Admissibility of an acknowledgment of debt “without prejudice” in the courtroom during a dispute – Finance and Banking

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South Africa: Admissibility of an IOU “without prejudice” in a courtroom during litigation

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It is common for a debtor (defendant) to submit correspondence to their creditor (plaintiff) and mark it as “without prejudice”, in which the debtor acknowledges its debt to the creditor and further offers a settlement offer to the creditor.

Although not stipulated in any specific law, it is general practice in South African law that correspondence “without prejudice” made by one party to another for the purpose of negotiating the settlement of a dispute or a debt is inadmissible in a courtroom and therefore a party to the proceedings cannot use this correspondence as evidence. Our courts have, however, recognized limited exceptional circumstances in which the courts may without prejudice to allow correspondence or statements made during settlement negotiations to be admissible as evidence – these include acts of insolvency, limited cases of estoppel, fraudulent misrepresentation and threats. .

The SCA in KLD Residential CC v Empire Earth Investments 17 (Pty) (1135/2016) [2017] ZASCA 98 3 All 739 SCA; 2017 (6) SA (July 6, 2017), introduced statute of limitations as an additional limited exceptional circumstance under which it would be acceptable for the Court to allow without prejudice that negotiations be admitted as evidence in a courtroom. The SCA stated the following:
“When an acknowledgment of debt is made by a debtor to a creditor, even in the context of settlement negotiations without prejudice, the acknowledgment may be admitted in evidence for the sole purpose of interrupting the course of limitation within the meaning of article 14 of the statute of limitations. 68 of 1969. “

Article 14, paragraph 1, of Law 68 of 1969 on the limitation period provides that the execution of the limitation period is interrupted by an express or tacit acknowledgment of the debtor. Article 14 (2) provides that if the execution of the limitation period is interrupted in accordance with paragraph (1), the limitation period continues to run from the day on which the interruption occurs.

The SCA in KLD Residential CC v Empire Earth Investments stated that “the rationale behind Section 14 of the Prescription Act is that where there is an acknowledgment of liability there is no uncertainty on the part of of the debtor as to the existence of the debt. “The Court further referred to statements made by other judges in the following cases:

  • In Murray & Roberts Construction (Cape) (Pty) Ltd v Upington Municipality 1984 (A), Grosskopf AJA stated that “When the debtor removes the uncertainty by admitting his liability, the course of the limitation period is” suitably adapted “.
  • In the Foreign Law Case Bradford & Bingley plc v Rashid [2006] UKHL 37; [2006] 4 All ER 705, Lord Walker said that “it is in the public interest that a debtor who acknowledges his debt, ‘and thus induces his creditor not to immediately resort to litigation’, cannot claim that the debt has prescribed because ‘the creditor held his hand ‘.

The SCA therefore decided that “When acknowledgments of liability are made in such a way that, under Article 14 of the Limitation Act, they interrupt the course of limitation, such acknowledgments should be admissible, even if they are made without prejudice to the period. settlement negotiations, but only for the purpose of interrupting the limitation period. The exception itself is not absolute and will depend on the facts of each case. And nothing prevents the parties from expressly or implicitly excluding it in their discussions. and the protection of a creditor. Admission remains protected insofar as it proves the existence and amount of the claim concerned.

The above judgment expressly indicates that, without prejudice, acknowledgments of liability are admissible for the sole purpose of interrupting the limitation period. The effect of such a decision would inherently render the remaining content of the letter or correspondence inadmissible in court, such as the acknowledgment of the amount of the debt. The Court specifies, however, that the exception is not absolute and will depend on the facts of each case. The question that remains is, what are these facts that can modify this exception?

The general practice of “without prejudice” correspondence for the purpose of settlement negotiations appears to be, to a large extent, abused by debtors in South Africa. Often, debtors attempt to protect themselves from the rule without prejudice by submitting settlement proposals to their creditors with the awkward intention of evading litigation and with no intention of discharging the debt in question. This is a question which must be dealt with by the South African courts. In my opinion, the aforementioned rule set out by the SCA in KLD Residential CC v Empire Earth Investments should be extended: when a debtor acknowledges responsibility for a debt during settlement negotiations and enters into a settlement agreement with its creditor, whether verbal or written, and if said debtor violates the settlement agreement, the debtor’s acknowledgment of debt (including the entire agreement) should be admissible as evidence in legal proceedings. A debtor should not be allowed to hide behind the rule without prejudice to the detriment of his creditor simply because the creditor has placed his trust in the hands of that debtor and granted him an indulgence for the payment of the debt.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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