Engagement letters are worth their weight in gold. Here’s why
Failure to complete a basic engagement letter with clients can leave legal practices exposed to serious business and financial consequences, and such inaction also removes the chance for the firm to build stronger ties with clients, writes Merinda Timpany.
“I don’t have time to prepare an engagement letter? The client wants me to get on with urgent work and we’ve verbally agreed what I will charge.”
It turns out that you should prioritise your engagement letter. Why?
1. Because you are required to.
Every Australian state, and most overseas jurisdictions, require an engagement letter containing specific information.
The majority of Australian legal practitioners are regulated by the Legal Profession Uniform Law (LPUL), which applies in New South Wales and Victoria and which will apply in Western Australia from July 1, 2020.
Prior to the LPUL, each state had its own Legal Profession Act and corresponding rules, and these still apply in Queensland, South Australia, the Australian Capital Territory and the Northern Territory.
The disclosure requirements differ by state and may be influenced by how sophisticated your client is and what the work involves. For example, litigation is likely to require additional disclosure about the amount you may obtain as part of a costs order if you are successful, or conversely that you may be required to pay if you are unsuccessful. You also need to ensure that any fee arrangements are compliant with your rules – for example, all Australian jurisdictions prevent you from charging a percentage of the settlement or acquisition value. Lawyers are not real estate agents.
2. Because it provides certainty for you and your client and sets expectations.
An engagement letter typically covers off the following elements:
- At its most basic, it sets out who the client is – which is not always as obvious as it sounds. For example, is it the company or the individual director; is it a joint venture, or one party to the joint venture?;
- It says who is doing the work – the supervisor and team of individuals and, in the case of increasingly connected law firms, the particular practising entity doing the work;
- It sets out what you will charge and how; and
- It sets out your professional obligations, including confidentiality, and your method of communication, how you will address conflicts of interests, data protection obligations, retention of documents, and termination rights.
3. Because you set out what you will and, crucially, what you will not do
The more detailed you can make your scope the more you will benefit from the advantages of having an engagement letter. It is not sufficient to state that ‘we will deal with all legal aspects to your purchase’. What exactly does that involve in terms of advice, correspondence, due diligence, searches, and work from additional consultants? What work are you not doing? If you are not providing tax advice you should say so, but equally if the client is dealing with aspects in-house or via other professional service providers, confirm how that is being done.
4. Because you are more likely to be paid
You are much more likely to be paid if you honestly and openly communicated the likely fees and the different factors that may influence the final fee. This is because clients are more likely to pay fees that equal their expectations and not fees that exceed their expectations.
If you have this in writing you are much more likely to be able to take action to enforce outstanding amounts, including interest, and show what the payment terms were. This is particularly true when the scope has changed during the life of the matter (some matters are fast moving, and the client may change their mind or the instructing personnel may change). You need to have any changes in writing, or you may have done the work for free.
5. Because if there is a potential claim, you and your insurer may need to rely on what you said you would do and the terms setting out how you would work
There is less likely to be a complaint or claim if you have clearly set out the basis on which you are working, but if there is a problem you are more likely to have protection. If the client subsequently claims that they thought you were going to advise them about an issue, you can prove what was agreed.
‘I have sent my engagement letter and now I can get on with work.’
Actually, no – you need to consistently revisit the engagement to ensure that nothing has changed. This is particularly true of scope and cost – if you do not re-scope extra areas you may do work that you cannot charge for, or you may be liable for advice you did not think you were providing.
Beyond the problems that can emerge if you do not send an engagement letter, it is often your first opportunity to impress your client and it is your chance to set the tone of your future communications.
In short, the letter allows you and your client to move forward with a shared understanding of the path ahead.
Merinda Timpany is Regional Risk Manager & Senior Legal Counsel, Australia & Middle East, for DLA Piper.