USE OF ENGAGEMENT LETTERS TO REDUCE MALPRACTICE CLAIMS
By Thomas P. Sukowicz
Director of Lawyers' Risk Management Services
Hinshaw & Culbertson
In legal malpractice claims, sometimes the dispositive issue is whether the plaintiff was a client of the lawyer or whether the lawyer agreed to handle a certain matter. In such cases, an engagement letter addressing such issues as the identity of the client and the scope of the representation would help defeat the malpractice claim.Who Is the Client? One way to increase the risk of a claim is to leave unclear who you are representing. This can occur in a variety of circumstances and some courts use as the test for determining the existence of an attorney-client relationship the client’s subjective, but reasonable, belief that he is consulting a lawyer in that capacity and his manifested intention to seek professional legal advice. A person's subjective, reasonable belief may not become an issue if the lawyer puts in writing at the outset of the representation exactly who he is representing.
Some states, such as California and New York, require that all fee agreements be in writing when the matter involves more than a certain minimum dollar amount. Even in jurisdictions in which written fee agreements are not required, it is a good idea to use them.
The essential elements of an effective engagement letter are:
- identity of the client;
- the scope of the representation including, when appropriate, what the lawyer is not undertaking;
- the fee to be charged and the manner in which it is to be paid;
- the consequences of non-payment including the lawyer's right to withdraw;
- the client's duties;
- dispute resolution; and
- any ethical issues.
The engagement letter should be signed by the client, as evidence that the client accepts the terms contained in the letter.
Absent a clear statement of the clients being represented, a lawyer's conduct may, by implication, create an attorney-client relationship between the lawyer and someone he did not intend to represent. That was the finding in Kotzur v. Kelly, 791 S.W.2d 254 (Tex. App. 1990), where an attorney was retained by a man who was selling 225 acres of land to his two sons. The sons did not retain another attorney, but believed that their father’s attorney also represented them. When they later learned of a lien on the property, they sued the lawyer for malpractice. One of the sons testified that he thought the lawyer also represented him and his brother, stating, "As far as we were concerned, yes, as far as getting the papers legally fixed up." The attorney apparently was unsure about whether he represented the sons. He testified, "I didn’t feel I was dealing with two different parties here." He also admitted that he prepared the documents related to the transaction for the Kotzurs on a "family-type basis." The settlement statement also reflected that he charged the sons $750 as attorneys fees. The court reversed the summary judgment that had been entered in favor of the lawyer and remanded the case for trial.
When a lawyer is involved in a transaction involving parties who are not represented by their own attorneys, it is prudent to put in writing who the lawyer is representing, and who the lawyer is not representing. Such a writing could prevent a non-client from even making a claim that the lawyer represented him.
Scope of the Representation To avoid a claim based on breach of a duty the lawyer never thought he undertook, it is helpful to specify in an engagement letter the scope of the representation. When a lawyer intends to handle less than all possible aspects of a client’s legal matter, it is the lawyer's responsibility to make sure the client understands the limitation of the engagement. Many courts have held workers’ compensation attorneys liable for malpractice for failure to either file a third party action or advise the client they were not going to handle those actions. Although it is permissible for an attorney to limit his representation to a workers’ compensation claim, he should advise the client that there may be other remedies that he will not investigate or pursue and that the client should consult other counsel on those matters. This advice should be included in writing in the engagement agreement.
Even a written engagement agreement that states what the lawyer is handling (such as a workers’ compensation claim) but is silent as to the other aspects of the client’s legal matter, will not protect the lawyer from liability. In Campbell v. Fine, Olin & Anderson, P.C., 642 N.Y.S.2d 819 (1996), the court held that a client’s signature on preprinted form called “Notice of Retainer and Appearance” indicating that the attorney represents the client in the workers’ compensation case does not defeat a claim of malpractice for failure to advise the client of possible remedies against third parties. The court stated that an attorney has an affirmative duty to ensure that the client understands any limits on the work that the attorney will perform. A lawyer’s silence about any third party claims does not discharge that duty.
Any vagueness regarding the scope of the lawyer's retention may be construed against the lawyer. In Atkin v. Tittle & Tittle, 730 So. 2d 376 (Fla. Dist. Ct. App. 1999), a lawyer represented the purchasers of a vacant lot on which they wanted to build a single family home. The lawyer was concerned about whether the clients could build the house without violating the contiguous lot rule in that jurisdiction and carefully included a contingency regarding that issue in the contract to purchase the lot.
