More light on contingency fees agreements

Tjatji v The Road Accident Fund (unreported case no 22475/10); Khoza v The Road Accident Fund (unreported case no 4412/06); Mxolisi v The Road Accident Fund (unreported case no 11632/09) (GSJ) (19-10-2012) (Boruchowitz J)

By Poobie Govindasamy

In the October edition of De Rebus the background of contingency fees agreements was highlighted, with particular reference to the judgment in Mofokeng v Road Accident Fund (unreported case no 22649/09); Makhuvele v Road Accident Fund (unreported case no 19509/11); Mokatse v Road Accident Fund (unreported case no 24932/10); Komme v Road Accident Fund (unreported case no 20268/11) (GSJ) (22-8-2012) (Mojapelo DJP) (see 2012 (Oct) DR 48).

More recently, on 19 October, judgment in the Tjatji matter was delivered in the South Gauteng High Court by Boruchowitz J, which sounds a warning and provides more light on how contingency fees agreements are being treated by the courts. It is important to note, however, that leave to appeal this decision has been filed.

Background

In all three cases before the court, the defendant, the Road Accident Fund, had made an acceptable offer of settlement and the parties wished to have the terms of settlement made an order of court.

In each case the plaintiff’s legal representative acted on a contingency fees basis in terms of which the legal practitioner undertook to render services on a ‘no win, no fees’ basis. The agreements in respect of each case involved the following:

• The Tjatji case

A new contingency fees agreement was entered into on 29 August 2012, one day before the trial. In terms of the initial fee agreement, the plaintiff’s attorney was to provide the plaintiff with funds to prosecute the action. The old agreement did not comply with the Contingency Fees Act 66 of 1997 (the Act) and the new agreement was entered into with the object of ensuring compliance.

• The Khoza case

A new contingency fees agreement was executed on the date of the trial, 30 August 2012. When the action was instituted, the plaintiff’s attorney agreed to act on a contingency basis but the agreement recording their arrangement was lost. The missing agreement did not comply with the Act and therefore a new contingency fees agreement was concluded.

• The Mxolisi case

A new contingency fees agreement was entered into on 27 August 2012, some four days before the trial and three days before an acceptable offer was made by the defendant. When the plaintiff’s attorney was instructed to proceed with the claim, the plaintiff signed a ‘cost agreement’ and was not required to carry any risk for fees or disbursements. The plaintiff did not pay any fees or disbursements to his attorney.

Decision

The critical question the court had to decide was whether the new contingency fees agreements complied with the prescriptions laid down in the Act and were legally enforceable.

In respect of the Act, Boruchowitz J stated that it was intended ‘to be exhaustive of the rights of legal practitioners to conclude contingency fee agreements with their clients. There is no room whatever for a legal practitioner to enter into a contingency fee agreement with a client outside the parameters of the Act or under the common law’. He added that only two forms of contingency fees agreements are recognised in terms of the Act, namely –

• a ‘no win, no fees’ agreement (s 2(1)(a)); and
• an agreement in terms of which a legal practitioner is entitled to fees equal to or higher than his normal fees if the client is successful (s 2(1)(b)), which is subject to the limitation set out in s 2(2).

The judge went on to say that a contingency fees agreement that does not comply with the provisions of the Act is illegal.

It was argued on behalf of the plaintiffs that the Act is silent as to when and at what stage of the proceedings a contingency fees agreement may be entered into and therefore it is permissible to enter into such agreement at any stage of the proceedings, even on the eve of a trial, as long as success, or what the parties consider to be success, has yet to be achieved.

The court rejected this argument and pointed out that although the Act does not stipulate when a contingency fees agreement may be entered into, the Act contains textual indications that such agreement must be entered into at a sufficiently early stage of the proceedings so as to enable compliance with the requirements of the Act.

The court stated that what constitutes a sufficiently early stage of the proceedings is a question of fact. ‘Much would depend on the nature of the proceedings and whether, when the contingency fee agreement is entered into, it is reasonably possible to comply with the prescripts laid down in the Act.’

The textual indications to which the court referred to were:
• Section 2(1), which provides that a legal practitioner may only enter into a contingency fees agreement with a client if he is of the opinion that the client has reasonable prospects of success in any proceedings. ‘It is therefore a requirement that before entering into the agreement a full and proper assessment of the client’s prospects of being successful in the proceedings be undertaken,’ the court stated.
• Legal practitioners may not act on a contingency basis unless they have signed a written agreement to that effect and further have delivered a copy thereof to the client on the date on which the agreement is signed (ss 3(2) and 3(4)).
• The agreement must be in the form contemplated by the Act and s 3 thereof sets out the minimum requirements for a valid contingency fees agreement.

