The Prescription Act 68 of 1969 (“the Act”) regulates the running of Prescription. A debt will prescribe after the lapse of a certain time period. This means that the claimant will not be able to issue a claim once the time period has lapsed. Section 12 (1) and (2) of the Act stipulates that prescription shall commence to run as soon as the debt becomes due with most debts prescribing after a period of 3 years.

 

In the Constitutional Court case of Trinity Asset Management (Pty) Limited v Grindstone Investments 132 (Pty) Limited [2017] ZACC 32, the court dealt with the date of demand and the right of the creditor to determine final payment through lawful demand. This case should serve as a warning to creditors advancing credit which is repayable upon demand.

 

Background

 

Trinity Assesment Management (Pty) Ltd (“the Applicant”) and Grindstone Investments 132 Pty Ltd (“the Respondent”) entered into a written loan agreement, effective from 1 September 2007, in terms of which the Applicant borrowed a capital amount from the Respondent.  Clause 2.3 of the loan agreement provided that the loan capital was due and repayable to the applicant within 30 days from the date of delivery of the Applicant’s written demand. On 19 September 2013 the Applicant requested payment from the Respondent via email. The Respondent’s representative acknowledged receipt thereof and agreed to make payment. However, the Respondent failed to make payment. Consequently, the Applicant served a Letter of Demand upon the Respondent on 9 December 2013.

 

Subsequently an application was brought in the High Court for the liquidation of the Respondent. The Respondent denying its indebtedness to the Applicant and raising the defence of prescription. The High Court upheld the defence of prescription and the application was accordingly dismissed.

 

The matter was then taken on appeal to the Supreme Court of Appeal where the court held that the claim had in fact prescribed as the debt was due the moment it was advanced and enforceable, that is from 1 September 2007.

 

There was a minority judgment which held that the true intention of the parties must be considered as it appears from the agreement as well relevant policy considerations to determine when a debt is due.  It was held further that the debt did not extinguish as a result of prescription as the parties had intended that prescription would commence from the date on which written demand was made by the Applicant.

 

Constitutional Court

 

In the Constitutional Court two issues were considered:

  1. Whether the Applicant’s claim had prescribed; and
  2. The circumstances that triggered the running of prescription.

 

The court referred to Standard Bank of South Africa v Mircale Mile Investments 67

187/2015) ZASCA 91 (1 June 2016) where it was held that:

a debt must be immediately enforceable before a claim in respect of it can arise. In the normal course of events, a debt becomes due when it is claimable by the creditor and as a corollary thereof, is payable to the creditor.’

 

Thus, a debt falls due when the creditor acquires a complete and actual cause of action to approach a court and recover the debt; the running of prescription thus only commencing once the creditor is in a position to legally enforce its rights in respect of the claim.

 

However policy considerations stipulate that a creditor should not by its inaction cause a delay in the running of prescription. Our courts have thus accepted the general rule that debts that are “payable on demand” and are immediately enforceable upon the conclusion of an agreement. Where the debt is “payable on demand”, no specific demand for payment is required and the debt becomes due and payable once incurred.  In an instance where the agreement does not indicate a due date, the debt is regarded as due and owing upon the conclusion of the agreement.

 

The court did however acknowledge that this general rule was subject to the general principle of freedom of contract.

 

But after consideration of the content of the agreement, the court found that the term ‘due and payable’ was used loosely and gave no indication of the parties’ actual intention with regard to delaying when the debt would be due as envisaged in Section 12(1) of the Prescription Act. Importantly the court held at 124:

 

For the parties to delay prescription is simple.  They just have to say so.  But they must say so.  If they don’t, the featurelessness of their agreement – as here – means that prescription starts to run immediately once the money is paid over.”

 

The court therefore held that it was not the intention of the parties to defer when the debt became due and it followed that it was never intended to delay prescription.

 

In light of this judgment, it is essential for parties, specifically creditors, to structure their agreement in a manner so as to avoid debt being unduly extinguished by prescription when the intention of the parties is a long-term agreement of unknown duration. Parties should include terms that clearly indicate the conditions for when the debt is due as envisaged in Section 12(1) of the Prescription Act and even go so far as to precisely indicate this.

DISCLAIMER:
This article is made available for educational purposes only, as well as to give you general information and a general understanding of the law, not to provide legal advice. You should not act upon this information without seeking advice from an attorney relating to the specific circumstances on your matter and as such you rely on this article at your own risk. This article may age and may not reflect the most current legal developments, legislation and judgments. The material may be changed, improved, or updated without notice. Bentley Attorneys nor Bentley Credit Control are not responsible for any errors or omissions in the content under any circumstances.