After the closing, when they were preparing to build the house, the purchasers were told that the lot was not zoned for a single family house. The couple then successfully sued the lawyer for malpractice based on his failure to address the zoning issue. The lawyer contended that zoning was not within the scope of his engagement, but the court found that, because the lawyer agreed to address the contiguous lot issue, he understood to determine lot buildability, which included zoning for a single family house. If the lawyer's engagement agreement had specified that his engagement did not include advise as to land use and zoning options, the litigation and the resulting liability could have been avoided.
Conflicts of Interest If there are ethical issues apparent at the outset of the attorney-client relationship, such as an actual or potential conflict of interest, those issues should also be addressed in the engagement letter. For example, there may be multiple clients with potentially conflicting interests. In litigation in which a corporation and an officer, director or employee have been named as defendants, the interests of the corporation and the officer, director or shareholder may be potentially adverse. In such cases, the possible conflict should be identified in writing. If the law firm seeks to represent both, then both should sign a consent to the representation after acknowledging that the conflict and its consequences have been fully disclosed. Other situations that should be addressed include seeking a waiver of future conflicts.
Staffing and Communications
The engagement agreement should identify the attorney who will be primarily responsible for the matter, any other attorney or paralegal who will be assigned to the matter and any outside experts or consultants.
Describe the frequency and form of communications with the client, identifying the person or persons the client should contact with any questions. Inform the client of the firm's policy regarding the time within which calls, will be returned and what to do if a timely response is not received. State the firm's policy regarding the use of faxes and e-mail to the client and obtain the client's consent to such communications.
Client's Obligations Clients are not always familiar with legal processes and often do not understand the role they must necessarily play in assisting the lawyer. Identify issues that must be decided by the client and when those issues may arise. Inform the client that he or she must communicate and provide information, documents and records needed for the legal matter. Clients should be told to inform the law firm of any changes in address, telephone number and employment. If the client is an entity, any changes in the client's structure, organization, ownership or affiliation with other entities should be reported to the lawyer.
Fees Engagement letters should clearly state the basis on which fees will be charged and the manner of billing and payment. If the fee will be hourly, specify the respective billing rates of all lawyers and other professional staff. If the fee is contingent, the ethics rules of most states require that the fee agreement explain the percentage that accrues to the lawyer in the event of settlement, trial or appeal, the expenses to be deducted from the recovery and whether those expenses are to be deducted before or after the contingent fee is calculated.
The engagement agreement should also inform the client of the consequences of non-payment of fees when expected, such as the firm's withdrawal.
Dispute Resolution The manner in which disputes between the law firm and the client will be resolved should be included in the engagement letter. Mediation and arbitration are generally desirable alternatives to law suits. Lawyers should distinguish between fee disputes and malpractice claims and consider separately whether the claims should be the subject of a dispute resolution clause in the engagement agreement.
In some jurisdictions, there may be restrictions on a lawyer’s ability to include mandatory arbitration clauses in engagement agreements. For example, an Ohio ethics opinion states that a lawyer may not require a client to prospectively agree to arbitrate fee disputes, malpractice disputes or disciplinary issues and that such clauses may be included in engagement agreements only if the client is given an opportunity to consult with independent counsel. In other jurisdictions, courts have held that there is nothing inherently improper about arbitration clauses as long as the client is fully informed of the possible consequences of the agreement. Other courts have upheld arbitration clauses for malpractice claims even without disclosure of what rights the client would be waiving by entering into the agreement.
When considering the inclusion of an arbitration clause in an engagement agreement, first determine whether your jurisdiction limits or prohibits the use of such clauses.
Conclusion To reduce the risk of claims, use written engagement agreements that clearly state who the lawyer is representing; the scope of the representation including, when appropriate, what the lawyer is not undertaking; the fee to be charged and the manner in which it is to be paid; the consequences of non-payment; staffing; communications; the client's duties; dispute resolution and any ethical issues such as conflicts of interest and waivers of any such conflicts.
Using engagement letters should not only help reduce the risk of claims, but should also help improve client relations by giving the client a clearer understanding of what to expect.