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[2016] ZAGPJHC 227
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Masango and Another v Road Accident Fund and Others (2012/21359) [2016] ZAGPJHC 227; 2016 (6) SA 508 (GJ); 79 SATC 295 (31 August 2016)
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REPUBLIC
OF SOUTH AFRICA
HIGH
COURT OF SOUTH AFRICA,
GAUTENG
LOCAL DIVISION
Case
No.: 2012/21359
DATE:
31 AUGUST 2016
In the
matter between:
MASANGO MLUNGISI
NELSON
..................................................................................
Plaintiff
THE ROAD ACCIDENT
FUND
..................................................................................
Defendant
RENIER VAN RENSBURG
INCORPORATED
..........................................
..
Intervening Party
JOHANNESBURG
SOCIETY OF ADVOCATES
..........................................
1
st
Amicus Curiae
And
LAW SOCIETY OF THE
NORTHERN PROVINCES
.................................
.
2
nd
Amicus Curiae
JUDGMENT
MOJAPELO DJP:
[1]
Is
a legal practitioner entitled to charge as his or her fess 25% of the
capital amount recovered for his or her client plus 14%
Value-Added
Tax (VAT) in terms of a contingency fees agreement concluded with the
client under the Contingency Fees Act 66 of 1997
(the CFA)? This is
the first question that was raised by the court. The plaintiffs
attorney in this case, now the intervening party,
contends that he is
entitled to do so and provided for it in an agreement concluded with
the plaintiff. It is trite law that a
contingency fee agreement which
does not comply with the CFA is invalid.
[1]
A related and broader question is therefore whether the agreement is
valid or should be declared invalid.
[2]
The first question has in it two questions rolled into one:
firstly whether a legal practitioner may charge 25% of the capital
award
as fees (the fee question), and secondly, whether 14% VAT may
be added to the 25% capital amount (the VAT question), assuming that
the answer to the first question is positive. I propose to deal with
the sub-questions in that order.
[3]
These
questions arise in the context of the supervisory power and duty that
rest on the court to ensure that contingency fees agreements
comply
with the provisions of the CFA.
[2]
Contingency fees agreements were at common law
[3]
and in terms of the English law
[4]
unlawful and unenforceable. In terms of both our law and the English
law, which the development of our law on the subject mirrored,
contingency fees agreements are allowed and recognised as valid,
subject to the provisions that they will be supervised strictly
by
the courts to ensure that the rights of the clients in litigation are
protected and not compromised.
[5]
[4]
Accordingly
the CFA includes a set of strict controls. They include a provision
that an offer for settlement in a matter litigated
under an agreement
in terms of the CFA may not be accepted until the requisite
affidavits have been filed in court if the matter
is pending in
court
[6]
,
or with the relevant regulatory professional body.
[7]
A client furthermore has to be provided with a copy of the agreement
upon signature and has a fourteen (14) days cooling off period
within
which the client may opt out of the agreement.
[8]
The agreement is further subject to review by the regulatory body of
the legal practitioners.
[9]
These are but some of the controls prescribed by the CFA.
[5]
In
the present matter, the Court raised the first question (in its
composite form) after examining the contingency fee agreement
and the
prescribed affidavits when the parties sought to obtain a court order
to make the settlement concluded between the plaintiff
and the
defendant an order of court. The second broad question arises as a
matter of law.
[10]
The questions are considered against the relevant clause in the
agreement and the applicable law.
[6]
A material part of the agreement contained in clause 8
provides as follows:
“
The
parties agree that if the client is successful in the aforementioned
proceedings a fee shall be payable to the attorney, calculated
at 25%
(exclusive of VAT) of the total amount awarded and/or obtained by the
client in consequence of the proceedings. The total
amount charged by
Renier van Rensburg Inc will therefore be 25% (fee) on all amounts
awarded and/or recovered, add 14% VAT on the
fee and add all
disbursement [sic] (including interest) and the remaining balance
will be paid to the client.”
[7]
The agreement in this clause provides for 25% of the amount
awarded to or obtained by the client to be charged as a fee. This is
the first part of the composite question, which will be examined
first. The fee question is considered in the context of the
provisions
of the CFA while the VAT question brings in the provisions
of the Value-Added Tax Act 89 of 1991 (the VAT Act).
[8]
The CFA 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.
[9]
Section 2 of the CFA provides as follows:
“
2.
Contingency fees agreements.-
(1)
Notwithstanding anything to the contrary in any law or the common
law, a legal practitioner may, if in his or her opinion there
are
reasonable prospects that his or her client may be successful in any
proceedings, enter into an agreement with such client
in which it is
agreed -
(a)
that the legal practitioner shall not be entitled to any fees for
services rendered in respect of such proceedings unless such
client
is successful in such proceedings to the extent set out in such
agreement;
(b)
that the legal practitioner shall be entitled to fees equal to or,
subject to subsection (2), higher than his or her normal
fees, set
out in such agreement, for any such services rendered, if such client
is successful in such proceedings to the extent
set out in such
agreement.
(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.”
[10]
The
section provides for two kinds of contingency fee agreements. The
first is a “no win, no fee” agreement,
[11]
and the second is an agreement whereby the legal practitioner may
charge fees higher than the normal fee if the client is
successful.
[12]
The higher fee is also referred to as the success fee. Only the
second type of agreement is subject to the statutory caps.
[13]
25%
of Capital award as a fee
[11]
The agreement concluded between the plaintiff and his attorney
falls in the second category. It is subject to the statutory caps.
