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Engagement Letters

By Jeffrey P. Ayres
September 28, 2007

Engagement letters in the big law firm are like death, taxes, and timesheets. You can't live with them. You can't live without them. On the one hand, while many practitioners may not realize it, engagement letters are part of the attorney-client contract that defines the relationship between the parties. Typically, such letters are also ethically encouraged or required, depending upon the circumstances and jurisdiction. On the other hand, particularly when the law firm does not adhere to the engagement letter, big and unpleasant surprises can ensue.

This article identifies the general ground rules regarding engagement letters, the bells and whistles that such letters can contain for the good of the law firm, and the problems that can arise when lawyers don't pay attention to or fail to follow to the letters. It then discusses some of the systems that the law firm can implement to manage the engagement letter process. The three most important systems in that regard are as follows: 1) to develop template engagement letters that everyone must use, unless a designated partner permits exceptions for good cause shown; 2) to have centralized oversight of the process, in order to ensure that uniformity is achieved and that the engagement letters are maintained for recordkeeping purposes; and 3) to educate lawyers and other personnel to recognize the need for engagement letters and the problems that can arise in this area if the engagement letters are not accurate or are not followed.

General Ground Rules

Sections 18 and 38 of the Restatement Third, The Law Governing Lawyers (ALI) state the general rule well. Client-lawyer contracts (including modifications) that are embodied within the terms of an engagement letter ' governing fees, expenses, and a variety of topics ' can be enforced by either party. However, if the contract or modification is made beyond a reasonable time after the representation has begun, the client can avoid it ' unless the lawyer shows 'that the contract and the circumstances of its formation were fair and reasonable to the client.' Id., '18(1)(a). Moreover, if the contract or modification is made after the lawyer has finished the work, 'the client may avoid it if the client was not informed of facts needed to evaluate the appropriateness of the lawyer's compensation or other benefits conferred on the lawyer by the contract.' Id., '18(1)(b). Finally, tribunals construing attorney-client contracts are to do so 'as a reasonable person in the circumstances of the client would have construed it.' Id., '18(2) (emphasis supplied).

So, what would any first-year associate advise a law firm to do in negotiating contracts with prospective clients? Get it in writing! Ethics in some jurisdictions require written fee agreements. Some only require written agreements for new clients, or contingent fee arrangements, or when different firms are sharing fees. Some jurisdictions (like California) require that the client countersign the written agreement under certain circumstances.

Yet despite this seemingly straightforward ground rule, many lawyers balk at written engagement letters. At times, especially with longstanding clients with whom a senior partner has a close personal relationship, dispensing with a written agreement (where ethically permitted) makes sense. In the vast majority of circumstances, however, the firm should insist upon having something in writing.

The Bells and Whistles

Many firms today include provisions in their engagement letters to address non-economic issues arising in the practice of law. In accordance with the ground rules described in the previous section of this article, such provisions can become contractually binding upon the parties.

Conflict Waivers

A good example is the following 'Conflicts of Interest' Policy:

XYZ is a large firm with offices throughout the United States, and we represent many other companies and individuals. It is possible that during the time we are representing you, some of our present or future clients will be engaged in transactions, or encounter disputes, with you. You agree that we may continue to represent, and may undertake in the future to represent, existing or new clients in any matter, including litigation, that is not substantially related to our work for you even if the interests of such clients in those matters are directly adverse to you. We agree, however, that in any instance where, as a result of our representation of you, we have obtained proprietary or other confidential information of a non-public nature that, if known by such other client, could be used in such other matter to your material disadvantage, we will, as appropriate, construct a firewall to prevent XYZ lawyers representing the other client in such other matter from learning that information.

A prudent firm would not blindly rely upon this policy in all circumstances ' either for sound business or ethical reasons. For example, most attorneys would not cite this policy as a justification for suing the firm's largest client for RICO violations. Similarly, despite the provision's clear language, relying upon it to sue a 90-year-old probate client would only be considered in unusual circumstances. But in many cases, especially transactional conflicts involving clients in different firm offices, this type of provision makes the practice of law much simpler.

