The High Court in Johannesburg recently handed down judgment in Masango and Another v Road Accident Fund and Others[1], a case with important implications for lawyers who enter into contingency fee agreements. The Court’s primary finding was that VAT is not recoverable above the 25% cap imposed by the Contingency Fees Act 66 of 1997 (“the Contingency Fees Act”).[2]

The plaintiff’s attorney of record concluded a contingency fee agreement with the plaintiff. The agreement provided that if the plaintiff was successful the fee payable would be calculated at 25% of the total amount awarded to the plaintiff, exclusive of VAT.[3] When the agreement came before the Court, however, the honourable Mr Justice Boruchowitz queried whether this provision was valid in terms of the Contingency Fees Act. The plaintiff’s attorney accordingly removed the matter from the roll and lodged an ex parte application to argue the issue separately, as an intervening party. Deputy Judge President Mojapelo asked the Johannesburg Society of Advocates and the Law Society of the Northern Provinces to present argument as amici curiae.

The Contingency Fees Act regulates contingency fee arrangements between legal practitioners and their clients. It caps the fees that legal practitioners are allowed to charge their clients in terms of contingency fee agreements and sets out requirements and a prescribed form for such agreements. The Act also stipulates requirements for any settlement entered into by a party to a contingency fee agreement.[4]

The Contingency Fees Act provides for two types of contingency fee agreements. The first is a “no win, no fee” agreement. The second is an agreement whereby the legal practitioner may charge a “success fee”, which is a fee higher than his or her normal fee. Only the second type of agreement is subject to the statutory caps.[5]

Section 2(1)(b) of the Contingency Fees Act allows for success fees. Section 2(2) provides for caps on such success fees, in the following terms:

“(2) Any fees referred to in subsection (1) (b) which are higher than the normal fees of the legal practitioner concerned (hereinafter referred to as the ‘success fee’), shall not exceed such normal fees by more than 100 per cent: Provided that, in the case of claims sounding in money, the total of any such success fee payable by the client to the legal practitioner, shall not exceed 25 per cent of the total amount awarded or any amount obtained by the client in consequence of the proceedings concerned, which amount shall not, for purposes of calculating such excess, include any costs.”

The Court held that the present case gave rise to two related questions. The first was whether a legal practitioner could charge 25% of the capital award as fees. The second was whether VAT could then be added to the capital amount, assuming the answer to the first question was positive.[6]

On the first question, the Court considered the meaning of “fees”, “normal fees”, and “success fees”, as such terms are used in the Contingency Fees Act (only “normal fees” are defined in the Act). It held that a “fee” was a payment due to a professional person or body for services rendered, or advice given, and was only payable for professional services which had been rendered.[7] “Normal fees” were those that would ordinarily be allowed on taxation, and, in terms of the relevant High Court rule, may only be charged for “services actually rendered by an attorney in his capacity as such in connection with litigious work”.[8] “Success fees” were the increased fees which a legal practitioner would be entitled to recover in the event of the client being successful in the litigation, as calculated in terms of section 2(2) of the Contingency Fees Act. A success fee was a normal fee which had been increased by a pre-agreed percentage.[9]

The Court held that the second cap, which was a proviso to the success fee provision in section 2(2), was only a cap – and not a fee. There was accordingly no basis for a legal practitioner to reflexively charge 25% of a client’s capital as fees. The Court held that this was an illegal practice which needed to be weeded out.[10]

On the VAT question, the Court held that the Value Added Tax Act No. 89 of 1991 (“the VAT Act”) made it clear that VAT was a tax levied on and paid by the vendor and not the consumer.[11] Section 64(1) of the VAT Act also required that prices were deemed to include value-added tax, whether or not the vendor had in fact included it in the price or not.[12] Section 65 of the VAT Act required that if the price was to exclude VAT the vendor must in his or her advertisement or quotation specify the price excluding VAT and including VAT.[13] These sections, read with various other sections of the VAT Act, led the Court to conclude that VAT output was not a cost to the legal practitioner which could be recovered from the client over and above the maximum fees, but rather that it was included in the maximum fees that the practitioner was entitled to recover from the client.[14]

As a result of the above findings, the contingency fees agreement between the intervening party and the plaintiff was found to be invalid. This was because it sought to authorise the recovery of VAT over and above the 25% cap, but also because of a number of other defects which the Court briefly outlined. In doing so, the Court emphasised that the Act required strict compliance with the Act and with the form of contingency agreement prescribed by the Act.[15]

Mojapelo DJP had some harsh words for lawyers who try to recover fees beyond those allowed by the Contingency Fees Act. The Masango case is accordingly essential reading for any lawyer working with contingency fee agreements. These may include personal injury lawyers and class-action lawyers, who often work for clients who cannot afford to pay for legal services in the ordinary way. For these clients, the case brings some welcome clarity and protection.

[1] (2012/21359) [2016] ZAGPJHC 227 (31 August 2016). See: http://www.saflii.org/za/cases/ZAGPJHC/2016/227.html.

[2] Masango para 52.

[3] Masango para 6.

[4] Masango para 8.

[5] Masango para 10.

[6] Masango para 2.

[7] Masango para 14 – 15.

[8] Masango para 16 – 17.

[9] Masango para 18.

[10] Masango paras 19 – 20.

[11] Masango paras 29 – 30.

[12] Masango paras 31.

[13] Masango paras 32 – 33.

[14] Masango paras 27 – 52.

[15] Masango paras 52 – 62.