The agreement gives the legal practitioner the right to charge 25% of
the award (the cap) as fees and then imposes VAT on top of
the 25%
cap. The validity of the clause in paragraph [6] above therefore
depends, in the first place, on whether the attorney is
entitled to
charge 25% of capital as a fee. If he is not then the contingency
fees agreement is invalid since it contains a material
provision
which does not comply with the CFA. The VAT question is a secondary
one which will be dealt with later.
[12]
The attorney (legal practitioner) is authorised in terms of section
2(1 )(b) read with 2(2) of the CFA, as an incentive, to
charge a
success fee which is higher than his or her normal fee subject to the
two caps. The normal fees of the attorney are taken
as a base and the
attorney is authorised to increase the normal or base fee by up to
100%. The attorney may thus increase the normal
fee by say 10%, 20%,
30%, 45% etc., but the percentage increase may not exceed 100%. This
is the first cap on success fees. What
is important is that there is
a base (the normal fee) from which a percentage increase is
permissible. This is the ordinary and
only basis on which the
practitioner may increase fees. The legal practitioner first
determines his normal fee, which he would
have been entitled to
charge without a contingency fee agreement, and then increases it in
terms of the contingency fee agreement.
The success fee is a fee
which has been increased from the normal fee. It is thus necessary
that we understand the meaning of “fees”,
“normal
fees" and then “success fees” as contemplated in the
section.
[13]
In a sense, the validity of the clause depends on the meaning of
“fees”, “normal fees, and “success
fees”
as used in the CFA. The term “fees” and its derivatives
“normal fees” and “success fees”
are not
defined in the CFA. One should therefore consider the ordinary
meaning of these concepts.
[14]
Webster’s
Third
New International Dictionary,
[14]
defines
“fee” as “
compensation
often in the form of a fixed charge for professional service or for
special and requested exercise of talent or of
skill (as by an artist
or by a lawyer)”.
Black’s
Law
Dictionary
[15]
defines
“attorney’s fees” as
“
the
charge to a client for services performed for the client, such as an
hourly fee, a Hat fee, or a contingent fee.”
Wex
Legal
Dictionary
[16]
defines
"attorney’s fees” as
"the
amount billed to a client for legal services performed on his or her
behalf."
It
recognises that within the US system an
“
attorney’s
fees may be an hourly, flat (for a particular service, e.g. $10,000
to handle all aspects of a DUI case) or contingent
fee.”
Also
that an attorney’s fees may be set by an attorney-client
compensation agreement or, in certain types of cases, by statute
or a
court. The definition with which we are concerned here is an ordinary
attorney’s fees where neither an agreement nor
statue has fixed
same. The
Concise
Oxford Dictionary
[17]
defines
“fee" as “*n. 1 a
payment
made to a professional person or to a professional or public body in
exchange for advice or services > a charge made
for a privilege
such as admission.
2
Law,
historical an estate of land, especially one held on condition of
feudal service.
m
v.
(fees, fee’d or feed, feeing) rare pay a fee to.”
Only
the first meaning from the
Concise
Oxford Dictionary
is
applicable to our context. We are also not concerned with a public
body and shall restrict the meaning to a professional person
or
professional body. The
Verklarende
Handwoordeboek van die Afrikaanse
7aa/,
[18]
defines “Fooi” as “sekere professionele geld deur
bv. ‘n argitek, ingenieur gevra; ook, enige bedrag vir
dienste
gelewer”
[15]
From the above dictionary meanings, a fee, in our context, may
be defined as a payment due to a professional person or body for
services rendered, or advice given. The key and operative words here
are “payment" for “professional services"
“rendered", which may include the giving of advice. A fee
is only payable for professional services which have been
rendered.
In our context, we are concerned with the professional services of a
legal practitioner (an attorney in this case) for
litigious work.
[16]
“Normal
fees” of an attorney for litigious work are fees or charges
that would ordinarily be allowed on taxation.
[19]
The High Court rule on taxation
[20]
provides a useful guide as to what fees are normally allowed on
taxation. The Rule
[21]
provides that a taxing master shall be competent to tax a bill of
costs
“
for
services actually rendered by an attorney in his capacity as such in
connection with litigious work”
(emphasis added). When one focusses on the concept “for
services actually rendered”, it is an established principle
that charges for work not actually done cannot be allowed on
taxation. The practitioner’s statement for fees must be
specific
in respect of the particular business done and for which a
fee is charged.
[22]
In
City
Deep (Pty) v Newcastle Town Council and Another
[23]
Galgut J restated the well-established principle that in a bill of
costs the business or action of the practitioner for which a
fee is
raised should be specified item by item with each item dated and its
subject matter stated precisely and not in general
terms.
[24]
In litigious work the normal fees for attorneys are thus fees for
services actually rendered or for advice actually given.
[17]
In
a sense normal fees that an attorney charges his client are the fees
which are included in what is referred to as attorney and
client
costs. Leaving aside the disbursement part of such costs, attorney
and client fees are the fees that an attorney is entitled
to recover
from his client for professional services rendered. Such fees are
payable by the client regardless of the outcome of
the matter for
which the attorney’s services were engaged. They are not
dependent on an award for costs by the court. In
a wide sense, such
fees include all fees that an attorney is entitled to recover against
own client on taxation.