Another word of caution on conflict waiver provisions in engagement letters: More and more clients send their own engagement letters ' or outside counsel policies ' to all of their outside law firms. Often, the client's engagement letter will specify: 1) that it supersedes inconsistent provisions in the lawyer's letter; 2) that the client refuses to accept advance conflict waivers; and 3) that if the firm accepts work from the client, the lawyers agree not to be adverse to any of the client's subsidiaries set forth in what is often a lengthy attachment to the client's engagement letter. Under these circumstances, the firm will need to decide whether to accept the work with the strings attached by the client. Typically, the decision will turn upon two factors: how much fees are anticipated, and how often the new client has conflicts with existing firm clients. Sometimes, the attorney and client end up negotiating the scope of the advance conflicts waiver ' for example, to exclude litigation.

Insurance Disclaimers

Another provision often included in engagement letters specifies that the firm is not advising the client on whether the underlying dispute is covered by insurance, unless the engagement letter states otherwise. An example of such a provision follows below:

You should understand that, where the scope of our representation involves or may involve a claim or potential claim against you, you may have an insurance policy that may provide coverage of some sort for the claim or potential claim. Insurance companies are offering a wide variety of insurance products, and we urge you to consult with your insurance representative (or carrier), risk manager, or other appropriate persons about the potential for insurance coverage for any claim or potential claim. Unless you specifically request our advice and provide us with a copy of the policy, we assume no obligation to advise you with respect to insurance coverage for any claim or potential claim within the scope of our representation of you.

Termination of Engagement Provision

Sometimes, especially when the strategy provides a litigation advantage, long-dormant clients will claim a conflict because the law firm never specifically terminated the attorney-client relationship. The following engagement letter provision often serves to frustrate that strategy:

Either of us may terminate the engagement at any time for any reason by written notice, subject on our part to our professional obligations to you under applicable rules of professional conduct. Unless previously terminated, our representation of you will terminate on our sending you our final statement for services rendered in this matter. Unless you engage us after termination of this matter, we will have no continuing obligation to advise you with respect to future legal developments, such as changes in the applicable laws or regulations, that could have an effect on your future rights and liabilities.

Records and Files Provision

My final example of a 'bell and whistle' engagement letter provision, addressing client records and files, provides as follows:

Following the conclusion of our representation, we will keep confidential any non-public information you have supplied to us that we retain in accordance with applicable rules of professional conduct. At your request, we will return your papers and property to you promptly on receipt of payment for outstanding fees and costs. The firm will retain its own files pertaining to the matter in accordance with the firm's records retention program. For various reasons, including the minimization of unnecessary storage expenses, we reserve the right to destroy or otherwise dispose of any such document or other materials after a reasonable time and without further notice after the termination of the engagement.

Lawyers Must Follow Engagement Letters

To say that lawyers must follow engagement letters seems like an obvious proposition. Failure to do so can result in civil liability, bar grievances, and damage to reputation and client relationships. But there are additional nuances to that obvious proposition that lawyers cannot afford to forget. The two most important nuances relate to the scope of the engagement and to fees and expenses.

Too many lawyers never think about the engagement letter once their secretary mails it and files a copy. As time passes during the course of the representation, however, the matter often evolves. The majority of engagement letters define the scope of the representation. If the matter evolves beyond that defined scope, lawyers need to be careful to document that fact with the client. Otherwise, the same problems plaguing construction contractors that use verbal change orders will also be visited upon the law firm. The client will claim that work was unauthorized and refuse to pay. If the matter results in litigation between the parties, the lack of documentation almost always dooms the attorney's chances of success.

