Contingency fees – quo vadis

May 1st, 2014

Ronald Bobroff & Partners Inc v De La Guerre; South African Association of Personal Injury Lawyers v Minister of Justice and Constitutional Development (CC) (unreported case no CCT 122/13, CCT 123/13 20-2-2014) (Moseneke ACJ, Skweyiya ADCJ, Cameron J, Dambuza AJ, Froneman J, Jafta J, Madlanga J, Van der Westhuizen J and Zondo J)

By Michael de Broglio

The Constitutional Court judgment in the cases of Ronald Bobroff & Partners Inc v De La Guerre and South African Association of Personal Injury Lawyers v Minister of Justice and Constitutional Development (CC) unreported case no CCT 122/13, CCT 123/13, 20-2-2014) (Moseneke ACJ, Skweyiya ADCJ, Cameron J, Dambuza AJ, Froneman J, Jafta J, Madlanga J, Van der Westhuizen J and Zondo J) has once and for all removed all doubt that may have existed regarding the legality of common law contingency fee agreements between attorneys and their clients. In February, the Constitutional Court (CC) dismissed an application for leave to appeal against the finding of the full court in South African Association of Personal Injury Lawyers v Minister of Justice and Constitutional Development (Road Accident Fund, Intervening Party) 2013 (2) SA 583 (GSJ) to the effect that the Contingency Fees Act 66 of 1997 (the Act) and in particular ss 2 and 4, were not unconstitutional on the grounds raised. In the process the CC, without favouring us with anything approaching a ratio decidendi, found that: ‘Under the common law, legal practitioners were not allowed to charge their clients a fee calculated as a percentage of the proceeds the clients might be awarded in litigation’ (at para 2).

The attack by certain personal injury lawyers belonging to the South African Association of Personal Injury Lawyers (SAAPIL) on ss 2 and 4 of the Act was based on a limitation of the fundamental right of access to justice. The court held that the right had been misunderstood by SAAPIL in that it was not the right of the legal practitioners themselves, but the rights of their clients that the Act sought to protect.

SAAPIL’s application was not brought as a representative action in terms of s 38 of the Constitution, but as one where SAAPIL acted only on behalf of its own members. The court held that even if they had sought to bring it on behalf of others, there was no evidence before the court that any clients’ rights had been limited.

In its judgment, the Constitutional Court referred to the decision of the court a quo, saying: ‘The Full Bench accepted that a rational distinction may be made between the regulation of contingency fees for attorneys and that of champertous agreements amongst lay persons’ (at para 10).

When a lay person enters into a contingency arrangement with another lay person – in other words, agrees to finance litigation in exchange for part of the proceeds – it is known as champerty, which now it seems is perfectly permissible. This followed on the decision in the case of Price Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd 2004 (6) SA 66 (SCA). The full Bench held that there was a difference between lay persons concluding such agreements with each other and legal practitioners entering into such agreements with their clients. Legal practitioners are perceived by their clients to be experts, which puts them in a ‘powerful position to influence the actual conduct of litigation’. The court held that lay persons who enter into champertous agreements ‘do not possess any of the skills or characteristics’ of lawyers. Legal practitioners (in that capacity) have ethical duties to their clients, and to the courts, and that these can come into conflict with their own financial interest in litigation where contingency fee arrangements are involved. Lay persons have no ethical or other legal duties towards the person they are financing. There is therefore, no possibility of a conflict of interest, and they are free to agree on a percentage basis as a reward for financing the case. One begins to wonder how our courts really view the members of our profession. Are we assumed to be prone to ignore ethical duties, duties that were after all mostly developed by ourselves and are ultimately sanctionable by professional bodies and courts? To put it differently, attorneys at least do have ethical duties to guide their conduct, whereas lay men are apparently at large to enter any pactum de quota litis, conscionable or not. Lay men, it seems, are at least given the benefit of the doubt.

Common law contingency fee agreements were from time-to-time accepted by courts. These agreements are now clearly prohibited. Subsequent to the CC’s ruling, any attorney who now enters into such an agreement with a client, might well have no fee agreement at all. Common law contingency fee agreements were widely used as an alternative to contingency fee agreements in terms of the Act.

The courts have recently made it clear that unless one has used the exact agreement as laid out in the regulations to the Act, subject to the variations and insertions that that particular form allows, the agreement is not a valid contingency fee agreement, whether it was entered into in the spirit of the Act and follows its other directions or not. South Gauteng High Court Deputy Judge President Mojapelo, in Mofokeng v Road Accident Fund, Makhuvele v Road Accident Fund, Mokatse v Road Accident Fund, Komme v Road Accident Fund (GSJ) (unreported case no 2009/22649, 2011/19509, 2010/24932, 2011/20268 22-8-2012) (Mojapelo DJP) found that the Contingency Fees Act agreement has to be in accordance with the prescribed form in the Act. The Act is clear and unambiguous in that an attorney shall use the agreement as prescribed in the regulations. In other words, you cannot use any other agreement that appears on the face of it to be a contingency fee agreement, and then claim that it falls within the Act. According to the Mofokeng judgment, one should either use the agreement laid out in the Act, an ordinary non-contingency fee agreement or be faced with invalidity.