[25]
Normal fees exclude any fees that an attorney may be entitled to
recover from his client by virtue of any special arrangements
made
with the client or in terms of some specific statutory provision
applicable to a particular case or cases. Normal fees in
litigation
are fees which are recoverable by an attorney from his or her own
client and which would be allowable on taxation of
an attorney and
client bill by the taxing master outside any special arrangements.
The legal practitioner (the attorney in this
case) and the client are
required by sec 2(2) of the CFA to set out the normal fees in the
contingency agreement concluded.
[18]
“Success
fees"
[26]
are contemplated and explained, but are not defined, in section 2(2)
of the CFA. They are increased fees which a legal practitioner
will
be entitled to recover in the event of the client being successful in
the litigation to the extent set out in the agreement
concluded in
term of the CFA. The subsection requires the legal practitioner and
the client to specify in the agreement what they
will regard as
success in the particular litigation.
[27]
A success fee is normal fee which has been increased by a pre-agreed
percentage. There is no other way of increasing the normal
fee to the
increased or success fee other than through a percentage. The normal
fee may be increased by up to 100% to reach the
success fee. Success
fee may thus be and is often double the normal fee. Ordinarily a 100%
increase on the normal fee in effect
entitles the attorney to charge
a fee for one matter as if the attorney had done two matters. A
double fee is more than sufficient
incentive to the legal
practitioner to pursue litigation on a contingency basis. One can
therefore not understand the ever increasing
rampant and persistent
attempt by legal practitioners (especially attorneys) to provide for
and recover more than the legitimate
and legalised success fee.
[28]
[19]
The second cap on the increase that the attorney may charge is
introduced as a proviso to section 2(2) and applies only in claims
sounding in money. It does not apply to other claims litigated
through a contingency agreement. In claims sounding in money the
total of the success fee shall not exceed 25% of the total amount
awarded or obtained by client (excluding costs). It is important
to
emphasise that there is no basis for the practitioner to charge 25%
of client’s capital as his or her fees. The 25% of
the client’s
capital is introduced only as a cap: the attorney charges a success
fee which shall not exceed 25% of the client’s
capital award.
Twenty five per cent of the capital claim is therefore not a fee.
[20]
The agreement in this case simply provides for the attorney to
charge 25% of the capital award as fees. There is no basis in the
CFA
that authorises or sanctions such a provision in fee agreements or
such practice by legal practitioners. There is reason to
believe that
the practice of attorneys simply charging 25% of their client’s
capital award is widespread, especially in personal
injury claims.
This court has seen many such agreements that were handed to it by
counsel when seeking to obtain court orders to
sanction settlements
in such claims. The practice is not legal and needs to be weeded out.
[21]
An attorney renders professional services and therefore
charges professional fees for such services rendered. An attorney
cannot
charge for anything other than the services he or she has
actually rendered. The services that an attorney charges for must
thus,
of necessity, be specified in his or her account, unless the
client, properly informed, waives details of the services for which
he or she is charged. The fees charged must, however, always relate
to actual professional services rendered, of which the attorney
has
records and which must be specified when required. One cannot think
of any basis for charging fees in litigation other than
for specified
services and which are capable of being taxed, when required.
[22]
There is no basis for an attorney in our law to charge as
his/her fees a percentage (25% or even smaller percentage) of the
amount
awarded to his client. The CFA certainly does not provide such
a basis. An attorney can for instance not simply agree with his
client to charge 25% or 20% of capital. His charge is neither a
percentage commission nor a share in the injuries or damages suffered
by his client. An agreement or practice that makes an attorney a
partner in the injuries suffered by his client is
contra
bones mores
and is therefore unlawful and illegal at common
law and under the CFA. Outside the strict confines of the CFA there
is no basis
for a legal practitioner to share in the capital of his
or her client’s claim.
[23]
The illegality of the practice is demonstrated by the
following:
If
an attorney in a claim worth R1 million takes a few steps to enforce
the claim after receiving instructions (e.g. a letter of
demand or
telephone call to the defendant) and the defendant immediately agrees
to settle the capital, the actual and normal attorneys’
fees in
such a case will be restricted to the professional services actually
rendered, and may, e.g., not be more than a few thousand
rand, say
R10 000, at most. An increase of 100% would give the attorney a total
fee of R20 000.00. This would have been the case
even if the capital
claim was R100 million. In such a case the success fee could never
have been more than R20 000.00 which is
way less than 25% of the
capital. The size of the claim does not even come into consideration
in such a case. It would be unconscionable
and totally illegal in
such a case for the attorney to charge R250 000.00 (25% of the R1
million) or R25 million (25% of R100 million)
for services worth only
R10 000.00. An agreement which stipulates 25% as the attorneys fee
would in such a case lead to a situation
where the attorney, for very
little professional services actually rendered (without even issuing
a summons) charges fees of R250
000.00 (on a claim of R1 million) or
R25 million (on a claim of R100 million). This is totally
unreasonable and unlawful. It is
an illegal practice which should not
be allowed to survive. The professional controlling bodies (the Law
Societies, Societies of
Advocates or Legal Practice Council, as the
case may be) must in the interest of the good image of their
respective professions
take steps to weed out such practices, and if
necessary punish the offending conduct, whenever they are found to
exist. They could
perhaps start by introducing rules for their
members as contemplated in section 6 of the CFA.
[24]
There is another perspective from which the point made in this
judgment may be explained. It is about the two different caps placed
on success fees. The CFA places two caps on success fees that a legal
practitioner may charge in terms of an agreement with the
client.