Similarly, if the scope of the representation paragraph is broader than the scope of the work actually performed, that fact can hurt the law firm, for example, in a subsequent malpractice lawsuit. Largely for these reasons, prudent lawyers are very careful in describing the scope of the engagement.

The problem with fees and expenses arises because most law firms prefer to apply today's rates to the file that was opened last year. Engagement letters typically reserve the right of firms to do so. Nevertheless, without documentation that a client was notified of rate changes, a fee dispute may well result.

One final observation is in order with respect to the importance of law firms following engagement letters. If a letter states that the client must countersign and return a copy to the attorney, the firm must make sure that this occurs. Otherwise, if a dispute arises down the road, the client can argue that its failure to countersign and return the letter means that it never agreed to the terms in the letter.

Systems That Firms Should Implement

Firms that permit individual attorneys to customize their engagement letters are asking for trouble. Inconsistent policies and practices ' not to mention lawyers within the same firm competing against each other based upon rates and other provisions ' can only serve to erode the firm's ability to compete in the marketplace against other firms. Just as General Motors does not permit each dealership to use its own unique sales contracts, law firms shouldn't either, with respect to engagement letters.

Template letters must be developed, vetted, and required by the law firm. Exceptions can be made, but a single partner or committee must be responsible for approving exceptions. Otherwise, inconsistencies will inevitably result. That person or committee can also oversee the maintenance of engagement letters ' as well as any outside counsel policies or counter-engagement letters that the client sends to the law firm.

Finally, lawyers and other personnel need to be educated about the need for engagement letters, and the problems that can arise if engagement letters are not accurate or are not followed. Often, the ethics partner or committee will be responsible for this education function as well. Sophisticated law firms will find that the benefits flowing from these education efforts will far exceed the time that these efforts take in this very important aspect of firm life.


Jeffrey P. Ayres is a partner at Venable LLP, with offices in New York, California, Washington, DC, Maryland, Delaware, and Virginia. For many years, Ayres has chaired Venable's Ethics Committee. He regularly advises management (including law firms) on ethics and employment issues. He can be reached at [email protected].

Engagement letters in the big law firm are like death, taxes, and timesheets. You can't live with them. You can't live without them. On the one hand, while many practitioners may not realize it, engagement letters are part of the attorney-client contract that defines the relationship between the parties. Typically, such letters are also ethically encouraged or required, depending upon the circumstances and jurisdiction. On the other hand, particularly when the law firm does not adhere to the engagement letter, big and unpleasant surprises can ensue.

This article identifies the general ground rules regarding engagement letters, the bells and whistles that such letters can contain for the good of the law firm, and the problems that can arise when lawyers don't pay attention to or fail to follow to the letters. It then discusses some of the systems that the law firm can implement to manage the engagement letter process. The three most important systems in that regard are as follows: 1) to develop template engagement letters that everyone must use, unless a designated partner permits exceptions for good cause shown; 2) to have centralized oversight of the process, in order to ensure that uniformity is achieved and that the engagement letters are maintained for recordkeeping purposes; and 3) to educate lawyers and other personnel to recognize the need for engagement letters and the problems that can arise in this area if the engagement letters are not accurate or are not followed.

General Ground Rules

Sections 18 and 38 of the Restatement Third, The Law Governing Lawyers (ALI) state the general rule well. Client-lawyer contracts (including modifications) that are embodied within the terms of an engagement letter ' governing fees, expenses, and a variety of topics ' can be enforced by either party. However, if the contract or modification is made beyond a reasonable time after the representation has begun, the client can avoid it ' unless the lawyer shows 'that the contract and the circumstances of its formation were fair and reasonable to the client.' Id., '18(1)(a). Moreover, if the contract or modification is made after the lawyer has finished the work, 'the client may avoid it if the client was not informed of facts needed to evaluate the appropriateness of the lawyer's compensation or other benefits conferred on the lawyer by the contract.' Id., '18(1)(b). Finally, tribunals construing attorney-client contracts are to do so 'as a reasonable person in the circumstances of the client would have construed it.' Id., '18(2) (emphasis supplied).

