Johannesburg High Court Deputy-Judge President Phineas Mojapelo handed down a seminal contingency fees judgment earlier this week. He clarified precisely how a legal practitioner’s success fee should be calculated and whether Value Added Tax (VAT) was payable by the client or by the attorney.
Masango Mlungisi Nelson, a road accident victim, had signed a flat rate [common law) contingency fee agreement with law firm Renier van Rensburg Inc Attorneys of Emmarentia, Gauteng, in which he instructed it to process his claim against the Road Accident Fund (RAF).
Nelson’s matter became settled with the RAF by agreement and came before Judge Mojapelo in order for it to be made an order of court. The judge was not happy with the agreement and set the matter down for a full hearing, which required that all parties involved present legal argument for the benefit of the court and in the interest of justice.
Judge Mojapelo said: “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.”
The first question to be determined by the court was whether a flat rate of 25% of the capital amount paid by the RAF complied with the Contingency Fees Act (CFA) and whether VAT could be levied on top of this.
The CFA provides that an attorney may charge up to double the ordinary fee, as a success fee, in circumstances where there is a risk. (The CFA caps this at 25%.) A court official called a ‘taxing master’, who vets a bill of costs, determines the ordinary fee. At the conclusion of a litigation matter the attorney draws up an itemised bill. It is a narrated account of work done. Unless the ordinary fee is calculated it is impossible to calculate the success fee. There are a number of safeguards built in, such a judicial oversight and the fact that the agreement has to be entered into between attorney and client up front and is subject to a two-week cooling off period in terms of the Consumer Protection Act.
Judge Mojapelo: “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.”
How is VAT determined on success fees?
Judge Mojapelo analysed the VAT Act and came to the conclusion that VAT is a tax levied on the legal practitioner and not on the client. Both the liability to account for output tax and the right to deduct input tax 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.”
He explained that it is the practitioner, as a VAT vendor, who has to account for output tax and deduct the input tax. Furthermore, VAT is not a disbursement that an attorney incurrs on behalf of a client.
An attorney can only charge VAT to a client on professional fees, not on a capital amount recovered, as that is not permitted by the VAT Act.
The court, in its judgment, referred to a number of decisions which held that contingency fees agreements that do not comply strictly with the terms of the CFA and prescribed form are invalid.
Legal costs consultant Cora van der Merwe told Moneyweb that she was pleased with the clarification that the judgment provided and the guidance that it would provide for taxing masters.
Friends of the court
The Johannesburg Society of Advocates (JSA) and the Law Society of the Northern Provinces (LSNP) formally intervened in the matter as amici curiae (friends of the court). The JSA and LSNP told the court that the provisions of the CFA and its regulations need to be strictly complied with, but that this had not happened in the present matter.
Attorney and client
Renier van Rensburg Attorneys was not a party to the matter between Nelson and the RAF and had itself to intervene in order for the court to hear its submissions. It did not persist with its claim for 25% plus VAT, but agreed that Nelson would have to pay the bare minimum fee, known as the party and party tariff. This benefitted Nelson in that he will receive a greater amount of his capital than he would have if an ordinary fee agreement had initially been entered into.
LSNP President Anthony Millar has consistently told Moneyweb over the past few years that the 25% is a cap and not a fee. He told Moneyweb:
“We welcome the court’s judgment on this important issue of the rights of both attorneys and their clients. It serves to enhance and promote the access to court for which the CFA was intended. With 280 000 road accident victims every year, it is an important issue which is likely to affect you or someone you know.”
Renier van Rensburg told Moneyweb that judicial clarity on these issues benefits road accident claimants.
Oops! We could not locate your form.