Engagement Letters: Preventive Medicine

Establishing a successful relationship between a law firm and its clients requires clear communication, and what better time to start than when the relationship begins? In addition to helping avoid misunderstandings on billings, a well-drafted engagement letter provides an early opportunity to confirm both the client's and the firm's expectations on a number of other matters as well.

What should a good engagement letter contain? That depends to some extent on the type of services to be provided, the expected duration of the relationship and any specific concerns the client may have raised. Different firms, and even different lawyers within a firm, may have preferred formats for their engagement letters, but regardless of their form, there are some common denominators that should be included in each.

Who Is the Client?

According to one malpractice insurer, conflicts of interest are one of the most common causes of malpractice claims made by clients against their lawyers. Unfortunately, these claims often have their origin in failing to make clear at the outset of an engagement exactly who is the client and, in some cases, who is not the client. A classic example is the case where three founders ask a lawyer for help in forming their new company. Who does the lawyer represent? Is it the new company or is it one or more of the three founders? A good engagement letter leaves no doubt. In addition to making this clear in the letter, it may be appropriate also for the lawyer to recommend (in writing) that each other party obtain independent counsel to look out for his or her own interests.

A similar misunderstanding can occur in family representations when, for example, one of two siblings seeks advice with respect to the interpretation of her parents' wills. Bearing in mind that what's best for one sibling may not be best for another, an engagement letter provides an effective way to make clear that the lawyer does not represent all members of the family, even if they are similarly situated.

Conflict Waivers

If representation of a client does present a conflict of interest or a potential conflict, it may be one that can be waived. When that is the case, an engagement letter should note the conflict and include, where appropriate, a waiver or a limited waiver. While some lawyers seek an absolute waiver of all conflicts, actual or potential (and even known or unknown), a more common practice is to seek a waiver of just known conflicts, and even then often just a limited waiver. The engagement letter might provide, for example, that a potential conflict is waived, subject to the lawyer's agreement not to represent either party in the event that litigation should ever arise between the two parties with respect to the subject matter of the transaction.

Scope of the Engagement

Clients hire lawyers to provide services, and a good engagement letter should describe the scope of those services, where appropriate. In some cases, this may mean spelling out as well any services that the lawyer is not expected to provide. For example, an engagement letter might provide that the lawyer is being retained to provide tax advice with respect to a particular business transaction, but note that other counsel will be handling the 'deal' negotiations and documentation.

The Client's Responsibilities

It may seem counterintuitive to include in an engagement letter the obligations of the client hiring the lawyer, but doing so can avoid a problem later. Among others, the client's obligations might include an agreement to cooperate with the lawyer in the matter, to provide requested information on a timely basis, to update that information if it changes, and to pay on a timely basis for the services being rendered.

Fee Structure and Billing

That brings us to the subject of fees and billing. Firms approach the discussion of fees and billing in a number of different ways in their engagement letters. Frequently, they provide the client with a range of billing rates for lawyers in the firm and indicate simply that charges will be determined based upon time spent at the applicable hourly rates. Others provide specific billing rate information for each attorney in the firm who may be involved the matter and indicate what attorneys are likely to perform which tasks. Whatever a firm's preference, it is important that the letter cover also such things as how often invoices will be sent, expectations as to the timeliness of payment and what might happen if the client falls behind, e.g., interest charges or withdrawal from representation.

Clients often request an estimate of total fees they might incur for the services they are purchasing. It is hard to argue with the reasonableness of such a request. After all, few of us are in the habit of buying something without some sense of what it might cost. But, if an estimate is provided in an engagement letter, the letter should make clear that it is just that, an estimate, and that actual charges may be greater. All too often, estimates come up short, not because the lawyer is inefficient or slow, but because of unexpected delays or developments (and there always seem to be some). Remember, estimates may set expectations that in the minds of clients become 'caps.' Too often, that can result in tension at billing time.