It is clear, the court found, that before a legal practitioner is entitled to act on a contingency basis, there must be compliance with the matters set out in s 3(3)(b)(i) – (iv).

‘The client must also have a proper understanding of the financial implications of the agreement. This can only be achieved if before signature of the contingency fee agreement the parties agree on the following matters: What will be regarded as constituting success or partial success; the circumstances in which the legal practitioner’s fees and disbursements relating to the matter are payable; the amounts payable and method to be used in calculating such amounts; the manner in which disbursements made or incurred by the legal practitioner on behalf of the client are to be dealt with. Agreement also has to be reached in regard to the manner in which any amendment or agreement ancillary to the contingency fee agreement will be dealt with.’ Further, the court held:

‘To agree upon these matters only after a legal practitioner has commenced to act on a contingency basis and when disbursements such as the fees of expert witnesses and advocates have already been incurred would be contrary to the provisions of the Act.’
The court referred to s 3(3)(h), which provides for a 14-day cooling-off period during which the client has the right to withdraw from the agreement, and stated that to effectively exercise this right, it is essential that the provisions of the section be brought to the client’s attention and the prescribed form of the agreement is used. To do so only after the legal practitioner has commenced to act on a contingency basis and shortly before the trial, as occurred in the present cases, ‘would render the cooling-off provision nugatory and ineffectual’.

The court held that the primary object of the Act is to legitimise contingency fees agreements that are otherwise prohibited by the common law. Its purpose is also to encourage legal practitioners to undertake speculative actions for their clients in order to promote access to the courts but subject to strict control ‘so as to minimise the disadvantages inherent in the contingency fee system and to guard against its abuse’. The court referred to ss 2 and 3 of the Act as part of the safeguards introduced to prevent such abuses, adding that: ‘As these sections are not enabling but prescriptive in nature, it would undoubtedly have been the intention of the legislature to visit nullity on any agreement that did not comply with these provisions.’

In each of the cases under consideration the new fee agreement was only entered into after the legal practitioner had commenced to act on a contingency basis and when disbursements had already been incurred. The court held that this was contrary to the provisions of ss 3(2) and 3(4) of the Act. The new fee agreements were entered into when the proceedings were at an advanced stage, and the court held that it was doubtful whether at that stage all of the requirements of s 3 had been fulfilled or were capable of being met. The court noted that in the Khoza matter, the new fee agreement was entered into on the day of the trial, when it was clear that no contingency could have existed.

The court further noted that ‘on the face of it’, the new contingency fees agreements appeared to be valid as the prescribed form of agreement was used; however, in substance, they were invalid for failing to meet the requirements of the Act: ‘Although the new contingency fees agreements are formally in order, they are substantially invalid.’

The judge added that the new contingency fee agreements were invalid on the basis that in each of the cases under consideration the intention in entering into the new agreement was to ‘retrospectively validate the contingency fees agreements that were entered into in violation of the Act’, which could not be done. ‘It is trite that an agreement which is a nullity cannot be rectified so as to become a valid contract,’ the court held.

The court finally concluded that, as both the initial and new contingency fees agreements were invalid, the common law would apply and, under the common law, the plaintiffs’ attorneys were only entitled to a reasonable fee in relation to the work performed. The court added that taxation of a bill of costs is the method whereby the reasonableness of a fee is assessed and the plaintiffs’ attorneys were therefore only entitled to such fees as are taxed or assessed on an attorney and own client basis.
However, after the plaintiffs’ representatives pointed out that in the case of smaller claims the plaintiffs would be prejudiced if fees were charged on such basis, as the taxed fees were likely to exceed the amount of the award, the court – in order to obviate any prejudice – ordered that the fees recoverable by the legal practitioners from their clients not exceed 25% of the amount awarded or recovered by the plaintiffs. 
Poobie Govindasamy BA LLB (UKZN) is an attorney at Govindasamy, Ndzingi & Govender Inc in Pietermaritzburg.

Note: An application for a declaratory order in respect of the validity of common law contingency fees agreements was due to be heard by a full Bench of the North Gauteng High Court on 29 November (after this issue of De Rebus went to print). The Law Society of the Northern Provinces, which made submissions in the matter, cautioned its members to ensure they ‘comply with the current legal position in terms of the latest judgments, which seem to indicate that courts do not regard common law fee agreements entered into outside the Contingency Fees Act [66 of] 1997, as valid agreements’ – Editor.