Both caps are expressed as percentages. The first cap is the
percentage by which the legal practitioner is entitled to
increase
his fee, which is from 0% up to 100%. The second cap is a percentage
of client’s capital award, which the success
fee may not
exceed, namely, 25%. The first percentage (by which the success fee
is capped) is a fee percentage. It is therefore
a fee. However the
second percentage is neither a fee nor a fee percentage. It is a
percentage of client’s capital award
which a success fee may
not exceed. It is not a fee but part of client’s capital award.
It is accordingly not proper to talk
of VAT on what is neither a fee
nor a price. Twenty five percent of client’s capital is not a
fee. It is a percentage of
the client’s award, and therefore a
part of quantum, which an increased fee may not exceed.
[25]
The agreement between the plaintiff’s attorney {the
intervening party) and the plaintiff, as quoted in paragraph [6]
above,
provides for such a basis for charging fees. It is for this
reason unlawful and stands to be declared invalid.
[26]
It is necessary to consider the second part of the first
question, which becomes important, in the event that the conclusion
reached
above, is incorrect.
VAT
on Fees (the 25% cap)
[27]
For purposes of the VAT question and the VAT Act the word
“fees" appears to have the same meaning as “price”.
Normal fees and success fees will have meanings that correspond to
normal price and success price respectively.
[28]
The agreement concluded between the plaintiff and his attorney
gives the legal practitioner the right to charge 25% of the award
(the cap) as fees and then impose VAT on top of the 25% cap. The
validity of the clause in paragraph [6] above therefore depends,
from
this perspective, on whether the 25% cap, placed on “success
fee” as contemplated by section 2(2) of the CFA,
includes VAT.
If it does, the contingency fee agreement will be invalid since it
contains a material provision which does not comply
with the Act. On
the other hand, if the cap excludes VAT, then the legal practitioner
was entitled to indicate that fact in the
agreement and the agreement
cannot be invalid for that reason.
[29]
Section 7(1 )(a) of the VAT Act provides for the levying of
VAT in the following terms:
"(1)
Subject to the exemptions, exceptions, deduction and adjustments
provided for in this Act, there shall be levied and paid
for the
benefit of the National Revenue Fund a tax, to be known as the
value-added
tax-
(a)
on the supply by any vendor of goods or services supplied by him
on or after the commencement date in the course or furtherance of
any
enterprise carried on by him;” (own emphasis).
The tax is levied on the
supply by the vendor and not on the acquisition of goods or services
by the consumer. The vendor is the
supplier.
[30]
Section 7(2) of the VAT Act provides in the following terms
for payment of VAT:
“
(2)
Except as otherwise provided in this Act, the tax payable in terms of
paragraph (a) of subsection (1) shall be paid bv the vendor
referred
to in that paragraph...” (Own emphasis)
The tax levied is to be
paid by the supplier. It “shall be paid by the vendor”
[31]
Section 64(1) of the VAT Act stipulates that prices are deemed
to include value- added tax, whether the vendor has in fact included
the tax in the price or not. It provides as follows:
“
Prices
deemed to include tax -
(1)
Any price charged by any vendor in respect of any taxable supply of
goods or services shall for the purposes of this Act be deemed
to
include any tax payable in terms of section 7(1 )(a) in respect of
such supply, whether or not the vendor has included tax in
such
price.”
[32]
Section 65 of the VAT Act further provides:
“
Prices
advertised or quoted to include tax -
Any
price advertised or quoted by any vendor in respect of any taxable
supply of goods or services shall include tax and the vendor
shall in
his advertisement or quotation state that the price includes tax,
unless the total amount of the tax chargeable under
section 7(1) (a),
the price excluding tax and the price inclusive of tax for the supply
are advertised or quoted by the vendor...”
[33]
The section makes it clear that any price (fee) advertised or
quoted by a vendor includes VAT. The vendor must state so in the
advertisement
or quotation. There is only one exception to these
statements of principles. The only situation where a price does not
include
VAT is where the vendor specifies the three components
separately, namely, (a) “the price excluding tax”, (b)
“the
amount of tax payable” and (c) “the price
inclusive of tax
11
. The vendor, who wishes to indicate
that the quoted or advertised price does not include VAT, has to
comply with the section. If
the vendor does not comply, the price
quoted or advertised includes VAT
[34]
As appears from section 7(1 )(a) of the VAT Act, VAT is levied
on the supply by a vendor (in this case the legal practitioner) and
not on the consumer (in this case the client) of services supplied by
the vendor. Similarly in terms of section 7(2) VAT is paid
by the
vendor. VAT is therefore a tax on the legal practitioner and not on
the client. Consequently the legal practitioner pays
the tax to the
South African Revenue Services (SARS). The quoted price (fees) is
deemed to include VAT, unless the price is broken
down into its
components in terms of section 65 of the VAT Act.
[35]
What the client pays to the legal practitioner (vendor) is the
“price” (fee). The client does not pay VAT, although the
price may be structured to account for the VAT payable by the legal
practitioner (vendor) to SARS. Regardless of how the price
is
structured or quoted, the final price charged by a vendor is
inclusive of VAT. This court accordingly agrees with Mr C. Badenhorst
SC, for the first
amicus curiae,
that it is a common misnomer to state that a client or customer pays
VAT. In truth the client pays a price (fees) and the vendor
(supplier) is the one that pays tax (VAT) on the supply.