So, what would any first-year associate advise a law firm to do in negotiating contracts with prospective clients? Get it in writing! Ethics in some jurisdictions require written fee agreements. Some only require written agreements for new clients, or contingent fee arrangements, or when different firms are sharing fees. Some jurisdictions (like California) require that the client countersign the written agreement under certain circumstances.

Yet despite this seemingly straightforward ground rule, many lawyers balk at written engagement letters. At times, especially with longstanding clients with whom a senior partner has a close personal relationship, dispensing with a written agreement (where ethically permitted) makes sense. In the vast majority of circumstances, however, the firm should insist upon having something in writing.

The Bells and Whistles

Many firms today include provisions in their engagement letters to address non-economic issues arising in the practice of law. In accordance with the ground rules described in the previous section of this article, such provisions can become contractually binding upon the parties.

Conflict Waivers

A good example is the following 'Conflicts of Interest' Policy:

XYZ is a large firm with offices throughout the United States, and we represent many other companies and individuals. It is possible that during the time we are representing you, some of our present or future clients will be engaged in transactions, or encounter disputes, with you. You agree that we may continue to represent, and may undertake in the future to represent, existing or new clients in any matter, including litigation, that is not substantially related to our work for you even if the interests of such clients in those matters are directly adverse to you. We agree, however, that in any instance where, as a result of our representation of you, we have obtained proprietary or other confidential information of a non-public nature that, if known by such other client, could be used in such other matter to your material disadvantage, we will, as appropriate, construct a firewall to prevent XYZ lawyers representing the other client in such other matter from learning that information.

A prudent firm would not blindly rely upon this policy in all circumstances ' either for sound business or ethical reasons. For example, most attorneys would not cite this policy as a justification for suing the firm's largest client for RICO violations. Similarly, despite the provision's clear language, relying upon it to sue a 90-year-old probate client would only be considered in unusual circumstances. But in many cases, especially transactional conflicts involving clients in different firm offices, this type of provision makes the practice of law much simpler.

Another word of caution on conflict waiver provisions in engagement letters: More and more clients send their own engagement letters ' or outside counsel policies ' to all of their outside law firms. Often, the client's engagement letter will specify: 1) that it supersedes inconsistent provisions in the lawyer's letter; 2) that the client refuses to accept advance conflict waivers; and 3) that if the firm accepts work from the client, the lawyers agree not to be adverse to any of the client's subsidiaries set forth in what is often a lengthy attachment to the client's engagement letter. Under these circumstances, the firm will need to decide whether to accept the work with the strings attached by the client. Typically, the decision will turn upon two factors: how much fees are anticipated, and how often the new client has conflicts with existing firm clients. Sometimes, the attorney and client end up negotiating the scope of the advance conflicts waiver ' for example, to exclude litigation.

Insurance Disclaimers

Another provision often included in engagement letters specifies that the firm is not advising the client on whether the underlying dispute is covered by insurance, unless the engagement letter states otherwise. An example of such a provision follows below:

You should understand that, where the scope of our representation involves or may involve a claim or potential claim against you, you may have an insurance policy that may provide coverage of some sort for the claim or potential claim. Insurance companies are offering a wide variety of insurance products, and we urge you to consult with your insurance representative (or carrier), risk manager, or other appropriate persons about the potential for insurance coverage for any claim or potential claim. Unless you specifically request our advice and provide us with a copy of the policy, we assume no obligation to advise you with respect to insurance coverage for any claim or potential claim within the scope of our representation of you.

