When a new client appears at the front door of your law firm, do you see opportunities or risks?
Our firm's experience advising law firms on risk management issues demonstrates that law firms can incur substantial risks in the way that they manage the intake of new clients and matters. The focal point for these vulnerabilities is the engagement letter.
engagement letters, risks, and opportunities
Good engagement letters can be one of your firm's most effective risk management tools. However, in too many law firms, the engagement letter is no more than a boilerplate form, which lawyers consider as a nuisance, and which they send to the client with little thought about the implications for business risk, client relations, or potential claims for malpractice.
An engagement letter is, of course, a contract, the terms of which will be construed against its author (i.e., your firm). If an issue arises that is not adequately documented in the engagement letter, the firm could be defenseless against in a fee dispute or malpractice claim.
Almost as important is the engagement letter's value as a client relations document. Ensuring that the client has no misunderstandings about the scope, cost, terms, or other conditions of the engagement reduces the probability of insoluable disputes to almost zero. It also is the first step in demonstrating to the new client, especially, the importance to your firm of transparency and clarity in all aspects of the relationship with each client, no matter how large or small the matter.
Engagement letters not only help to manage the risk of fee disputes or malpractice claims.They also can eliminate many of the sources of the risk of client dissatisfaction. Even if the client pays the fee and does not file a malpractice complaint, a dissatisfied client can seriously harm your firm's reputation. This risk might be the most expensive one of all.
5 basic risk-management tests for each engagement letter
1. Is there a signed engagement letter?
This seems obvious, but a surprising number of law firms conduct entire engagements on faith, hoping that there will be no disputes with the client and that the client eventually will pay the fee. This flies in the face of the strong, but often unnoticed, positive correlation between fee disputes and the absence of a signed engagement letter. We advise our clients to observe this zero-tolerance rule: Do not begin any substantive work on a matter until the client has signed the engagement letter. No exceptions.
Even if the matter is genuinely urgent and the client's interests in the matter could be jeopardized by not starting work at once, at least have the client sign or confirm the basic scope and terms by electronic mail an interim engagement letter, subject to further elaboration in a full engagement letter.
Likewise, even if the client has a long-standing relationship with the firm, there still should be a distinct engagement letter for each new matter. Do not assume that the terms of previous letters, especially with respect to the scope of the engagement, will automatically be sufficient in a new one.
2. Are all of the client identities clearly identified?
Who is the client? Some law firms begin an engagement without every finding out this important detail. This will alert both the parties and the firm to potential multiple-representation conflicts issues, and the need to address disclosures and waivers in the engagement letter.
3. Is the scope of the engagement described accurately, completely, and with reasonable specificity about the services to be delivered to, or on behalf of, the client?
This might be the greatest single vulnerability for business risk in law firm engagement letters. When disputes arise, they often can be traced back to a disagreement about the nature and scope of the engagement. When trying to defend a poorly crafted engagement letter in a scope dispute, law firms typically have only two options, each of which can wipe out any profits that the firm had expected:
- If the client refuses to pay a fee, claiming that the service was outside the scope of what the client agreed, the firm frequently simply concedes the fee rather than try to argue that the engagement letter's defective description of the scope of the engagement creates an obligation on the part of the client to pay. (Except in the most outrageous situations, a law firm's contentions of "unjust enrichment" to the client seldom carry much weight.)
- If the client claims that the law firm has not delivered all the services that were engaged, most firms grudgingly deliver the service rather than risk a malpractice claim.
4. Are all of the financial obligations of the client clearly and completely described?
This one speaks for itself, but many law firms get into trouble when they try to rely on general descriptions, especially in the area of reimbursable expenses (e.g., "The client agrees to reimburse the firm for all reasonable and customary expenses that it incurs in its representation of the client.")
5. Can a non-lawyer client understand all of the terms and conditions?
If not, your firm is almost inviting misunderstandings, disputes, and client dissatisfaction. Even the most carefully written, reader-friendly engagement letter can mystify some clients. This is why, in every case involving a new client, we recommend that a lawyer -- not a secretary or billing clerk -- go over the engagement letter, line-by-line if necessary, to ensure that the client fully understands all of its terms and conditions. Assume nothing.
not 100% client-proof (nor 100% lawyer proof)
Despite my enthusiasm for engagement letters as highly-effective risk management tools, they are not airtight protections against an unreasonable client or an incompetent lawyer. It is therefore important to keep a sharp watch on the front door, to try to keep either of these risks from entering your firm.