[36]
The aforegoing becomes even clearer when one has regard to
section 10(2) of the VAT Act. The section provides:
“
(2)
The value to be placed on any supply of goods or services shall, save
as is otherwise provided in this section, be the amount
of the
consideration for such supply, as determined in accordance with the
provisions of subsection (3), less so much of such amount
as
represents tax" [Emphasis added]
[37]
The
section,
[29]
read together with the other sections of the VAT Act referred to
above, confirms that the 14% by which a vendor increases the price
of
his or her services “represents” tax, but is not in fact
tax. Accordingly the amount paid by a client to the legal
practitioner (vendor) in terms of a contingency fees agreement is a
fee and is subject to the 25% cap regardless of whether or
not it is
stated to be inclusive or exclusive of VAT.
Computation
of VAT payable by the Vendor
[38]
The manner in which the VAT payable by the vendor (supplier)
is computed and paid to SARS reinforces the fact that VAT is a tax
levied on the supplier and payable by him or her. It is not a tax on
the consumer (client). The consumer only pays a price (fee)
which is
always inclusive of VAT, unless the three components stipulated in
section 65 are stated separately.
[39]
Section 16(3) of the VAT Act provides for computation of VAT
payable by the vendor. It provides that the amount of tax payable in
respect of a tax period shall be calculated by deducting input tax
from the sum of the amounts of output tax of the vendor which
are
attributable to that period and the amounts (if any) received by the
vendor during that period by way of refunds of tax.
[40]
The section authorises the vendor (legal practitioner), when
completing his VAT returns, to deduct input tax (the amount of VAT
which the practitioner paid to his suppliers) from the total of
output tax (the amount of VAT which he charged to his clients on
his
services) and any tax refunds, and to pay the balance over to SARS.
The legal practitioner therefore only pays to SARS the
difference
between output tax and input tax where output tax is greater than
input tax. The fact that the practitioner is entitled
to make this
deduction confirms the position that the liability for value added
tax attaches to the practitioner and not his client.
In a sense, the
deduction is a benefit that the vendor gets and which he does not
pass to his client. If the tax liability were
that of the client, the
benefit would also have been that of the client. The liability to
account for output tax and the right
to deduct input tax both vests
in the legal practitioner. Value added tax is not a tax which the
legal practitioner incurs on behalf
of the client and therefore
recovers from the client. It is a tax levied on the practitioner (on
the supplier) and for which the
practitioner is liable. The fact that
the practitioner is entitled to include the tax in the price does not
change the locus of
tax liability, which is on the supply by the
practitioner.
[41]
The
relationship between the practitioner (vendor) and SARS, in relation
to VAT collected by the latter, is not one of agency, but
is that of
debtor and creditor.
[30]
This is a further confirmation that the liability for tax is that of
the legal practitioner and not of his or her client. It is
not a
relationship of agency in which the legal practitioner collects VAT
on behalf of SARS and pays it over to SARS. The vendor
(attorney)
only pays over to SARS the difference between output tax and input
tax. Where the input tax (VAT paid by the vendor
to his suppliers in
the production of income) is equal to the output tax, the vendor
(legal practitioner) does not pay VAT to SARS;
and where the input
tax is greater than the output tax, the vendor (legal practitioner)
in fact receives or is entitled to a credit
or refund from SARS,
notwithstanding the fact that he collected VAT output from the
client.
[42]
It is therefore the legal practitioner (the vendor) who owes
the VAT to SARS and not his client. VAT output is therefore not a
cost
to the practitioner which the legal practitioner is entitled to
recover from the client over and above his maximum fees. It is
included in the maximum fees that the practitioner is entitled to
recover from the client.
Can
VAT be excluded from the 25% cap on the basis that it is a “cost”
for the
purposes
of section 2(2) of the CFA?
[43]
This court has already indicated above that value-added tax is
not a cost which the attorney incurs for the client.
[44]
The
plaintiffs attorney, who is now the intervening party, argues that
VAT is a “cost” for the purpose of section 2(2)
of the
CFA and that it is therefore excluded from the 25% cap, even if VAT
is also held to be a fee.
[31]
[45]
Section 2(2) of the CFA contains the following proviso:
“
...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.” [Emphasis added]
[46]
In
Thulo
v Road Accident Fund,
[32]
Morison AJ interpreted this proviso to mean that the taxed costs to
be paid by the other side could fall outside the cap and could
be
recovered as additional thereto. In
Mofokeng
v Road Accident Fund,
however,
this court disagreed with the interpretation applied in the
Thulo
case. As this court stated in
Mofokeng
:
“
As
I read this portion of the proviso the phrase ‘which amount
1
refers to and qualifies the phrase ‘the total amount awarded or
any amount obtained by client’. The effect is that
when one
calculates the 25% limit of the attorney’s fees, one is not to
include any costs in the total amount (i.e. the 100%
capital). The
25% limit is calculated on the capital amount only and not on the
capital plus costs.'’
[33]
[47]
The word
"amount’
in the phrase
“
which
amount shall not’
refers
to
“
the
total amount awarded or any amount obtained by the client in
consequence of the proceedings concerned.
”
[48]
In
other words, the section
[34]
distinguishes between two amounts: the amount payable to the legal
practitioner and the amount awarded to the client. The amount
payable
to the legal practitioner is (a maximum of) 25% of the amount awarded
to the client, and, for the purposes of calculating
this 25%, the
amount awarded to the client is taken not to include the costs (or
disbursements) portion of the award. The words
“for purposes of
calculating such excess” make this clear
[49]
The proviso above is therefore a part of the calculation of
the limit of what is payable to the legal practitioner, and does not
serve to exclude costs from what is ultimately recovered.
