Newsletters & Articles
"Start Out Right: Engagement Letters"
This article by Marian C. Rice appeared in the June 2015 New York State Bar Association Journal, Vol. 87, No. 5., the Law Practice Management Issue, which was edited by Marian C. Rice.
Since 2002, New York attorneys have been required to enter into written engagement letters documenting the terms of their relationship with each of their clients.1 Matrimonial attorneys have had to do so for even longer.2 Every professional liability insurance application asks whether the attorney or law firm uses written engagement letters on each of its matters. According to Michael Furlong, Vice President – Underwriting at CNA Insurance Co., the NYSBA-endorsed professional liability insurer selected by our sponsored broker, USI Affinity, slightly more than 50% of law firms report regular use of engagement letters containing all the essential recommended elements of such letters. Yet less than 20% of law firms have utilized engagement letters in reported claims. Based upon current information, it seems the majority of claims filed against attorneys involved representations where the attorney and client did not enter into a written engagement letter.
Is there a correlation between the lack of a written engagement letter and legal malpractice claims? Welldrafted engagement letters will often prevent the misunderstandings that lead to claims. In other situations, the connection may not be as obvious. But the absence of a written engagement letter may be emblematic of a larger client communication issue, and poor client communication is a significant source of legal malpractice claims and grievances against attorneys.
The absence of a written agreement does not necessarily determine whether a client-attorney relationship exists. A clear, unambiguous engagement letter assists each of the parties in understanding their respective roles and promotes good client relations. Considering that the law is a service profession and there are so many law firms available, it is odd that poor client-attorney relationships continue to cause legal malpractice actions and grievances. Part of the problem is client perception. No one is ever at their best when hiring an attorney. When clients come to us, they have a problem and look to their attorney to fix it. At a minimum they are looking for responsiveness. Nevertheless, the 2012 study of the American Bar Association Standing Committee on Lawyers’ Professional Liability looked at a cross-section of legal malpractice claims during the period of 2008–2011 and reported that nearly 15% of all claims were caused by poor client-attorney relationships.3
One of the most important components of client satisfaction and a healthy client-attorney relationship is full and frank communication between the attorney and client. The first step toward the goal of client satisfaction is an understanding of the purpose of the retention, the terms under which services will be provided, and the respective responsibilities of the attorney and the client. The second step is reducing to writing the agreement reached with the client.
THE COURT RULES
Under Part 1215 of the court rules, written engagement letters are mandatory for all representations where the fee is expected to be $3,000 or more, unless the "services are of the same general kind as previously rendered to and paid for by the client." Similarly, the N.Y. Rules of Professional Conduct (Rules) require that the written engagement letter explain the scope of the services rendered and the fee and expenses to be charged, and contain a statement of the client’s fee arbitration rights under Part 137.4 A clearly written engagement letter will assist an attorney in complying with the ethical requirements as to the scope of engagement and allocation of authority between the attorney and client.5Attorneys handling domestic relations matters must comply with separate procedures detailed at Part 1400 of the court rules.
WHOM DO I REPRESENT?
Failure to address the seemingly simple question of the identity of the client leads to a host of problems ranging from confidentiality issues to conflict conundrums. As a result, the engagement letter should explicitly specify the identity of the client whose interests are being represented. Equally as important is a definition of those parties whose interests are not being represented by the attorney (with separate notification to individuals or entities who might believe their interests are being covered by the retention). When representing a business organization, particular care should be taken to explain to the constituents of the organization that the organization is the attorney’s client and the interests of the organization may not be aligned with those of the constituents.6 Engagement letters in the trusts and estates field should also identify the attorney’s client to avoid the common misconception by relatives of the client that the attorney is the "family" lawyer.
SCOPE AND SCOPE "CREEP"
Attorneys often labor under the misapprehension that the broader and more general the engagement letter, the greater the likelihood that additional services will be requested. One does not follow the other. It is certain, though, that a broadly worded scope of services provi sion will generate increased exposure to the attorney for services the original engagement may never have contemplated. It is perfectly acceptable for a lawyer to reasonably limit the terms of the engagement, provided the client knows of the limitations and gives his or her informed consent.7 A plainly worded provision setting forth the defined scope of the services to be performed is one of the most important risk management tools an attorney can adopt. If the intended engagement does not include appeals, the engagement letter should say so. If the attorney represents the executor but an accounting professional is separately retained by the estate to prepare the estate tax returns, spell it out in the engagement letter.
Do not let the services rendered "creep" beyond the originally defined scope without documenting the expanded services being provided. A simple amendment to the original agreement will suffice. Rendering services beyond those originally requested without documenting the increased responsibility vitiates the benefit of a finely crafted scope of services provision.
