Without prejudice? Not always…

It is an accepted principle of South African law that negotiations between parties, which take place with a view to settling the disputes between them, are privileged and cannot be disclosed. This is known as the “without prejudice” principle and provides parties with substantial protection to ventilate their issues freely in an attempt to resolve their disputes outside of court without fear of reprisal.

In the recent case of KLD Residential CC v Empire Earth Investments 17 (Pty) Ltd (2017) ZASCA 98, the Supreme Court of Appeal (SCA) was tasked with determining whether an exception to the without prejudice principle existed in South African law and, specifically, whether an acknowledgment of indebtedness made by a debtor to a creditor in without prejudice correspondence could be admitted as evidence to prove that prescription had been interrupted in accordance with section 14 of the Prescription Act, 1969 (“the Act”).

Section 14 of the Act provides that the running of prescription is interrupted by an express or tacit acknowledgment of liability by a debtor. Where prescription is interrupted by such an acknowledgment then prescription begins to run afresh from the day on which the interruption takes place.

The High Court considered the English law of evidence and found that no such exception to the without prejudice rule existed and that there was no compelling public policy reason to limit the protection offered by the without prejudice rule. The court found that English law had long recognised the without prejudice rule and that statements, including admissions of liability, which are made in an attempt to settle litigation, are inadmissible. The court confirmed that the without prejudice principle is based on policy grounds; namely that parties involved in litigation should be encouraged to settle their disputes outside of court and should be entitled to have frank and open discussions without the fear that statements made during these discussions will be used against them at a later stage.

On appeal, the SCA set out the policy reasons behind the necessity of extinctive prescription; namely that a debtor is entitled to certainty as to whether or not a debt is still owed where a creditor has not sought to enforce it. In this sense, the reason behind section 14 is clear – if a debtor acknowledges that he/she is liable for a debt, then there is no uncertainty about the debt.

So, should section 14 provide the same protection where an acknowledgment of debt is made on a without prejudice basis? In answering this question, the SCA noted that there was a balance to be struck in prolonging the prescription period where there had been an admission of liability and in preventing statements being made during negotiations from being used in trial.

The court considered the English case of Bradford & Bingley Plc v Rashid [2006] UKHL 37 in which the court weighed up the public interest considerations underlying the without prejudice policy and the competing interest that a debtor who acknowledges his debt, with the result that a creditor does not resort to litigation immediately, should not be able to later claim that the debt has prescribed.

Ultimately, the SCA upheld the appeal and recognised that an admission of liability made in without prejudice discussions could be admitted as evidence, but solely for the purposes of interrupting prescription under section 14 of the Act. In this regard, the court was careful to point out that the exception was not absolute and each case would need to be judged on its own facts. However, the court believed that the exception would allow for the prevention of abuse of the without prejudice rule and the protection of the creditor. Recognising an exception ensures that the interests of section 14 and the without prejudice rule are properly served.

It is worth considering the dissenting judgment of Schippers AJA who expressed the view that such an exception would negate the without prejudice rule. Schippers AJA emphasised that an exception to the without prejudice rule would only serve to ensure that parties monitor everything said in without prejudice discussions in order to guard against admissions or acknowledgments of liability. This defeats the very purpose of without prejudice settlement discussions.

There is certainly merit to this view and the recognition of an exception to the without prejudice rule may ultimately result in parties being unnecessarily guarded in their discussions, thereby defeating the very purpose of without prejudice discussions.

The decision in this case is important because it means that parties need to be increasingly careful about the contents of without prejudice discussions, and, specifically, any admissions of liability made during these discussions. In matters where there is a risk of a debt prescribing, debtors will need to guard against admissions of liability in without prejudice correspondence and may need to ensure that it is expressly stated that any settlement offers are being made without admitting any liability.

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