Eyes Wide Open: Practical Tips for Conducting Due Diligence Before Engaging a Client

Picture the following scenario: You receive a call from a prospective client about taking over a new matter from another lawyer. The client’s explanation for the change of counsel seems reasonable: The client would like someone with more subject-matter expertise, was impressed by your credentials, and would like to work with someone who is more affordable. During the initial call you gather limited information about the client and the potential matter. Although you feel comfortable that this is a matter you could handle, you are worried about the impending deadlines—and something about your conversation with the client gives you the feeling that you aren’t getting the full story. However, because you cannot put your finger on any reason to turn down the representation, you agree to go forward, essentially assuming the risk and hoping that the uneasy feeling you had during the first conversation will subside.

Lawyers are forced to make judgment calls like this every day. We are often asked to enter into a representation that could last months or even years based on a limited interaction with a prospective client about a matter that may take a number of twists and turns before finally resolving. Although we can’t predict the future, developing a simple due diligence process can help lawyers identify red flags and manage risk before entering into a new engagement.

What Is Client Due Diligence?

What does it mean to conduct due diligence on a client? Do you really need to conduct a “deep dive” into every single prospective client’s background to see if there are any skeletons in the client’s closet? The amount of diligence a law firm should perform before engaging with a client will depend on a number of factors, including the size of the firm, the nature of the engagement, and the foreseeable risks involved in the representation. However, at the end of the day, agreeing to represent a client is inherently a business relationship, and it is important to gather sufficient information before deciding to go into business with someone you may have just met. In other words, a simple and efficient intake process forces the lawyer to take a step back and evaluate whether the proposed engagement makes sense for the firm and, if so, under what conditions.

Top Ten Questions to Ask During the Due Diligence Process

To effectively conduct due diligence, it is helpful to create a set list of questions to ask during the intake process. Not only will this save time, but it will also ensure that all members of the firm are adhering to the same standards and following the same protocol for client intake. Below are some key questions to ask during the intake process. This is by no means an exhaustive list, but these questions can serve as a guide for designing an intake process that meets your and your firm’s needs.