Furthermore, it refers to the costs portion of a court award, granted
in favour of the client, and not to be costs to be charged to the
client as part of the client’s final bill. These costs
and
disbursements are excluded from the cap by virtue of the fact that
they are not a “fee”, but for the reasons stated
above
the extra 14% that is paid by a client on a fee (to account for the
vendor’s VAT), remains part of the fee.
[50]
In
Mofokeng,
this court
[35]
said that an attorney could only recover “out-of-
pocket” expenses
above and beyond the 25% cap:
"The
attorney may recover from party and party costs, once he or she has
recovered the full attorney and client fees, only
the reimbursement
of his out- of-pocket expenses and not fees.”
[51]
It
deserves to be made clear that VAT is not an “out-of-pocket
expense" for these purposes. The effect of the deduction
of
input tax on purchases from output tax on taxable supplies is that
ultimately the vendor does not bear any VAT, but rather that
the
consumer ultimately bears the burden of VAT. For this reason it has
been said that VAT should not generally be treated as a
cost to the
vendor.
[36]
The Supreme Court of Appeal in
Price
Waterhouse Meyernel v The Thoroughbred Breeders’Association of
South Africa
[37]
put it as follows:
“
In
terms of s 16(3) it is obliged to pay the Receiver of Revenue only
the excess by which, in each tax period, its output tax is
greater
than its deductible input tax. It follows that if the vendor’s
output tax in that period is less than the input tax,
or there is no
output tax, the vendor is entitled, if not to a refund of input tax,
then at least to a credit in respect of the
input excess. In short,
any payment of input tax will inevitably be matched by a credit or
refund. Consequently, if plaintiff is
entitled to claim from the
Revenue, as an input tax, the VAT which it is required to pay to its
attorney, it does not, in respect
of such input tax incur an out of
pocket expense.”
[52]
VAT is therefore not recoverable above the 25% cap imposed by
section 2(2) of the CFA. As the contingency fees agreement
in
casu
seeks to authorise the plaintiff’s attorney to
recover VAT above the 25% cap imposed by section 2(2) of the CFA, it
is for
that reason invalid.
[53]
For what it is worth, the court wishes to point out that the
amici curiae
are both in
agreement that the contingency fee agreement in issue in this case is
invalid to the extent that it seeks to authorise
the charging of VAT
on top of the 25% fee.
Contingency
Fee Agreement invalid on other basis
[54]
The
intentions of the CFA have repeatedly been stated to be both to
encourage speculative litigation and to ensure that it is strictly
controlled.
[38]
The courts have a responsibility to ensure strict control by ensuring
that agreements which do not comply with the Act for any
reason are
not allowed. The responsibility of the court to ensure compliance
goes beyond any specific point which may have been
raised. The court
should not allow an agreement which is invalid to stand. In this case
the intervening party (the plaintiffs former
attorney) and the
amici
curiae
were given notice and invited to address any other basis on which the
agreement might be invalid. They have done so and the additional
bases of potential invalidity are dealt with hereunder.
[55]
The
courts have repeatedly asserted that common law contingency
agreements are invalid and that any contingency agreement must comply
with the CFA.
[39]
[56]
This
Court
[40]
has emphasised the importance of strict compliance with the Act and
the form of contingency agreement prescribed by the Act:
“
The
Act specifies what must be contained in the agreement (s 3(3)). The
Act is very specific as to the contents and all matters
prescribed
are inclusive, that is, all the matters or provisions stated in
paragraphs (a) up to (i)) of the subsection have to
be included in
the agreement. Similarly the provisions in sub-paragraphs (i) to (iv)
of paragraph (a) are all to be included. It
is not some provisions or
the others. It is all prescribed provisions which have to be in the
agreement. The attorneys are not
at liberty to draw a contingency
fees aareement in any form as they like. The agreement has to be in
accordance with the provisions
of the Act and in the form prescribed
bv the Minister
(s
3(1
[Emphasis added]
[57]
From the above it ought to be clear that this Court was of the
view that a contingency fees agreement which does not comply strictly
with the terms of the CFA and prescribed form is invalid.
[58]
The court in
De La Guerre v
Ronald Bobroff & Partners Inc. and Others
u
appeared to hold the same view when it said:
“
It
is my view that the above mentioned decisions were correct in finding
the following:
at
common law a contingency agreement between an attorney and his client
was unlawful;
the
Contingency Fees Act is
exhaustive on its stated object, and any
contingency fee agreement not in compliance with it is invalid.”
[59]
The
court in
Tjatji
and Others v Road Accident Fund
[41]
came to the same conclusion, holding that the intentions of the Act
and the use of peremptory language pointed towards non-compliance
of
a contingency fee agreement being visited with invalidity.
[60]
Furthermore,
compliance must be substantial and not merely formal compliance with
the prescribed form.
[42]
[61]
There are other grounds on which the agreement between the plaintiff
and his attorney {the intervening party) does not comply
with the
CFA. These are pointed out briefly for the guidance of members of the
legal profession. The intervening party, who may
have concluded
similar agreements with its other clients, may also benefit from the
indication of this court. They are as follows:
41
[2013] ZAGPPHC 33 para [14]
61.1
The
agreement does not describe “the proceedings to which the
agreement relates” as required by section 3(3) (a). The
agreement simply refers to “the relevant proceedings”.
