Contingency fee arrangements: Clarifying the common law position

• South Africa

• Other

21-09-2017

The Contingency Fees Act 66 of 1997 (“the CFA”) legitimises and regulates the conclusion of contingency fee arrangements between legal practitioners and their clients. The CFA prescribes certain formalities for the conclusion of a lawful contingency fee agreement. These include reducing the agreement to writing in a prescribed form and the signing of the agreement by both the legal practitioner and the client.

Prior to the introduction of the CFA, contingency fee agreements were generally considered to be proscribed under the common law for being contrary to public policy. However, the North Gauteng High Court (“the HC”) recently delivered a significant judgment in Nash and Another v Mostert and Others (“Nash”) where it clarified the position regarding the lawfulness of contingency fee agreements which fall outside the remit of the CFA. The judgment primarily answers the question relating to whether the common law permits legal practitioners and their clients to conclude contingency fee arrangements in relation to non-litigious matters.

In this matter, a large amount of money had been stolen from the Sable Fund (“the Fund”) which left the Fund without any assets. Consequently, the Financial Services Board (“the FSB”) brought an application in terms of the Financial Institutions Act 28 of 2001 (“the FIA”) to have the whole business of the Fund placed under curatorship and thereafter appointed Mr. Mostert as the curator of the business. The dispute arose because the FSB and Mr. Mostert had entered into a contingency fee arrangement regarding the latter’s remuneration which fell outside the remit of the CFA. This prompted the Applicants – Mr. Simon Nash, against whom criminal proceedings had been instituted for the theft of R36 million from the Fund, and his company, Midmacor Industries – to bring an application before the HC to have the contingency fee arrangement declared invalid for non-compliance with the CFA and as being prohibited under the common law.

It was common cause that the contingency fee agreement did not comply with the provisions of the CFA. The basis for the Applicants’ argument that the contingency fee agreement was prohibited under the common law is to be found in a number of court judgments which expressly provided that contingency fee agreements which fall short of the requirements of the CFA are contrary to public policy and therefore unlawful. The Respondents, on the other hand, argued that the judgments in the court cases referred to by the Applicants extended only to situations whereby legal practitioners and their clients concluded contingency fee agreements under the common law in respect of litigious matters. The Respondents therefore contended that in terms of the common law legal practitioners were entitled to enter into contingency fee agreements with their clients in respect of non-litigious matters.

The HC agreed with the first part of the Respondents’ argument, finding that the earlier judgments of the courts were concerned only with contingency fee agreements concluded in terms of the common law in respect of litigious matters. Regarding the lawfulness of contingency fee arrangements concluded under the common law in respect of non-litigious matters, the HC was not persuaded that such agreements were permitted but rather found that the issue had not yet been decided by the courts.

Deciding the issue, the HC found that ‘contingency fee agreements in relation to non-litigious work are against public policy for broadly the same reasons that such agreements are contrary to public policy in relation to litigious work.’

This judgment is significant in that it declares that the only lawful route in terms of which legal practitioners may conclude contingency fee arrangements with their clients is through compliance with the CFA.