First off, for those who don’t know differently: in the world of professional services firms an ‘Engagement Letter’ isn’t an expression of love to another. Indeed, for us an ‘Engagement Letter’ might better be phrased as a ‘Pre-nup agreement’!
What is an Engagement Letter and why are they so important?
In the world of professional services firms, an ‘Engagement Letter‘ can generally defined as being:
“A document that sets out the business relationship between a client and their law firm. This letter serves as an agreement between the parties on the terms of their engagement. This includes details on the services being offered, client responsibilities, deadlines and compensation.”
Engagement Letters can include more, but in short they set out:
- Exactly what the Scope of Services being provided are
- Who is assigned to do what, and
- How much the law firm will be paid by the client for doing said Scope of Services.
They are important for two main reasons: (1) on the part of the law firm they set out what the client’s expectations are – thus limiting the potential professional indemnity risk on the part of the firm; and (2) on the part of the client they set out the service standards, the expectations – they hold the law firm to account.
So, for both parties: a properly agreed to Engagement Letter sets out the expectations and assigns the risk – “win/win” as they say.
Two recent case studies
So let’s take a look at two recent cases that evidence just how important Engagement Letters are.
In the first case (a US-based medical case), a [medical] patient was billed US$230K for surgery having previously been advised – in their Engagement Letter – that the cost of the said surgery was estimated at US$1,300.
The Supreme Court in that case held that the estimate was protected by contract law, as no formal extension of scope letter had been issued and so the patient was only required to pay the US$1,300 original estimate.
Lesson Learnt: Send your out of scope (or extension of scope or variation of scope) letter out as soon as you are asked to do something that is not in your Engagement Letter.
In the second case (UK-based legal matter), a properly executed retainer agreement allowed a law firm to keep its agreed £300K fee, even though the bond issue that it related to was aborted.
Interestingly, the judge in the second case, His Honour Judge Paul Matthews, previously (as in a week earlier) made a comment – in reducing costs sought by a receiving party because all of the work was handled by a solicitor claiming grade A rates, that:
“it was not for the paying party to identify which work could have been delegated.”See here
Lesson Learnt: Engagement Letters need to be properly drafted; but, importantly – get yourself a Project Manager to manage the case so that they can constantly review the work and ensure that any Out of Scope work is immediately communicated.
My 5 hints on how to manage Engagement Letters
If you follow these 5 hints, I think you’ll find you have far fewer issues with getting your fees paid:
- The most important thing to remember is to have an Engagement Letter with your client!
- Once you have the Engagement Letter, remember that it is not a ‘set and forget’ document. Don’t sign it, then put it in the file and forget it. Keep a copy close to hand and review it daily.
- If, at any time, you see Scope Creep happening, send an immediate notification to your client that you are being asked to do tasks outside of the originally agreed Scope of Works.
- And by ‘client’ here, I don’t mean the person asking you to do the work, but the person who will be paying the bill (accepting they may be the same).
- Finally, if your project is big enough, put a Project Manager in charge of reviewing and managing all of this.
As usual, comments are my own and I welcome feedback.
Have a great week all.
Image credit goes to Scott Graham on Unslpash
Very wise counsel and especially helpful with the scope creep issue, which can develop a life of its own.
Thanks for the kind words Patrick