[43]
This clearly lacks the level of detail contemplated by the prescribed
form of contingency fees agreements,
[44]
which is plainly designed to clearly identify the proceedings. The
agreement between the intervening party (the plaintiff’s
attorney) and the plaintiff in no way identifies the proceedings to
which it relates. It does not identify the motor vehicle collision
which gave rise to the claim, the date of event, the cause of action,
the defendant or the court in which proceedings are instituted.
Its
reference to proceedings is imprecise in the extreme. It can in fact
be utilised in any proceedings where the plaintiff is
represented by
the same attorney. It clearly does not comply with the specific
requirements of the CFA. It is furthermore open
to abuse.
61.2
The agreement does not define “partial success” as
is required by section 3(3) (c) of the CFA and Regulation 4.2 of the
prescribed form.
61.3
The agreement does not explain the amount that will be due,
and the consequences which will follow in the event of partial
success
in the proceedings, as required by section 3(3) (e) and
Regulation 7 of the prescribed form.
61.4
Finally,
the agreement provides for an alternative fees agreement in the event
that the main agreement is found to be invalid (annexure
“A”
to the agreement). Such an agreement is not authorised under the CFA.
The alternative agreement in itself is based
on an inflated fee
because the quoted fee is R2000.00 per hour, regardless of whether
the work is performed by an attorney or any
other staff member.
[45]
The provision is unreasonable and departs from an important principle
that applies to the professional fees of attorneys
[46]
described as “the age old approach of reasonableness assessing
chargeable fees”
[62]
Furthermore,
there are some respects in which the affidavits tendered in
compliance with section 4(1) of the CFA do not comply with
the Act.
It is unnecessary to point all these out.
[47]
Let it suffice to point out for present purposes that an affidavit
tendered in terms of the section must be compliant.
[63]
The Law Society of the Northern Provinces, as the second
amicus,
has urged this court
to rule that where counsel is instructed by an attorney, and is
presumably a party to the contingency fees
agreement, counsel’s
fees must be included in the 25% cap. The issue does not arise in
this case in as much as counsel has
not signed the contingency fees
agreement and is not a party thereto in the present case. The Law
Society could deal with any other
issue it may wish to by exercising
its rule making authority conferred under section 6 of the CFA.
[64]
Prior to the commencement of argument in this matter, counsel
for the intervening party advised the court that the intervening
party
and the plaintiff have settled the question of attorney and
client fees on the basis that the intervening party would charge the
plaintiff fees as set out in subparagraph (f) of the order given
below, that is, “limited to party and party High Court scale
as
agreed or taxed, which will not exceed 25% of the capital amount
settled”. The words are taken from the draft order that
the
intervening party tendered. That settlement provides the sole reason
for limiting the intervening party’s fees as set
out in
subparagraph (f) of the order below.
[65]
In the result the following order is made:
(a)
The defendant shall pay the amount of R664 000.00 (six hundred
and sixty four thousand rand) to the plaintiff’s attorney of
record in settlement of the plaintiff’s claim.
(b)
The amount referred to in sub-paragraph (a) above is to be
paid into the plaintiffs attorney’s trust account, the
particulars
of which are as follows:
Standard Bank, Melville
Renier Van Rensburg Inc
Trust Account
Account Number: 4…….
Branch Code: 0…..….
(c)
The defendant shall furnish the plaintiff with an undertaking
in terms of section 17 (4) (a) of the Road Accident Fund Act 56 of
1996 for 80% of the costs of future accommodation of the plaintiff in
a hospital or medical home or treatment of or rendering of
services
to him or supplying of goods to him arising out of the injuries
sustained by him in the motor vehicle collision on 31
January 2011
after such costs have been incurred and upon proof thereof.
(d)
The defendant shall pay the plaintiffs costs on the High Court
scale up until 27 August 2015, either as taxed or agreed, such costs
to include the costs attendant upon the obtaining of payment referred
to in subparagraph (a) above, and including the costs of
obtaining
medico-legal reports and joint minutes, reservation and / or
qualifying fees of the following experts:
i.
Dr Lurie (maxilla facial surgeon),
ii.
Dr Roodt (ophthalmologist),
iii.
Dr Volkerez (orthopaedic surgeon),
iv.
Maria Georgiou (occupational therapists,
v.
Dr Fine (psychiatrists),
vi.
Dr Fourie (industrial psychologist),
vii.
Dr Edeling (neurosurgeon),
viii.
Dr Kolon (dental surgeon),
ix.
Margaret Gibson (neuropsychologists) and
x.
Algorith (consulting actuaries).
(e)
The contingency fees agreement entered into between the
plaintiff and its attorneys, Renier Van Rensburg Inc, the intervening
party,
is hereby declared invalid and of no force and effect.
(f)
The plaintiffs attorney’s fees in this matter shall be
limited to the party and party High Court scale as agreed or taxed,
which taxed or agreed cost will not exceed 25% of the capital amount
settled as set out in subparagraph (a) above.
P.
