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LPLC: Reasons to get engaged

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Cite as: September 2012 86 (09) LIJ, p.73

Engagement letters are a vital tool for minimising risk of claims.

A common misconception is that most claims against practitioners arise because they got the law wrong, either by not knowing the applicable law or applying the wrong legal principles. While such claims account for a significant portion of LPLC’s total claims cost, a higher cost is attributable to claims where the underlying causes are characterised as poor engagement (retainer) management and communication.

These underlying causes underscore the importance of engagement letters as a risk management tool. An engagement letter is one of the first steps in effectively managing any retainer and the client’s expectations. It should formally communicate to the client, at the outset of the retainer, the parameters of agreed work.

LPLC’s experience is that many claims would not exist if the practitioner had put more thought into the engagement letter or, in some cases, sent one at all. When law firm files are audited for risk management purposes, engagement letters are usually near the top of the checklist. Many firms now have practice management systems which prevent matter opening, time recording or billing without an engagement letter.

What should the letter contain?

Every matter should have an engagement letter (acknowledged in some form by the client), including new matters for existing clients.

Unfortunately, engagement letters are regarded by many practitioners and clients as a non-billable formality and merely a means of providing mandatory costs disclosure information. Consequently, engagement letters are often treated with some indifference.

One way for practitioners to evaluate their engagement letters is to think about the advice they would give another professional on setting up a basic contract for services. Practitioners might then think about how their own engagement letters measure up to that advice.

Before accepting new instructions, practitioners always need to consider whether they should act, taking into account issues of client selection, expertise, potential conflicts, workload and resources, as well as being clear about what work they will and will not do. Another question is whether the retainer will be subject to any conditions or limitations. Practitioners are then in a position to set out, in writing, what they are going to do and the basis on which they are retained to act.

As practitioners owe duties to their clients, it is essential that all clients on a matter are identified and provided with an engagement letter. LPLC frequently sees claims by a person or organisation whom the practitioner never considered to be their client. To avoid such situations, it is often critical that the engagement letter specifies whom the practitioner is not advising and that the practitioner likewise informs unrepresented parties.

If a practitioner is representing multiple parties on a matter, the engagement letter can anticipate and address sources of potential conflict and confusion. For example, it can deal with issues such as the person from whom instructions are to be provided and to whom the practitioner is to report, liability for costs and sharing of joint clients’ confidential information. Issues about representation and access to documents in the event that clients’ interests diverge or the retainer is terminated can also be addressed upfront.

Specifying exactly what the practitioner will do is one of the most important parts of any engagement letter. Even where repeat work is done for a client under some overarching agreement, the scope of work, at the very least, should be documented for each mandate. As with client identification, it can be crucial for a practitioner to specify any aspects on which they will not be advising. This is especially important if other advisers, such as accountants, are involved in the matter or certain tasks are allocated to the client. In the absence of effective definition or limitation of the scope of work, a practitioner could be seen to owe broad duties to their client.

While scoping needs to be undertaken on a matter-by-matter basis, practitioners can be proactive. For example, a practitioner who frequently advises on commercial transactions may not have tax law expertise. It may make sense for that practitioner’s standard engagement letter to contain a carve-out regarding tax issues (strictly adhered to by the practitioner) to help avoid misunderstandings that the practitioner was retained to give tax advice.

The engagement letter can provide other information of importance to the client, such as details of personnel assisting the practitioner, billing arrangements, frequency of reporting to the client and how the practitioner may end the retainer.

Often, circumstances change and a matter evolves such that a practitioner’s work extends beyond what was initially understood to be required. “Retainer creep” therefore occurs. Additional parties, perhaps having an expectation that the practitioner will act in their interests, may become involved or tasks may be reallocated during the course of a matter. Whenever a retainer changes, the practitioner should ensure it is documented and sent to the client.

Apart from anything else, provision of the important information found in an effective engagement letter is proper client service. However, it is also critical for managing practitioners’ risk of exposure to claims.



This column is provided by the Legal Practitioners’ Liability Committee. For further information ph 9672 3800 or visit www.lplc.com.au.

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