguished between admissions made and negotiations during without prejudice communications.

In essence the court ruled in the Bradford case, as summarised in the KLD Residential case, 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 new SCA precedent

The facts of the KLD Residential case are that KLD had to market and sell the residential property of the respondent, KLD Residential (then trading as Seeff). The appellant was alleged to have sold 99 units of the respondent during 2008 and 2009 and, thereafter, in 2013 claimed commission for same in an amount exceeding R 2 million.

A special plea of prescription was raised by the respondent. In response the appellant claimed that the claim could not have prescribed as a without prejudice letter, transmitted by the respondent’s attorney in 2011, had the effect of interrupting prescription and thus cause prescription to start to run afresh.

The court now had to decide whether an acknowledgment of debt contained in a without prejudice letter could interrupt prescription. The court a quo had answered this question in the negative, as the court held that it was bound by the Naidoo decision. However, the SCA came to the opposite finding and decided that the appeal was upheld with costs.

In essence the court found that the content of a without prejudice letter would be admissible, but solely for the purposes of interrupting prescription as the remainder of the content of the letter, specifically the quantum of the debt concerned, would remain protected.

The reason the court offered in support of its finding is that ‘there is nothing to prevent the parties from expressly or impliedly ousting it [the so-called second exception] in their discussions.’ The court continues by stating that ‘the debtor should not be permitted to escape the obligation because the admission was made in the course of negotiations to settle a dispute.’

This in effect means that one may still engage with the opposing party in without prejudice communication only if both parties, prior to any negotiation, agree that the exception regarding admissions of liability and its effect on prescription, will find application of their settlement talks.

This, I believe, to be an unfortunate situation the South African law profession now finds itself in. Surely a reasonable person or attorney would never make such a concession prior to entering negotiations. This would be detrimental to the client’s case and it can be argued that this might even be construed as professional negligence on the attorney’s part, as this concession would effectively exclude prescription from ever taking effect.

The court further found that it was not a question of whether the without prejudice rule trumps the prescription but rather recognising that both prescription and the without prejudice rule protect public interest and in applying the exception the courts are ensuring that both interests are properly served.

How to negotiate a settlement without causing the interruption of prescription?

A practical solution would be to contact the creditor or their attorney and request that they provide a settlement offer. The debtor will then either accept the offer, which would bring an end to any litigation or prevent the institution of a claim, had same not yet been issued, or reject the offer which action can never be construed to be an acknowledgement of debt.

The problem with the possible solution alluded to above is that one does not simply accept the first offer but rather engages in further negotiations in an attempt to best serve the interest of the client. The opposing party may also elect not to make any settlement offer, leaving the client in an unfavorable position.

Another possible solution would be to state that any reference made to a claim, does not amount to the recognition of the validity of such a claim and may not be constructed to be an acknowledgement of debt, but is merely done for the purposes of negotiating settlement. This however, has its own risks since despite such a deliberate and express statement, the content of such communication may later be construed to amount to some kind of acknowledgement.

I would think that the court was referring to this very instance when it noted, in its decision of KLD Residential, that the application of this exclusion to the without prejudice rule will always be governed by the facts.

What these facts are, unfortunately still remains to be proven.

  • See law reports ‘Prescription’ 2016 (Dec) DR 40 for the WCC judgment and 2017 (Dec) DR 44 for the SCA judgment of the KLD Residential case.

Herbert James David Robertson LLB (UP) (cum laude) is an attorney at Lacante Henn Inc in Pretoria.

This article was first published in De Rebus in 2018 (June) DR 24.

De Rebus