Practitioners are left with the choice of either entering into an ordinary hourly fee agreement, where fees are due irrespective of the outcome or an agreement in terms of the Act. This would include a simple ‘no success, no fee agreement’, where no success fee is charged. This type of agreement, where the practitioner assumes all the risk in exchange for charging only his normal hourly fees, is a fee agreement where payment of fees, but not the extent thereof, is contingent on a successful outcome (non-success fee contingency fee agreements). Such an agreement still has to follow the Act and be in the form prescribed by the Minister. This differs from a contingency fee where the practitioner contracts to receive something more than his normal fee for taking the risk as provided by the Act, which would then be subject to the limitations (a success fee contingency fee agreement).

The courts seem to interpret the limitation of 25% of the capital in success fee contingency fee agreements to apply to the entire fee, which would consist of the normal fee plus the success or uplift fee. Accordingly, always subject to the limitation of double the normal fee, the total fee can never be more than 25% of the capital award. There has been much dispute over the years as to how the contingency fee would be calculated. Opinion obtained from Senior Counsel by the KwaZulu-Natal Law Society and the report on Speculative and Contingency Fees by the South African Law Commission seem to indicate that the 25% limit applied not to the normal fee, but only to the success part of the fee (the uplift fee) and accordingly the normal fee and the success fee together could exceed 25%. The CC never heard argument in this regard, nor dealt with the specific issues, but, again without any particular reasoning, remarked that the maximum amount allowed under the Act is 25%.

The curious result is that, when a non-success fee contingency fee agreement is entered into, there is apparently no limitation to the maximum that can be levied. The limitations in s 2(2) of the Act, on the face of it, seem to apply only in an instance where fees higher than the normal fees have been negotiated. Accordingly the astonishing result is that, depending on the quantum of the award, an attorney who has not negotiated a higher success fee, might well be entitled to a higher eventual fee than his colleague who has done so. As an example, if an attorney obtains an amount of R 100 000 for his client with whom he has a success fee contingency fee agreement and his normal fees would amount to R 30 000, he is entitled to only R 25 000. The attorney who entered into a non-success fee contingency fee agreement, obtains the same result for the same amount of normal fees will, however, be entitled to the full R 30 000. Even more curious would be the instance where the party and party fees are taxed at R 30 000 for a matter which resulted in a successful claim of R 100 000. What about the difference of R 5 000?

There are a number of issues that have not been resolved by the courts yet, and which will no doubt be raised and dealt with in the coming years. In June 2008, for example, in the judgment of Acting Judge Ramagaga in the Van der Merwe v The Law Society of the Northern Provinces (T) (unreported case no 36216/2006, 20-6-2008) it was held that the 25% cap covered not only the total amount of attorneys fees but would also include the advocates’ fees as well. It does appear, however, that the Acting Judge limited her views only to instances where the advocate has also agreed to work on contingency and negotiated a higher ‘success fee’. It remains, however, an area of uncertainty and it was uncertainties such as these that made many attorneys very wary of entering into Contingency Fee Act agreements.

In Thulo v Road Accident Fund 2011 (5) SA 446 (GSJ), Acting Judge Morison further confused issues by suggesting that the attorneys’ fees were still limited to 25% of the amount awarded in the judgment, excluding the costs, but implied that one could enter into an agreement to keep the party and party costs in addition to the 25%. The Mofokeng judgment differed in this regard and found this interpretation to be incorrect. Until there are further judgments clarifying these issues, or perhaps the Supreme Court of Appeal delivers a judgment on this, these issues relating to the costs, advocates’ fees and also proclamations by judges, incorporated into court orders, will continue to be a source of debate and difference of opinion.

There is also a difference of opinion as to whether or not the 25% includes VAT, especially when the 25% cap has already limited the attorneys fees to lower than what he or she would have been entitled to in terms of a normal fee agreement or non-success fee contingency fee. Another issue to be considered is the question of what the normal fee is and one would assume, logically, that it is whatever the normal hourly fee of the practitioner is. This would be subject of course to the law societies’ oversight as well as that of the Taxing Master when it comes to what is a reasonable fee. No law society or attorneys’ association would be foolhardy enough to attempt to set down or dictate a normal fee bearing in mind the R 250 000 fine that the Pretoria Attorneys Association incurred a decade ago for giving its members guidance on fees to charge.

Michael de Broglio BA LLM (Wits) is an attorney at De Broglio Inc in Johannesburg.

This article was first published in De Rebus in 2014 (May) DR 52.