FEES AND EXPENSES
The court rules require that the engagement letter set forth the financial terms of payment. Additional issues that should be addressed include the frequency of payment, the definition of the expenses for which the client will be responsible, a general outline of the steps involved in the representation and the time frame within which the client may expect to know the outcome of the retention. Disputes over fees disrupt the client-attorney relationship and are a constant source of non-payment – or worse, malpractice claims and grievances. Estimating the cost of the representation, subject to updates as the matter proceeds and unanticipated events occur, will go a long way toward avoiding misunderstandings. If the client’s reaction to the cost of the engagement is of concern at the outset, the problem will not get better with time. Even stellar results pale when attorney fees mount beyond the client’s expectations.
An engagement letter is a contract, the terms of which are set once executed. As the Court of Appeals has recognized, however, "attorney-client fee agreements are a matter of special concern to the courts and are enforceable and affected by lofty principles different from those applicable to commonplace commercial contracts."8A revised fee agreement entered into after the attorney has already provided legal services is reviewed with heightened scrutiny, because a confidential relationship has been established and the opportunity for exploitation of the client is enhanced.9 Rule 1.5 states that "[a]ny changes in the basis or rate of the fee or expenses shall also be communicated to the client." If it is anticipated that hourly rates may change throughout the representation, the engagement letter should spell out the circumstance warranting change. Additional factors which may negate the ability to change the terms of compensation include the sophistication of the client and the timing of the requested change. To condition the continuation of legal work when deadlines loom on the renegotiation of legal fees is impermissible.10
An attorney may not charge unreasonable fees or expenses.11 The factors that weigh in on reasonableness include:
1. the time and labor required;
2. novelty of the issue presented and skill required to perform the requested tasks;
3. the extent to which the engagement would preclude the attorney’s ability to service other clients;
4. the usual and customary fee for similar services;
5. the amount involved and the results obtained;
6. the time limitations imposed by the client or the circumstances;
7. the nature and length of the client-attorney relationship;
8. the experience and reputation of the attorney; and
9. whether the fee is fixed or contingent.
No one factor is determinative. Rather, the "reasonableness" of the fees provided for in the engagement letter is the client’s understanding of the amounts charged and the reasons for the fee structure. However, even if a client has provided his or her informed consent in advance, a fee disproportionate to the work performed will not be allowed and may form the basis for a grievance and order of restitution. The burden of demonstrating that the engagement letter is "fair, reasonable, and fully known and understood by their clients" rests with attorneys.12
The engagement letter should also spell out the consequences of the client’s failure to timely pay legal fees owed. The tolerance a law firm has for unpaid invoices may differ from client to client, but keeping track of troublesome accounts receivable and taking appropriate action if requests for payment are ignored is an important function of firm management. Conservative estimates place the likelihood of a legal malpractice counterclaim in response to a suit for fees at 25%,13 with anecdotal reports at more than double that figure. There is no question that suits for unpaid legal fees provoke retaliatory malpractice claims. While the ability of a law firm to extricate itself from an engagement in New York depends upon compliance with Rule 1.16 and, if the matter is litigated, permission of the tribunal,14 attorneys must pay close attention to accounts receivable and ensure clients do not fall too far behind in payment without addressing the issue. If a dispute over fees arises, work with the client and take advantage of the Part 137 arbitration program mandated by the court, as well as mediation programs sponsored by bar associations.
The adage that clients build relationships with attorneys, not law firms, is true. No client appreciates being passed to another attorney the moment the engagement letter is signed. To foster the trust and confidence of a client, it is important to identify from the outset the attorneys involved in the representation. Introduce the involved attorney(s) at the first meeting. Given the ever-increasing penchant for lateral movement in the legal profession, circumstances and even the subject matter of engagements may shift with time. As a result, the engagement letter should indicate that the law firm reserves the right to appropriately staff the engagement. If there is a change of assigned attorneys, get ahead of the issue by advising the client up front and do not charge the client for the time incurred in getting the new attorney up to speed.
The scope of an attorney’s ethical obligation to communicate with his or her client is set forth in Rule 1.4. An attorney must keep the client apprised of all material events in the representation and promptly respond to the client’s reasonable requests for information. Remember that this ethical rule is not aspirational. It is conduct required in order to avoid attorney discipline. Fostering a strong client-attorney relationship requires more than the minimum mandate.
Misunderstandings can be avoided by an upfront agreement as to the frequency and means by which the client will be kept apprised of the status of the proceedings. Addressing the issue in the engagement letter manages expectations from the start. While email has become a common means of communication, attorneys must caution their clients that no client-attorney privilege will attach to substantive communications made where there is a significant risk that the communications will be read by a third party.15
If an actual or potential conflict of interest exists, the manner in which the conflict is being addressed should be spelled out in the engagement letter. The ability to identify, analyze and resolve conflicts of interest is a critical component of being a good lawyer. It is not always easy. Discuss issues that arise with your colleagues (without divulging confidential information) and take advantage of ethics hotlines. If a conflict exists, the client’s informed consent must be obtained for any waiver to be effective. To obtain the client’s informed consent under the Rules of Professional Conduct, an attorney must provide the client with sufficient information so the person can make an informed decision after the attorney has explained the material risks of waiving the conflict and the reasonably available alternatives.16 Remember that not every conflict can be waived and that the consequences of failing to adequately analyze a conflict can be devastating to both the client and the law firm.
