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March 02, 2017 Articles

Engagement Letters: Four Key Terms to Reduce Risk

By Shari L. Klevens and Alanna Clair

Recent statistics from the ABA’s Standing Committee on Lawyers’ Professional Liability reveal that legal malpractice claims are becoming more expensive to defend and settle. Therefore, it is beneficial for practitioners to take steps to reduce the likelihood of claims for legal malpractice. One of the best tools an attorney can use to minimize the likelihood and severity of a later claim is a well-drafted engagement letter entered into at the beginning of a representation.

Engagement letters are one of the most reliable indicators of whether an attorney or firm has systems in place to effectively reduce the risks of malpractice claims. That is why many law firm audits, often conducted by insurers to assess a firm’s risk management processes, begin with a review of the engagement letter. Indeed, an effective engagement letter not only guides the representation, including its scope, but it can provide the first line of defense against a future legal malpractice claim.

To ensure that engagement letters are always used, some firms do not allow new matters to be opened or billed until an engagement letter is approved. Inevitably, it is the one new client for which a firm did not use an engagement letter that later causes problems.

Below are some, but not all, terms that law firms should consider including in their engagement letters to reduce overall risk.

Define the Client
Attorneys owe duties to their clients. Generally, attorneys do not owe special duties to parties outside the attorney-client relationship, even those who pay the bills. It is the unique relationship between the attorney and the client that gives rise to potential malpractice suits. Thus, by using the engagement letter to define who the client is, the attorney limits the class of persons to whom the duties of the representation are owed and therefore also limits the potential plaintiffs who could later bring suit.

Sometimes this requires a simple designation. In other circumstances, it may be more complicated. For example, it may behoove the attorney to specify that she represents the officer of a corporation but not the corporation itself (or its shareholders). Or, in a case involving wills, the attorney can specify whether she represents the executor, the heir, or some other party.

This approach is important because courts reviewing the existence and scope of an attorney-client relationship will typically review the facts from the perspective of the potential client. If an attorney is not clear regarding the identity of the client, she may find herself defending a claim from someone she did not intend to represent. Cutting off the potential for nonclients to infer a special relationship is important. Some attorneys consider using an exclusion in the engagement letter for any person or entity not specifically identified: “No duties have been undertaken or assumed for any person or entity that has not been specifically identified as a client.”

Confirm the Scope and Duration of Representation
The best evidence of what an attorney agrees to do for her client is the engagement letter. Indeed, the engagement letter can also be used to confirm the type of services to be provided as well as the expected length of the representation. The key is to clearly define exactly what the attorney has been hired to do and make clear that the attorney has not been retained for anything more. Courts have dismissed legal malpractice lawsuits in which the client alleged the attorney should have done more than what was contained in the engagement letter. In short, an attorney can rely on her engagement letter to defend against legal malpractice claims—but this requires her to include helpful, limiting language in the letter itself.

Absent a definition or limitation in the engagement letter, a court may later infer that the representation is a general one for multiple purposes. This inference is dangerous from both a statute of limitations perspective and a liability perspective. An open-ended representation that continues indefinitely may be viewed as preserving the statute of limitations for any client wishing to bring a claim. A broad representation could also be held against an attorney who could be viewed as agreeing to do tasks that are assumed by the client but never confirmed in writing by the attorney.

Even specifying the task in the engagement letter can create complications. A client hiring an attorney to represent him for a traffic ticket could have varied expectations for the advice received in the representation, including on the hearing itself, the potential liabilities arising from the accident, the applicable statute of limitations for claims relating to the accident, insurance issues, and others. A narrowly drawn engagement letter will help specify the attorney’s obligations. The language could be as simple as specifying that the attorney is responsible for the trial but not the appeal. If the representation continues or expands, the attorney can enter into another engagement letter or a modification.

In addition to confirming the scope of the representation, the attorney can use the engagement letter to confirm the duration of the representation. Such a limitation could be tied to a specific length of time or a specific event (such as settlement, a real estate closing, or execution of a document). Because tying the representation to a specific event could also support the drafted limitation on the scope, this may be the stronger approach.

Without a limitation on duration, for example, an attorney could be found responsible for renewing security filings long after a real estate closing or for advising a client on changes in estate law long after the execution of the will. Specifying a limitation on the duration of the representation typically goes hand in hand with a file-closing letter upon the terminating event, confirming the end of the relationship and, therefore, any other duties to the client.

Confirm the Fee
Most attorneys include fee information in the engagement letter as well. Pursuant to ABA Model Rule of Professional Conduct 1.5(a), “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” What makes a fee “unconscionable” under California’s rule, for example, depends on several factors, including the amount of the fee in proportion to the value of the services performed; the relative sophistication of the attorney and client; the novelty and difficulty of the questions involved and the skill requisite to perform the legal service properly; the amount involved and results obtained; time limits imposed by the client or circumstances; the experience and reputation of the attorney; whether the fee is fixed or contingent; and the amount of labor involved.

It is axiomatic that clients who are dissatisfied with the bill typically claim dissatisfaction with the representation. Attorneys can help reduce the likelihood of this event by confirming the fee arrangement in the engagement letter, whether it’s an hourly fee, a contingency fee, or an alternative fee arrangement. Although attorneys are generally permitted to make some adjustments to fees after the representation has begun (such as for reasonable, annual increases in rates), attorneys may have less flexibility to make major changes to the fee arrangement after the representation has begun.

Because Model Rule 1.5(b) requires the attorney to communicate, preferably in writing, “the basis or rate of the fee and expenses for which the client will be responsible,” the engagement letter is an appropriate place to do so.

Include Nonassignability Language
As discussed above, typically a malpractice claim is only owned by the person to whom the attorney owed a duty. Courts often recognize that the relationship between attorney and client is unique, both as a professional relationship and as to the specific terms of the representation. Although many courts or states have expressly stated that malpractice claims against an attorney are not assignable to third parties, some jurisdictions are ambiguous or even permit assignments in certain circumstances. Thus, it is recommended that attorneys include nonassignability language in the engagement letter, agreed to by the client. Because the potential for abuse is great, a “no assignment” clause will help ensure that attorneys are held only to those duties implicated by the unique attorney-client relationship.

Although there is no way to remain completely immune from receiving a claim for legal malpractice, a fortified engagement letter can help defend against such a claim. Because an engagement letter that lays out the points recommended above also explains the relationship and expectations to the client, it may also make future misunderstandings (that can lead to claims) less likely to occur. By anticipating some of these issues at the outset of a representation, attorneys can improve their relationships with their clients and lessen the likelihood of a future claim.

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