Oosthuizen and Another v Rene Fouche Incorporated and Others (GJ) (unreported case no 022383/2022, 26-7-2024) (Turner AJ)

By Prof Arthur van Coller and Daniel Humpel

The Eastern Cape Division of the High Court, Grahamstown, previously stated that misconduct associated with contingency fees agreements (CFA) that come to the attention of the courts are likely ‘but the tip of the iceberg’ (Mfengwana v Road Accident Fund 2017 (5) SA 445 (ECG) at para 27). Plasket J’s concerns were justified as another instance of misconduct concerning a CFA was recently reported in the Gauteng Local Division of the High Court, Johannesburg (Oosthuizen judgment). This judgment clarified the meaning of ‘settlement’ in s 4 of the Contingency Fees Act 66 of 1997 (the Act) and the consequences of a settlement on the operation of a CFA.

The Oosthuizen judgment was preceded by an initial unreported action against the MEC for Health by the guardian of a minor with cerebral palsy, which was probably caused by the negligence of state hospital employees. A CFA was concluded four and a half years after the summons was issued and one month before the trial date. At this stage, the preparation for the trial on the merits had essentially been finalised. The MEC ‘eventually capitulated’ on the merits, and damages were awarded in the amount of R 23 633 780. The order further provided that a special trust be formed for the minor to receive these funds. The MEC paid R 1 863 087,12 as costs to the attorneys, advocates, and experts involved following taxation on a party-to-party basis.

Three months later, René Fouche Incorporated (RFI) drafted an ‘Interim deed of settlement and mandate of instruction (subject to confirmation of costs)’ (Deed). The Deed, among other things, retrospectively authorised RFI ‘to settle my action, in my representative capacity on behalf of … the minor’. The Deed also confirms that RFI was entitled to deduct specific amounts from the capital awarded, including but not limited to an interim contribution pending taxation of R 895 546 in respect of counsel’s fees and a provision in the amount of R 6 879 573,70 in respect of RFI’s costs, fees, and disbursements. The High Court calculated that RFI eventually retained over R9 million as legal fees and disbursements.

The trustees of the special trust then instituted proceedings alleging that RFI overreached its client. RFI answered that the trustees and the High Court could not interfere with the Deed entered between them and their client. The High Court found that the guardian was not resourced or qualified to evaluate the need for the Deed or to assess the reasonableness or lawfulness of the fees charged. The High Court further stated that the Deed does not generate any benefit for the guardian or the minor as the litigation was finalised, the MEC payments were received, and the trust was being established. The Deed further does not regulate prospective arrangements for the benefit of the minor and is accordingly ultra vires the guardian’s powers.

The High Court, concerning the principles applicable to the validity of the CFA, cited various judgments confirming that non-compliance with the substantive and procedural requirements of the Act renders a CFA invalid. In this instance, the Act’s relevant provisions relate to the need for an early, full and proper assessment of the client’s prospects of success before the signing of the CFA. RFI failed to make their client aware of the implications of the CFA, including the risk inherent in the litigation. The CFA was further entered into at an unreasonably late stage. RFI argued that it could only determine that there was a reasonable prospect of success just before the trial on the merits. The High Court rejected this argument as the legal practitioners would not have instituted the proceedings and appointed experts without a reasonable belief of future success.

The High Court also dealt with the ‘normal fee’ of RFI. The CFA recorded that the hourly rate charged for attendances will be determined on an escalating scale based on the ‘full enforceable value’ of the quantum at the successful conclusion of the matter. The High Court found that the ‘normal fee’ should be based on what a paying client would typically be charged where no CFA is in place. It commented that a ‘success fee’ may, in any event, only be charged from the date on which the CFA was concluded. A legal practitioner can further, unless there are exceptional circumstances, not apply a success fee markup to fees incurred after success on the merits and not after the quantum of the claim was awarded, as there is then no further litigation risk. The fees after settlement should be the subject of the legal practitioner’s normal fees for debt recovery or work done in finalising the matter.

Neither the attorneys of record (RFI) nor the guardian filed an affidavit in terms of s 4 of the Act when the merits and quantum were finalised. RFI argued that filing the s 4 affidavits was unnecessary as the matter was not settled as contemplated by the Act. The High Court found that the quantum was settled through deliberations and agreement by the experts before the trial on quantum and recorded in the ‘Statement of Agreed Amounts’. This conclusion was supported by the bill of costs that recorded an attendance at court where the matter was stood down pending settlement negotiations, later settled, and made an order of court. RFI, therefore, had to comply with s 4 of the Act.

As a result, the CFA and the Interim Deed were declared invalid and unenforceable. RFI and its directors were ordered to, jointly and severally, the one paying the other to be absolved, pay to the trustees, for the benefit of the minor, the amount of R 3 896 250,43, together with the costs of the application. Turner AJ further directed that the judgment be referred to the disciplinary committee of the Legal Practice Council to consider whether disciplinary action should be taken against RFI and its directors.

Prof Arthur van Coller BA (Law) LLB LLM HDipTax (UJ) PGDHET (UFH) LLD (UP) is an admitted legal practitioner and Associate Professor at the University of Fort Hare. Daniel Humpel LLB LLM (Cum Laude) is lecturer at the University of Fort Hare.

This article was first published in De Rebus in 2024 (October) DR 35.