Engagement Letters Prevent Misunderstandings
(County Bar Update, March 2003, Vol. 23, No. 3)

Engagement Letters Prevent Misunderstandings

Engagement letters can be one of the most effective loss avoidance tools. If problems arise later in the relationship, the language in the written engagement letter can provide essential evidence of the parties’ actual intentions and may head off an incipient malpractice claim. Engagement letters also may serve as a way of opening the client communication by enclosing a copy of the initial interview form along with the engagement letter for the client’s review.

Scope of the Engagement

The understanding between you and your client concerning the nature and scope of the representation is paramount. In addition to fees and billing issues, a comprehensive engagement letter should cover several issues to clarify the scope of the representation:

Type of Services Provided. Early in the engagement, time is well spent in clarifying the exact nature of the representation. A clear, concise definition of the representation is often a portion of the engagement letter that must be individually drafted. This will not only assist you in meeting the client’s goals as the representation progresses but also will provide a useful benchmark for discussion of changing expectations as the representation evolves.

Services Not Provided. To avoid any misunderstanding(s), the letter should specify not only the services that will be provided but also those that will not be provided (e.g., “Our firm will represent you in the pending litigation but not on any appeal” or “You acknowledge that we are not your general counsel and that our acceptance of this engagement does not mean we do or will represent you or your business interests in any matter other than the one described in this letter”).

Parties Represented. The letter should specify the proper or entity names of the parties represented, especially when multiple interests are involved.

Responsibilities and Limitations on Attorney Responsibility. Significant areas of responsibility assigned either to the firm or to the client should be spelled out. Limitations on responsibility also should be detailed.

Delineation of Attorney and Client Authority. Well-constructed engagement letters include a clear delineation of the lawyer’s and the client’s respective areas of authority and responsibility.

Carefully Worded Case Evaluation. In litigation matters, engagement letters may be used to evaluate the likelihood of success, but this should be done in a manner that does not make you a guarantor of a positive outcome.

Framework for the Representation

The engagement letter should provide a framework for the legal work to be performed, as well as establish the course of communication and interaction throughout the representation. It should outline the following:

Important Deadlines. Time considerations should be delineated for major tasks, particularly if timing is key to the representation.

Frequency of Client Communication. The frequency and manner of keeping the client informed is another area that should be addressed.

Termination of the Representation. The letter should address how the representation can be terminated if either party is dissatisfied (e.g., “After providing written notice, you may end the engagement at any time” or “Subject to the Rules of Professional Conduct, we also may terminate the engagement. These rules permit or sometimes require withdrawal. Before this occurs, we will provide you with written notice”).

Document Retention and Storage. Most engagement letters state that all work product created in the course of the representation remains your property, but give the client reasonable access to pertinent documents. You should provide for return to the client of the client’s records and state the firm’s document retention policy for all other records. The client should be alerted that you will dispose of any other records after the stated time period, and indicate that it is the client’s responsibility to request such documents from you prior to that date if the client wishes to retain them.

Dispute Resolution. It is becoming customary -- or required in some jurisdictions -- to specify that any disputes regarding legal fees shall be submitted to some form of arbitration for prompt resolution. By providing separately for arbitration of fee disputes only, the firm avoids the possibility that malpractice claims flowing from fee disputes will become entangled with resolution of the fee dispute in the same forum.

Fee Arrangements

Many firms routinely use engagement letters for all new clients, new matters with existing clients, and contingent fee and pro bono matters. The likelihood of a fee dispute -- leading to a possible malpractice claim -- can be substantially reduced if the key details of the fee arrangement are made clear at the outset and confirmed in writing. The engagement letter should address the following:

Payment of Retainers. State the amount of a retainer, when it must be replenished, and the consequences of failure to replenish the retainer or other sums owed.

Payment of Fees. Include basis for computing the fee, and rate differentials for various attorneys and staff members.

Billing Frequency. Outline how often bills are sent and when they are due.

Handling of Client Funds. Address the handling of retainers or advances, the placement of client funds in general or trust accounts, whether or not interest will accrue, and so forth.

Expense and Disbursement Authorization. Confirm your authorization to incur certain expenses on behalf of the client, including authorization to retain others as co-counsel, expert witnesses, or consultants if the circumstances so warrant.

Confirmation of the Client’s Agreement

Most law firms send a copy of the engagement letter to the client together with the accompanying statement: “If the foregoing correctly reflects your understanding of the terms and conditions of our representation, please indicate your acceptance by executing the enclosed copy of this letter in the space provided below, and return it to our office.” Obtaining the client’s signature is essential when there is an issue requiring client consent or when the client is to assume responsibility for specific tasks.

This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association nor Aon and its affiliates assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is made available to County Bar Update by Aon Direct Insurance Administrators, administrators of the Aon Attorneys’ Advantage Program, part of the LACBA Sponsored Aon Insurance Solutions Program. The Aon Attorneys’ Advantage Program provides a wide variety of benefits and products exclusive to LACBA members. For information or to contact a representative, visit http://www.aonsolutions.com

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