Termination of Engagement Provision

Sometimes, especially when the strategy provides a litigation advantage, long-dormant clients will claim a conflict because the law firm never specifically terminated the attorney-client relationship. The following engagement letter provision often serves to frustrate that strategy:

Either of us may terminate the engagement at any time for any reason by written notice, subject on our part to our professional obligations to you under applicable rules of professional conduct. Unless previously terminated, our representation of you will terminate on our sending you our final statement for services rendered in this matter. Unless you engage us after termination of this matter, we will have no continuing obligation to advise you with respect to future legal developments, such as changes in the applicable laws or regulations, that could have an effect on your future rights and liabilities.

Records and Files Provision

My final example of a 'bell and whistle' engagement letter provision, addressing client records and files, provides as follows:

Following the conclusion of our representation, we will keep confidential any non-public information you have supplied to us that we retain in accordance with applicable rules of professional conduct. At your request, we will return your papers and property to you promptly on receipt of payment for outstanding fees and costs. The firm will retain its own files pertaining to the matter in accordance with the firm's records retention program. For various reasons, including the minimization of unnecessary storage expenses, we reserve the right to destroy or otherwise dispose of any such document or other materials after a reasonable time and without further notice after the termination of the engagement.

Lawyers Must Follow Engagement Letters

To say that lawyers must follow engagement letters seems like an obvious proposition. Failure to do so can result in civil liability, bar grievances, and damage to reputation and client relationships. But there are additional nuances to that obvious proposition that lawyers cannot afford to forget. The two most important nuances relate to the scope of the engagement and to fees and expenses.

Too many lawyers never think about the engagement letter once their secretary mails it and files a copy. As time passes during the course of the representation, however, the matter often evolves. The majority of engagement letters define the scope of the representation. If the matter evolves beyond that defined scope, lawyers need to be careful to document that fact with the client. Otherwise, the same problems plaguing construction contractors that use verbal change orders will also be visited upon the law firm. The client will claim that work was unauthorized and refuse to pay. If the matter results in litigation between the parties, the lack of documentation almost always dooms the attorney's chances of success.

Similarly, if the scope of the representation paragraph is broader than the scope of the work actually performed, that fact can hurt the law firm, for example, in a subsequent malpractice lawsuit. Largely for these reasons, prudent lawyers are very careful in describing the scope of the engagement.

The problem with fees and expenses arises because most law firms prefer to apply today's rates to the file that was opened last year. Engagement letters typically reserve the right of firms to do so. Nevertheless, without documentation that a client was notified of rate changes, a fee dispute may well result.

One final observation is in order with respect to the importance of law firms following engagement letters. If a letter states that the client must countersign and return a copy to the attorney, the firm must make sure that this occurs. Otherwise, if a dispute arises down the road, the client can argue that its failure to countersign and return the letter means that it never agreed to the terms in the letter.

Systems That Firms Should Implement

Firms that permit individual attorneys to customize their engagement letters are asking for trouble. Inconsistent policies and practices ' not to mention lawyers within the same firm competing against each other based upon rates and other provisions ' can only serve to erode the firm's ability to compete in the marketplace against other firms. Just as General Motors does not permit each dealership to use its own unique sales contracts, law firms shouldn't either, with respect to engagement letters.

Template letters must be developed, vetted, and required by the law firm. Exceptions can be made, but a single partner or committee must be responsible for approving exceptions. Otherwise, inconsistencies will inevitably result. That person or committee can also oversee the maintenance of engagement letters ' as well as any outside counsel policies or counter-engagement letters that the client sends to the law firm.

Finally, lawyers and other personnel need to be educated about the need for engagement letters, and the problems that can arise if engagement letters are not accurate or are not followed. Often, the ethics partner or committee will be responsible for this education function as well. Sophisticated law firms will find that the benefits flowing from these education efforts will far exceed the time that these efforts take in this very important aspect of firm life.


Jeffrey P. Ayres is a partner at Venable LLP, with offices in New York, California, Washington, DC, Maryland, Delaware, and Virginia. For many years, Ayres has chaired Venable's Ethics Committee. He regularly advises management (including law firms) on ethics and employment issues. He can be reached at [email protected].

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