THE CLIENT’S FILE
Attorneys are obligated to ensure a litigation hold is in place and the preservation of data is maintained from the moment it becomes reasonably evident that a dispute exists. Reference to the client’s role in the preservation obligation should be spelled out upon engagement. While the details of the client’s obligations should be outlined in a separate document (and reiterated throughout the engagement), a cursory reference to the need for the client to safeguard data and cease routine document destruction policies is warranted.
The disposition of a client’s file following the conclusion of the engagement should also be addressed up front and reiterated when the representation ends. While Rule 1.15(d) requires attorneys to maintain specified bookkeeping records for a period of seven years, there is no similar bright line rule articulating the period of time for retaining closed client files. Various appellate rules mandate that virtually every document in a file involving a claim for personal injury, property damage, wrongful death, loss of services resulting from personal injuries, due to negligence or any type of malpractice, and claims in connection with condemnation or change of grade proceedings, be maintained for seven years as well.17These court rules, however, do not authorize the law firm to destroy the client’s file when the representation is concluded.
Ethics opinions divide the components of a closed file into four general categories: (1) documents belonging to the attorney; (2) documents the attorney is under a legal duty to keep; (3) documents the client must keep; and (4) the remaining majority of documents found in an attorney’s file.18 Documents belonging to the attorney may be disposed of provided the lawyer has no other legal duty to keep the materials and there is no apparent indication the client has a need for the file. The problem with this subjective analysis is evident. All of the opinions sidestep the issue as to what constitutes documents belonging to the client because this issue is a question of law for the courts. The Court of Appeals has held that upon termination of a client-attorney relationship, where there is no claim for unpaid fees, the client is presumptively accorded full access to the entire file, including documents otherwise considered attorney work product.19 If one employs the analysis utilized by the majority of the ethics opinions on the issue, there is little in a file that may be unqualifiedly categorized as materials belonging to the attorney.
Outlining the attorney’s document retention policy in an engagement letter is the first step in advising the client that there is a finite period of time in which copies of the file may be obtained. Reiterating the policy at the time the representation terminates provides the client with the opportunity to obtain the file if desired before destruction. Purely for the purposes of risk management, the retention policy should exceed the longest period of limitation applicable to claims against attorneys and a copy of the file should be maintained before it is returned to the client during that period. Technological advances in scanning documents makes this process less cumbersome than retaining hard copies of the documents.
The practice of law requires implementing administrative obligations that didn’t exist in years past. The requirement that written engagement letters be entered into in most representations, however, has given us the opportunity to develop open communications with the client from the start. The time taken to draft a clear and unambiguous engagement letter will repay the attorney many times over by fostering a good relationship with the client, increasing prompt payment for services rendered and reducing the possibility of a malpractice claim or grievance.
MARIAN C. RICE, current co-Chair of NYSBA Law Practice Management Committee and past President of the Nassau County Bar Association, is the chair of the Attorney Liability Practice Group at the Garden City law firm of L’Abbate, Balkan, Colavita & Contini, LLP and has focused her practice on representing attorneys in professional liability matters for more than 30 years.
1. N.Y. Comp. Code, R. & Regs. tit. 22, pt. 1215 (N.Y.C.R.R.).
2. 22 N.Y.C.R.R. pt. 1400.
3. See Profile of Legal Malpractice Claims 2008–2011 (ABA 2012).
4. 22 N.Y.C.R.R. pt. 137.
5. Rule 1.2.
6. Rule 1.13(a).
7. Rule 1.2(c).
8. In re Cooper, 83 N.Y.2d 465, 472 (1994).
9. In re Lawrence, 24 N.Y.3d 320 (2014); see, e.g., NYSBA Ethics Op. 910.
10. Brooks v. Lewin, 48 A.D.3d 289 (1st Dep’t 2008).
11. Rule 1.5(a).
12. Shaw v. Mfrs. Hanover Trust Co., 68 N.Y.2d 172, 176 (1986).
13. 1 Legal Malpractice § 2:113 (Thompson Reuters 2015).
14. CPLR 321.
15. ABA Formal Op. 11-459.
16. Rule 1.0(j).
17. See, e.g., 22 N.Y.C.R.R. § 691.20(f) "Preservation of records of claims and actions."
18. The Association of the Bar of the City of New York Comm. on Professional & Judicial Ethics, Formal Op.1999-05; New York County Lawyers’ Ass’n Comm. on Legal Ethics, Formal Op. 725 (1998); NYSBA Comm. on Professional Ethics, Op. 623 (1986); The Association of the Bar of the City of New York Comm. on Professional & Judicial Ethics, Op. 1986-4; Nassau County Op. 81-10.
19. Sage Realty v. Proskauer Rose Goetz & Mendelsohn, LLP, 91 N.Y.2d 30 (1997).`
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