1. Who is the client? This may seem a simple enough question, but it has given rise to countless disputes between lawyers and clients. Identifying the client is important in order to determine who is authorized to give the lawyer direction and also who will hold the attorney-client privilege. Is the individual approaching you ultimately going to be the client, or is he or she speaking on behalf of another individual or entity? If the client is going to be an entity, are there other members from whom the lawyer will be taking direction? You may need to limit the number of constituents authorized to give you direction so you can avoid internal stalemates. (See American Bar Association (ABA) Model Rule of Professional Conduct 1.13(a): “A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.” This article will cite to the ABA Model Rules; while all U.S. jurisdictions have adopted some form of the ABA Model Rules, lawyers should consult the applicable rules of professional conduct in the jurisdiction where they practice for the specific rules governing attorney conduct.) The identity of the client is also important so that the lawyer knows whom to look to for payment and so the lawyer can determine if the individual or entity will have sufficient assets to pay the anticipated fees or if some form of guarantee needs to be obtained.
2. Are there any conflicts of interest? Comment [3] to ABA Model Rule 1.7 provides that a lawyer “should adopt reasonable procedures, appropriate for the size and type of firm and practice, to determine in both litigation and non-litigation matters the persons and issues involved” in order to properly check for conflicts of interest. As a result, before agreeing to represent a client, the lawyer should collect information from the client sufficient to run a conflicts check. It is advisable to gather conflicts information before obtaining any substantive information from the prospective client about the potential engagement; obtaining too much information too soon may create a basis for disqualification if a conflict is discovered later. This is especially important for solo practitioners given that screening to prevent a disqualifying conflict of interest with a prospective client would be impossible. (See ABA Model Rule 1.18(d).)
3. Has the prospective client had a prior attorney handling this same matter? In our above hypothetical, the answer was yes. As noted, while the existence of prior counsel on the matter isn’t necessarily dispositive of whether a lawyer should turn down a matter, it should certainly prompt the lawyer to ask a series of follow-up questions to understand why the client is changing counsel mid-representation. For example, is this the first time the client has changed counsel in the representation, or are you just signing up to be the next in a series of lawyers the client has hired? If there is a fee dispute between the client and the prior counsel, that may create an impediment to obtaining the client’s file until the dispute is resolved. These issues can be important not only in deciding whether to take on the representation but also, if you decide to take it on, the terms under which you agree to do so.
4. Is the matter outside of the lawyer’s normal area of practice? Two of the most common reasons for malpractice claims against lawyers and law firms are practices known as “hoarding” and “dabbling.” (LPLI 2021 Claims Survey: Frequency of Legal Malpractice Claims Slows as Costs Continue to Spiral, Ames & Gough, at 4–5 (2021).) Hoarding refers to lawyers who “hoard” work in an effort to boost their own productivity instead of involving other lawyers who may have more experience in a particular subject matter. Dabbling refers to lawyers who “dabble” in areas of law in which they do not normally practice. Hoarding and dabbling can be particularly prevalent during times of financial uncertainty, where lawyers may be more inclined to accept work outside of their comfort zone. But the short-term reward of bringing on a new client can be quickly outweighed if there is a claim down the road that the lawyer did not competently represent the client, either because the lawyer did not know what he or she was doing or because the lawyer tried to do too much without outside help.
5. Does the client have unreasonable expectations, or is the client motivated by personal concerns? It is important at the beginning of any engagement to have a clear understanding of what the client wants to accomplish in the representation and whether these goals are realistic. If the client’s goals seem unrealistic or the client is motivated by some type of personal concern or principle (e.g., revenge or personal animus toward the opposing side or some other third party), the lawyer should try to reach an understanding with the client and discuss what the likely outcomes would be. If the client appears unwilling to base his or her decisions on economic rationality, that may be a reason for the lawyer to decline the representation altogether.
6. Are the fees likely to outweigh the benefits of success? This is often the $64,000 question (literally). Of course, it is often impossible to predict the total fees for a matter; however, lawyers who take the time to answer questions one through five above will be in a better position to make this determination. If the answer to this question is yes, then it is also important to have a frank discussion with the client up front about the likely cost and the potential benefits of the matter so that the client is fully informed. The lawyer should also memorialize that conversation in writing. You may want to set a firm policy that claims below a certain value will not be pursued or will be pursued only with the approval of management.
7. Is there a soon-expiring statute of limitations or other impending deadline? In general terms, as soon as a lawyer agrees to represent a client, the lawyer becomes responsible for protecting the client’s interests in the matter at hand. As a result, one of the most important risk management questions a lawyer should ask before agreeing to represent a client is whether there are any upcoming deadlines that the lawyer would be responsible for meeting. For example, agreeing to take on a client one week before a statute of limitations is set to run or discovery is set to close can place the lawyer or law firm in a precarious position. Taking over a transactional matter on the eve of closing could also subject the lawyer to unnecessary risk because the lawyer may not be fully up to speed before the transaction is set to close. (See Ronald E. Mallen, Legal Malpractice § 2:44 (2022) (collecting cases where attorneys were held responsible for failing to warn a client about an imminent statute of limitations even where lawyers ultimately declined the representation).) Instead of simply agreeing to take on the representation and hoping that the court or your adversary will grant an extension, a better practice would be to take on the representation on the condition that the client first obtains an extension so that new counsel can get up to speed. Alternatively, the firm can consider whether it can limit the scope of its engagement so that the client or other counsel is responsible for certain tasks until the firm has had a reasonable opportunity to dig into the case. (See ABA Model Rule 1.2(c): “A lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent.”)
8. Does the client have a significant litigation history? Depending on the type of prospective client, running a basic search of the relevant federal and state court dockets to see whether the prospective client has a significant litigation history can provide important protection. Obviously, the fact that a prospective client has been a party to litigation should not be a disqualifying factor on its own. However, searching court dockets can reveal whether the client has a history of getting into litigated disputes with service providers, including previous lawyers. You do not want to be the next one on the list.
9. Is the client a credit risk? As discussed above, part of the purpose of any due diligence process is to screen for any risks of nonpayment. To that end, searching for any outstanding liens or judgments against a prospective client can be a helpful exercise. This step is by no means required in every instance but should be considered if the circumstances warrant it. For example, the existence of other creditors may inhibit the client’s ability to make regular payments to the lawyer during the course of the representation. Similarly, where the lawyer expects to be paid at the end of the representation (e.g., from the proceeds of a sale), it is important to know whether the prospective client has other creditors who may also make a claim to those same funds. Because credit information about corporate clients is often publicly available while individual credit ratings are not, you may want to limit the credit searches accordingly.
10. Are there any other red flags? In addition to the above steps, any intake process should contain a catchall question for the lawyer to consider whether any other red flags warrant special consideration. This type of catchall question helps avoid tunnel vision, where the lawyer is singularly focused on finalizing the engagement and bringing in the client. However, where a client may be trying to use the lawyer’s services for improper means, the lawyer’s failure to identify obvious red flags can create both ethics and liability issues for the lawyer. (See N.Y.C. Bar Ass’n Comm’n on Pro. Ethics, Formal Op. 2018-4, Duties When an Attorney Is Asked to Assist in a Suspicious Transaction (2018); Matter of Reno, 147 A.D.3d 8, 12 (N.Y. App. Div. 2016).)

Putting It All Together

While the thought of asking so many questions before taking on a client may seem daunting, in practice it can be accomplished in a matter of minutes. Lawyers will find that they are already asking many of these questions naturally as part of the initial client interview. In addition, some of the more technical questions can be answered using basic search engines that provide instantaneous results. In either case, lawyers and law firms should develop a preset list of due diligence questions and require all lawyers in the firm to complete those questions before agreeing to represent a client. Maintaining a robust intake system will help lawyers avoid unnecessary risks before it is too late and will also ensure that you start off on the right foot with a client—with your eyes wide open.