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Contingency Fees: VAT inclusive or exclusive?

Wednesday, 28 September 2016   (0 Comments)
Posted by: Author: Gerhard Badenhorst
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Author: Gerhard Badenhorst (ENSafrica)

The High Court, Gauteng Local Division, considered in a recent case (case No 2012/21359, 31 August 2016) whether an agreement in terms of which a legal practitioner charged contingency fees to a client under the Contingency Fees Act, No 66 of 1997 (the “CFA”), is valid. The court also considered whether the practitioner was entitled to levy value-added tax (“VAT”) in addition to the maximum fee of 25% provided for in the CFA.

The case involved an attorney who assisted his client with a claim against the Road Accident Fund. The attorney entered into an agreement with the client which stipulated that if the client is successful with his claim, the client shall pay a fee calculated at 25% (exclusive of VAT) of the total amount awarded or obtained by the client in consequence of the legal proceedings. The agreement further stipulated that the total amount charged will therefore be 25% on all amounts awarded or recovered, that VAT at 14% and disbursements will be added to the fee, and that the balance of the amount awarded or recovered will be paid to the client.

Section 2(2) of the CFA provides for a legal practitioner to charge a fee in excess of the normal fees which shall not exceed 100% of such normal fees. The proviso to section 2(2) stipulates that, in the case of claims sounding in money, the total of any such excess shall not exceed 25% of the total amount awarded or obtained by the client in consequence of the proceedings concerned, and which amount shall not, for purposes of calculating such excess, include any costs. The CFA is silent on VAT.

Firstly, the court considered whether the agreement with the client in terms of which the attorney charged a fee of 25% of the capital amount awarded to the client was lawful and a valid agreement in terms of the CFA. Having considered the provisions of the CFA, and various principles and authorities, the court concluded that the agreement between the attorney and his client was unlawful and was therefore invalid.

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