Introduction
Courts consistently emphasis that the legal effect of a document depends less on its label (e.g. “acknowledgement of debt”) and more on its substance – particularly the exact wording of what the debtor has undertaken to do. The courts have demonstrated over time why it is important to carefully consider the wording used when drafting legal agreements.
In a recent High Court judgment of Cash Converters Southern Africa (Pty) Ltd v Chalala (6152/2024) [2026] ZAFSHC 322 (“Cash Converters Case”), the court considered the wording contained in an acknowledgement of debt agreement and found that the wording had the effect of changing the substance of the acknowledgment of debt to that which falls within the ambit of a promissory note in terms of section 7(1), section 9(1) and section 87(1) of the Bills of Exchange Act 34 of 1964 (“Bills of Exchange Act”), thereby affecting the prescription period in terms of section 11(c) of the Prescription Act 68 of 1969 (“Prescription Act”).
Background Facts
The facts of the case were that the plaintiff instituted an action against the defendant on the basis of an acknowledgement of debt agreement, wherein the defendant acknowledged being truly and lawfully indebted to the plaintiff in the sum of R473 778,24 together with interest. The defendant further undertook to pay the debt by way of instalments of R15 000,00 per month until the debt has been repaid in full.
The defendant subsequently defaulted on its payment obligations under the acknowledgment of debt agreement resulting in the plaintiff issuing summons for the recovery of the outstanding amount together with interest. In response to the plaintiff’s claim, the defendant raised a special plea of prescription pleading that the cause of action arose on 26 April 2021 when the last payment was made by the defendant, and the action was instituted on 29 October 2024 and served on or about 5 November 2024, which is more than three (3) years and seven (7) months after the debt arose, and therefore the claim had prescribed by virtue of the provisions of sections 11 and 12 of the Prescription Act.
In its replication, the plaintiff pleaded that the defendant acknowledged liability in writing and made an unconditional promise to liquidate its indebtedness to the plaintiff by way of instalments. In the premises, the acknowledgement of debt agreement constituted a promissory note as contemplated in terms of section 87(1) of the Bills of Exchange Act, which prescription period in respect thereof is six (6) years as contemplated in section 11(c) of the Prescription Act.
The Legal Issue
In light of the above, the court was tasked to adjudicate the issue of prescription in respect of the acknowledgment of debt agreement, more specifically whether the acknowledgement of debt agreement, which typically prescribes after 3 years, constituted a promissory note, which prescribes after 6 years, as pleaded by the plaintiff.
The legal issue turned on whether the agreement contained an unconditional promise and whether the elements for a promissory note under the Bills of Exchange Act where met.
The Judgment
The court considered the Prescription Act and stated that the Act delineates the timeframes within which legal claims must be pursued, contingent upon the nature of the claim and the context in which the claim arose. The relevant prescription periods of debts are set out in section 11 of the Prescription Act.
A claim arising from an acknowledgement of debt agreement is ordinarily a regular debt which prescribes after three (3) years in terms of section 11(d) of the Prescription Act. However, in terms of section 14(1) of the Prescription Act, the running of prescription shall be interrupted by an express or tacit acknowledgment of liability to the debtor. The interruption of prescription postpones the due date of a debt and prescription commences to run afresh from the day of the interruption, i.e in this present case from the date the acknowledgement of debt was entered into by the parties.
Having regard to the wording contained in the acknowledgment of debt agreement concluded between the parties, the court found that:
- the defendant made an unconditional promise in writing to pay a sum that is certain in money at a fixed (or determinable future) time to the plaintiff in terms of section 9(1) of the Bills of Exchange Act which provides that “a bill is payable at a determinable future time within the meaning of this Act, if it is expressed to be payable, at the expiration of a fixed period after date or sight or on or at the expiration of a fixed period after, the occurrence of a specified event which is certain to happen, though the time of happening may be uncertain”, which agreement was duly signed by both parties;
- the matter before the court met the requirements of a ‘promissory note’ as set forth in section 87(1) of the BEA which provides that “…[a] promissory note is an unconditional promise in writing made by one person to another, signed by the maker, and engaging to pay on demand or at a fixed or determinable future time, a sum certain in money, to a specified person or his order, or to bearer”;
- the court further examined whether the wording of the acknowledgment of debt agreement fell within the ambit of section 7(1) of the Bills of Exchange Act in that the section provides that “the sum payable by a bill is a sum certain in money within the meaning of this Act although it is required to be paid with interest, by stated instalments, by stated instalments and upon default in payment of any instalment the whole debt becomes due by virtue of a provision to that effect in the bill or according to a rate of exchange indicated, or to be ascertained as directed by the bill”. The court found that section 7(1) does apply; and
- as a result of the findings above, the acknowledgment of debt agreement in question was not an acknowledgment of debt in the ordinary sense as it went further than a mere acknowledgment of an amount or debt due by the defendant to the plaintiff, but rather constituted a negotiable instrument in the form of a promissory note, which in terms of section 11(c) of the Prescription Act prescribes after six (6) years.
The court accordingly dismissed the special plea raised by the defendant and held that the debt had not prescribed as the summons were issued and served by the plaintiff on the defendant within the six-year period as contemplated in section 11(c) of the Prescription Act.
In delivering its judgment, the court relied on the judgment in Allright v Gluck 1962 (1) SA 562 (W), wherein the court similarly held that an acknowledgment of debt coupled with a promise to pay would constitute a valid promissory note. In line with the modern South African approach established in Natal Joint Municipal Pension Fund v Endumeni Municipality , the court interpreted the acknowledgement by reading its text (promise to instalment timetable), context (how repayment is structured and default effects work), and purpose (creating an enforceable obligation impacting prescription), rather than relying solely on the label ‘acknowledgment of debt’.
The court further clarified the difference between an acknowledgment of debt and a promissory note, noting that “…[a] promissory note is a promise. A promise is an undertaking to pay, and involves more than a mere acknowledgement of debt with an implied undertaking to pay … An acknowledgement of debt is not a promissory note but, coupled with an express undertaking to pay, it could be”. In other words, mere admission of indebtedness does not in itself amount to a promissory note, however, an admission and an undertaking may amount to a promissory note in terms of the Bills of Exchange Act.
Conclusion
This judgment highlights the importance of having special regard to the wording and language employed in the drafting of legal agreements as it may have far-reaching legal implications when given effect.
In line with the ‘substance over form’ principle, the courts may rule that wording and the substance of an agreement constitutes a promissory note even though the agreement is titled and structured as and intended by the parties thereto as an acknowledgment of debt.
The Court ultimately focused on what the agreement actually required the debtor to do, rather than how the document was labelled. language must be interpreted by evaluating text, context, and purpose simultaneously.