Retainers

Retainers are a good way to assess how serious a client is about pursuing a matter. They also send the message that the firm is serious about being paid for its work. Nevertheless, a majority of lawyers find the subject of retainers an uncomfortable one. If a lawyer is going to collect a retainer, good practice dictates that the engagement letter state clearly how the retainer will be applied, as well as any expectation as to replenishment if the retainer is exhausted and the circumstances, if any, under which all or a portion of the retainer will or will not be returned to the client.

Should the Client Countersign the Letter?

As with other terms, firms differ in their views as to whether a client should be asked to countersign an engagement letter. A countersigned engagement letter is the best evidence of the parties' agreement if the lawyer must seek a remedy for unpaid fees, but most lawyers and firms do not go this far. What is clear, according to malpractice insurers, is that the worst situation is an engagement letter sent to a client with a request for countersignature, but no follow-up to be certain the letter in fact is signed. The old principle from law school that silence is acceptance may not apply here, and certainly no lawyer would consider it good practice to let this happen. In the case of a contingent fee matter, of course, state or local ethical rules may mandate a countersigned agreement for the fee arrangement to be effective.

Be Consistent

Finally, don't overlook the importance of consistency. All firms seem to agree that engagement letters are advisable, but if the management of a firm allows individual attorneys to ignore the process, trouble undoubtedly will follow. A simple way to assure consistency is to prohibit any new client file from being opened without confirmation that an engagement letter has been sent to the client. Individual attorneys may be provided the first opportunity to send the letter, but if they do not comply within a specified number of days, the firm should send the letter signed by the Office Manager or perhaps the

Managing Partner

A well-drafted engagement letter can reinforce early in a client relationship the professionalism of the lawyer and the firm with whom the client is dealing. Firms that overlook this early opportunity to establish the 'rules of the road' increase the likelihood of a later misunderstanding that could jeopardize their relationship with the client, and also put at risk at least part of their fee. On the other hand, like any preventive medicine, the investment of a little time and effort early on can go a long way in assuring a healthier and happier client relationship later.

Establishing a successful relationship between a law firm and its clients requires clear communication, and what better time to start than when the relationship begins? In addition to helping avoid misunderstandings on billings, a well-drafted engagement letter provides an early opportunity to confirm both the client's and the firm's expectations on a number of other matters as well.

What should a good engagement letter contain? That depends to some extent on the type of services to be provided, the expected duration of the relationship and any specific concerns the client may have raised. Different firms, and even different lawyers within a firm, may have preferred formats for their engagement letters, but regardless of their form, there are some common denominators that should be included in each.

Who Is the Client?

According to one malpractice insurer, conflicts of interest are one of the most common causes of malpractice claims made by clients against their lawyers. Unfortunately, these claims often have their origin in failing to make clear at the outset of an engagement exactly who is the client and, in some cases, who is not the client. A classic example is the case where three founders ask a lawyer for help in forming their new company. Who does the lawyer represent? Is it the new company or is it one or more of the three founders? A good engagement letter leaves no doubt. In addition to making this clear in the letter, it may be appropriate also for the lawyer to recommend (in writing) that each other party obtain independent counsel to look out for his or her own interests.

A similar misunderstanding can occur in family representations when, for example, one of two siblings seeks advice with respect to the interpretation of her parents' wills. Bearing in mind that what's best for one sibling may not be best for another, an engagement letter provides an effective way to make clear that the lawyer does not represent all members of the family, even if they are similarly situated.

Conflict Waivers

If representation of a client does present a conflict of interest or a potential conflict, it may be one that can be waived. When that is the case, an engagement letter should note the conflict and include, where appropriate, a waiver or a limited waiver. While some lawyers seek an absolute waiver of all conflicts, actual or potential (and even known or unknown), a more common practice is to seek a waiver of just known conflicts, and even then often just a limited waiver. The engagement letter might provide, for example, that a potential conflict is waived, subject to the lawyer's agreement not to represent either party in the event that litigation should ever arise between the two parties with respect to the subject matter of the transaction.

