One of the legal hazards facing almost all businesses is that their claims against their debtors or customers may inadvertently be allowed to prescribe, that is to say, to become legally unenforceable as a result of the failure to enforce the claim.
The Prescription Act 68 of 1969 says (slightly paraphrased) that if a person has a legal claim against another person (for example, a claim for the payment of money, the rendering of services or the delivery of goods) and that person fails to enforce the claim by issuing and serving a summons within the period of extinctive prescription laid down in the Act (usually three years), the debt in question is extinguished and cannot be enforced.
Disputed claims that are referred to arbitration
Frequently, where a claim is disputed, the disputing parties agree that the validity or otherwise of the claim will be determined by an arbitrator acting in terms of the Arbitration Act 42 of 1964. Arbitration is often an attractive option, being usually a quicker and less expensive process than litigation in the ordinary courts.
How does an arbitration process impact on the running of prescription in respect of the disputed debt?
Is the running of the prescription period interrupted by the arbitration? Or does prescription continue running whilst the arbitration is in process? If the arbitrator makes an award in favour of one of the disputing parties, is that award a new claim, the enforcement of which is subject to a fresh period of prescription?
These are some of the important questions that were authoritatively answered by the Supreme Court of Appeal in Brompton Court Body Corporate v Khumalo [2018] ZASCA 27in which judgment was given on 23 March 2018.
The body corporate of a sectional title scheme and the owner of a unit had claims against one another
This matter concerned a dispute between the body corporate of a section title scheme and the owner of one of the units. The owner claimed that her account should be credited with various amounts and for the cost of repairs to her unit. The body corporate in turn had various claims against the owner for levies, special levies and electricity.
The dispute went to arbitration.
At the end of the arbitration, the arbitrator made an award on 21 December 2012, upholding some of the owner’s claims and dismissing others, and upholding some of body corporate’s claims. The nett result was a balance owing by the owner to the body corporate of some R87 000 – an amount that the arbitrator then awarded to the body corporate.
For some reason, the body corporate delayed for well over a year in applying to the High Court for the arbitrator’s award to be made an order of court to enable it to be enforced. The owner in question then opposed the application on the grounds of prescription, arguing that, in terms of the Prescription Act, an arbitration award prescribes unless it is made an order of court within one year after the making of the award.
The High Court ruled that the body corporate’s right to have the arbitrator’s award made an order of court had indeed been extinguished by prescription, and upheld the defence raised by the owner of the sectional title unit in this regard.
The High Court judgment was reversed by the Supreme Court of Appeal
The body corporate took the judgment on appeal to the Supreme Court of Appeal, arguing that the award made by the arbitrator constituted a new debt that triggered the commencement of a new three year period of prescription.
This argument was supported by the leading textbook on the law of prescription and by an earlier judgment of the Pretoria High Court.
The Supreme Court of Appeal ruled that the author of the textbook was wrong on this point, as was the judgment of the Pretoria High Court.
An arbitrator’s award, said the Supreme Court of Appeal, does not constitute a new debt – it merely affirms an existing debt – and the original prescription period of three years continues runningwithout interruption, subject to one important special statutory rule, outlined below.
The statutory one-year rule applicable to a dispute that is submitted to arbitration
A special rule, explicitly laid down by the Prescription Act, is (slightly paraphrased) that where a debt is the subject of an arbitration process and where that debt would ordinarily have prescribed during the course of the arbitration or within a year after the making of the arbitrator’s award, then (except in relation to an arbitration under the Labour Relations Act, which has a special rule in this regard) the prescription period will not be completed until a year has elapsedfrom the date the arbitrator made his award.
The onus of proof was on the party alleging prescription
In this matter, said the Supreme Court of Appeal (at paragraph [16] of the judgment) the legal onus had been on the owner of the unitto prove that the body corporate’s claim against her had prescribed.
This meant that the owner had to provide evidence to the court of the date on which the body corporate’s claims against her had become due– since this was the date on which the prescription period would have started running.
The owner of the unit had failed to provide the court with proof of the due date of the debts that she had owed the body corporate, and consequently failed to prove that the three year prescription period in respect of any of those debts had been completed.
Consequently, the sectional title owner’s defence of prescription failed, and the award of the arbitrator remained operative, in terms of which the owner was required to pay the body corporate the nett amount of the arbitrator’s award.
