Contractual damages and prescription

Prescription is judicially interrupted when process initiating a lawsuit for recovery of that particular debt is issued and served on the debtor.

In our law, breach of contract is remediable through mutually exclusive options, i.e. a claim for specific performance that seeks, notwithstanding the breach, to keep the contract alive; or cancellation of the contract and a claim for damages. This principle was recently reinforced by the Constitutional Court in Rademeyer v Ferreira [2024] ZACC 24. The matter centred around the interpretation and application of section 15 of the Prescription Act (judicial interruption of prescription) pertaining to a contractual dispute.

The case before the apex court originated as a contractual dispute between Mr. Thomas Ferreira (“Mr. Ferreira”) and Mr. Dion Rademeyer (“Mr. Rademeyer”) regarding Mr. Rademeyer’s obligations in terms of a sale agreement. Mr. Ferreira owned a large property which he subdivided to sell to purchasers for development. On 27 August 2008, Mr. Rademeyer and Mr. Ferreira entered into a sale agreement for one of the subdivided portions of land. However, Mr. Rademeyer did not fulfil all of the obligations of the sale agreement.

As a result, Mr. Ferreira launched an application for a declaratory order of specific performance as well as cancellation of the sale agreement and damages in the event that Mr. Rademeyer failed to comply with the order of specific performance.

On 7 August 2012, the court ordered Mr. Rademeyer to comply with his contractual obligations within five days, failing which, Mr. Ferreira would be entitled to cancel the sale agreement and claim damages. The court order was served on 15 August 2012 on Mr. Rademeyer and he failed to comply with same.

In July 2015, Mr. Ferreira cancelled the sale agreement. On 17 February 2016, Mr. Ferreira launched a further application under the same case number claiming damages from Mr. Rademeyer. Mr. Rademeyer objected thereto and contended that the court order was final and had disposed of the relief sought in the initial application.
Resultantly, on 18 April 2016, Mr. Ferreira instituted new proceedings under a different case number seeking damages pursuant to Mr. Rademeyer’s non-compliance with his obligations under the sale agreement and the court order.

Mr. Rademeyer raised a special plea of prescription and contended that the order was served him on 15 August 2012 and that his non-compliance was plainly common cause by 23 August 2012 and as such, prescription began to run on 23 August 2012 and the claim would have prescribed on 22 August 2015. Since the claim for damages was instituted on 18 April 2016, it had prescribed.

The High Court dismissed the special plea and held that the present action related to the computation of the damages suffered by Mr. Ferriera which was a continuation of the relief sought from the initial application.

The Supreme Court of Appeal agreed with the High Court and held that the action for damages stemmed from the same facts as the initial application and that the service of the initial application was a crucial step in enforcing the payment of a debt and that its service had the effect of interrupting prescription.

The Constitutional Court delivered two judgements. The minority judgement contended that the service of the initial application as well as the subsequent litigation constituted a step in the pursuit of the debt owed by Mr. Rademeyer to Mr. Ferreira. The minority judgement held that the legal proceedings were based on the same set of facts, Mr. Rademeyer’s breach of the sale agreement and as such, prescription for the recovery of the damages arising therefrom was interrupted as contemplated by section 15 of the Prescription Act. Therefore, the claim had not prescribed.

The majority judgement disagreed and stated that Mr. Ferreira’s claim for damages had prescribed. The majority judgment emphasized that Mr. Ferreira’s claim for damages did not exist when he launched the initial application. Therefore, the prescription of this claim could not have been interrupted at that time as Mr. Ferreira had made an election to keep the contract alive instead of cancelling and claiming damages. In reaching this conclusion, the majority pertinently emphasized that a claim for specific performance and cancellation of a contract are two mutually exclusive remedies available to an innocent party.

Therefore, for Mr. Ferreira to successfully claim for damages arising out of Mr. Rademeyer’s non-compliance with the contract, Mr. Ferreira would need to rely on a breach of the contract and its subsequent cancellation. Accordingly, Mr. Ferreira’s claim for damages only arose after Mr. Rademeyer’s failed to comply with the order, meaning prescription could not have been interrupted before this date.

The majority judgement further clarified that Mr. Ferreira’s “double-barrelled” approach in terms of the initial application could not preserve the damages claim from prescription as, at the time of launching the application, the necessary facts to sustain a claim for damages did not exist. Thus, the declaratory application could not act as a mechanism to interrupt the prescription of the claim as the cause of action had yet to arise.

The judgement highlights that where a creditor has two rights, or causes of action, then there are potentially two competing debts. Therefore, it is important that a creditor makes a sound and timeous election to determine which cause of action to pursue against a debtor. Inaction or incorrect election may prove fatal in respect of the right for enforcement of a debt. However, for prescription to be judicially interrupted in respect of a claim, there must be an existing claim for damages to begin with.