Scope of the Engagement

Clients hire lawyers to provide services, and a good engagement letter should describe the scope of those services, where appropriate. In some cases, this may mean spelling out as well any services that the lawyer is not expected to provide. For example, an engagement letter might provide that the lawyer is being retained to provide tax advice with respect to a particular business transaction, but note that other counsel will be handling the 'deal' negotiations and documentation.

The Client's Responsibilities

It may seem counterintuitive to include in an engagement letter the obligations of the client hiring the lawyer, but doing so can avoid a problem later. Among others, the client's obligations might include an agreement to cooperate with the lawyer in the matter, to provide requested information on a timely basis, to update that information if it changes, and to pay on a timely basis for the services being rendered.

Fee Structure and Billing

That brings us to the subject of fees and billing. Firms approach the discussion of fees and billing in a number of different ways in their engagement letters. Frequently, they provide the client with a range of billing rates for lawyers in the firm and indicate simply that charges will be determined based upon time spent at the applicable hourly rates. Others provide specific billing rate information for each attorney in the firm who may be involved the matter and indicate what attorneys are likely to perform which tasks. Whatever a firm's preference, it is important that the letter cover also such things as how often invoices will be sent, expectations as to the timeliness of payment and what might happen if the client falls behind, e.g., interest charges or withdrawal from representation.

Clients often request an estimate of total fees they might incur for the services they are purchasing. It is hard to argue with the reasonableness of such a request. After all, few of us are in the habit of buying something without some sense of what it might cost. But, if an estimate is provided in an engagement letter, the letter should make clear that it is just that, an estimate, and that actual charges may be greater. All too often, estimates come up short, not because the lawyer is inefficient or slow, but because of unexpected delays or developments (and there always seem to be some). Remember, estimates may set expectations that in the minds of clients become 'caps.' Too often, that can result in tension at billing time.

Retainers

Retainers are a good way to assess how serious a client is about pursuing a matter. They also send the message that the firm is serious about being paid for its work. Nevertheless, a majority of lawyers find the subject of retainers an uncomfortable one. If a lawyer is going to collect a retainer, good practice dictates that the engagement letter state clearly how the retainer will be applied, as well as any expectation as to replenishment if the retainer is exhausted and the circumstances, if any, under which all or a portion of the retainer will or will not be returned to the client.

Should the Client Countersign the Letter?

As with other terms, firms differ in their views as to whether a client should be asked to countersign an engagement letter. A countersigned engagement letter is the best evidence of the parties' agreement if the lawyer must seek a remedy for unpaid fees, but most lawyers and firms do not go this far. What is clear, according to malpractice insurers, is that the worst situation is an engagement letter sent to a client with a request for countersignature, but no follow-up to be certain the letter in fact is signed. The old principle from law school that silence is acceptance may not apply here, and certainly no lawyer would consider it good practice to let this happen. In the case of a contingent fee matter, of course, state or local ethical rules may mandate a countersigned agreement for the fee arrangement to be effective.

Be Consistent

Finally, don't overlook the importance of consistency. All firms seem to agree that engagement letters are advisable, but if the management of a firm allows individual attorneys to ignore the process, trouble undoubtedly will follow. A simple way to assure consistency is to prohibit any new client file from being opened without confirmation that an engagement letter has been sent to the client. Individual attorneys may be provided the first opportunity to send the letter, but if they do not comply within a specified number of days, the firm should send the letter signed by the Office Manager or perhaps the

Managing Partner

A well-drafted engagement letter can reinforce early in a client relationship the professionalism of the lawyer and the firm with whom the client is dealing. Firms that overlook this early opportunity to establish the 'rules of the road' increase the likelihood of a later misunderstanding that could jeopardize their relationship with the client, and also put at risk at least part of their fee. On the other hand, like any preventive medicine, the investment of a little time and effort early on can go a long way in assuring a healthier and happier client relationship later.