M. MOJAPELO
DEPUTY
JUDGE PRESIDENT
HIGH
COURT OF SOUTH AFRICA GAUTENG LOCAL DIVISION
Counsel
for the Intervening Party: Adv P. den Hartog
Instructed
by: Renier van Rensburg Incorporated
Counsel
for the First
Amicus Curiae
:
Adv C. H. J. Badenhorst SC
Instructed
by: Werksmans Attorneys
Counsel
for the
Second Amicus Curiae
:
Adv N. Makopo
Instructed
by: Maluleke Msimang Attorneys
Attorneys
for the Defendant: Duduzile Hlebela Attorneys
Argument
heard on: 22 June 2016
Judgment
delivered: 31 August 2016
[1]
Mofokeng
v Road Accident Fund, Makhuvele v Road Accident Fund, Mokatse
v
Road
Accident Fund, Komme
v
Road
Accident Fund [2012] ZAGPJHC 150 (Mofokeng) para [38] and [41]. See
also para [54] to [60] of this
judgment.
[2]
See Mofokeng supra para [28], [29] and [32]
[3]
In terms of the common law contingency fees agreements were unlawful
as pacta de quota litis.
[4]
In English law such agreements were champertous and unlawful in
terms of the champerty laws.
[5]
Price
Waterhouse Coopers Inc and Others
v
National
Potato Co-operative Ltd
2004
(6) SA 66
SCA);
[2004] 3
All
SA 20
(SCA) para [33], [40], [43]. See also Mofokeng para [33]
[6]
Section 4 (1) of the CFA. The court has to ensure that the
affidavits disclose the matters required by the section
of
CFA to ensure that the rights of the client are not compromised as
against those of the legal representative.
See
also Mofokeng para [51] and [52].
[7]
Section 4(1) of CFA; The bodies are the Law Societies in respect of
attorneys, the Societies of Advocates in
respect
of advocates and, in future, the Legal Practice Council created
under the
Legal Practice Act 28 of 2014
.
[8]
Section 3(3)(h)
of the CFA
[9]
Section 5
of CFA
[10]
In terms of the supervisory powers of the Court.
[11]
Section 2(l)(a)
of the CFA
[12]
Section 2(l)(b)
of the CFA
[13]
See Mofokeng at para [35]
[14]
Unabridged, 1993 by A. Merriam Webster
[15]
Seventh Edition, 1999, Bryan A. Gardner
[16]
www.law.comeU.edu/wex/attomevs
fees or attorneys fees. Cornell University Law School
(www.
lawschool. cornel 1. eduV
[17]
Tenth Edition
[18]
Vierde Uitgawe, 2000, F. F. Odendaal, R. H. Gouws.
[19]
Outside the area of litigation normal fees for attorneys are
assessed by the governing professional body, i.e.,
the
Law Society.
[20]
As contained in the Uniform Rules of Court
[21]
Rule 70(1) (a)
[22]
Spira
v
Weber
1912
TPD 353
at 355-356. See also
Duvos
(Pty) Ltd
v
Newcastle
Town Council and Another
1965
(4) SA 553
(WLD) at 558F; City Deep Ltd v Johannesburg City Council
1973 (2) SA 109
(W) at 119F-
120G;
EichhoffvEichhoff
1980 (4) SA 389
(SWA) at 392F
[23]
See footnote 22 above.
[24]
City Deep at 119G - H
[25]
Hawkins v Gelb and Another
1959 (1) SA 703
(WLD) at 705C-E; See also
Hebstein & Van Winsen: The Civil
Practice
of the High Court of South Africa, 5* Edition (Juta 2009) by
Cilliers, Loots and Nel at 953
16
As noted in para [12] above
[27]
Section 2(1 )(b) of the CFA
[28]
If the problem lies in the fact that normal fees for attorneys are
inadequate (a point which has so far not been asserted in
any of the
cases that one is aware of) then the problem lies elsewhere and not
in the CFA, because normal fees are neither defined
nor regulated by
the CFA. The Act regulates, through the two caps in section 2(2) and
its proviso, only success fees.
[29]
Section 10(2) of the VAT Act
[30]
Director
of Public Prosecutions, Western Cape v Parker
77
SATC 224
, 2015 Taxpayer 154;
[2015] 1 All SA
525
(SCA)
[31]
Intervening Party’s Heads of Argument paragraphs 25-31
[32]
2011 (5) SA 446
(GSJ) at paragraph [52]
[33]
Mofokeng para [50]
[34]
Section 2(2) of the CFA
[35]
At para [40]
[36]
See Commentary by De Koker & Kruger Value-Added Tax in Sou*
Africa [2015 Service 19] at 2 - 2
[37]
[2002] JOL 10354
(SCA) at para [21]
[38]
Price
Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd
[2004]
3 All SA 20
(SCA);
Mofokeng
{supra)
[39]
See Thulo supra paragraph [50]; Tjatji v Road Accident Fund
2013 (2)
SA 632
(GSJ) para [12]; MKBridget v
Road
Accident Fund (Case No: 2010/24932 of 22 August 2012) para [32]
[40]
Mofokeng at para [38]
[41]
2013 (2) SA 632
(GSJ) para [21] - [22]
[42]
Ibid para [24]
[43]
Clause 3 of the agreement
[44]
Such detail would include, at a minimum, identification of the claim
to which it relates and naming the relevant Court. See Regulation
3
of the prescribed form of the agreement [GNR.547 of 23 April 1999:
Contingency Fees Agreement in terms of the Contingency Fees
Act,
1997 (Act No 66 of 1997).
[45]
There is no basis in law for services of people who are not legal
practitioners to be charged for as if they were
qualified
legal practitioners.
[46]
Van
derMerwe
v
The
Law Society of the Northern Provinces
2016
JDR 0082 GP 2016 JDR 0082 page 1
[47]
The reader is in this regard referred to Mofokeng at paragraph [56]
and the specific provisions of section 4(1)).