Risk: Letters of engagement – why they matter

How well do solicitors engage? was published by the Scottish Legal Complaints Commission in May, following a review of over 80 engagement letters or terms of business. While the findings were generally positive, it highlighted a real variation as to the clarity and therefore effectiveness of the documents used.

This suggests that as a profession there is room for improvement in how we document our engagement with clients. As one of the Master Policy panel solicitor firms, we can attest to the difficulties created or exacerbated by inadequately framed appointment documentation.

A well drafted letter of engagement or equivalent is a crucial part of a professional’s risk management toolkit. It documents the business relationship we enter into with our clients, and is far more than a “tick box” requirement in order to comply with rule B4: Client communication. The SLCC’s recent report should prompt us to reassess how best to meet our obligations in this respect.

Managing expectations

All too commonly, claims and complaints materialise from clients facing an unexpected situation. From experience, this often arises not so much from the outcome achieved in a transaction or litigation but from a failure to manage the client’s expectations along the way.

For example, clients are typically concerned about what their matter will cost, and transparency is key to managing their expectations. It is often difficult to stipulate how much a piece of work will cost, but at the very least the client should be made aware of the method by which fees will be calculated (typically, but not exclusively, hourly rates). The more transparent the information, the less risk of confusion arising.

Poor communication is consistently the most common source of complaints and can often be traced back to a failure to set out clearly for your client how you intend working with them. Your engagement documentation should set the “ground rules” and can set the tone of an instruction, so it is recommended that you communicate in a manner which is as clear and concise as possible. As solicitors, while we might pride ourselves in the ability to draft complex documents, our regulator and complaints body are less impressed with this approach when it comes to communications with clients. In its report the SLCC considered that only one third of the sample documentation it reviewed would be easily understood by a client.

It is wise to stipulate who a client’s point of contact will be; how you intend to communicate with the client; and should there be multiple clients, which of them it is agreed should be the point of contact for instructions. We have seen this last point giving rise to multiple claims and complaints and it appears to be commonly overlooked. It is not uncommon for a solicitor to take instruction from a majority of, rather than all, executors, but this can lead to issues if there is later a dispute between the executors where one or more of them were not consulted. It will be uncomfortable for a solicitor who is unable to demonstrate that their intention to liaise with select, or a majority of, executors was clearly communicated and consented to.

This is certainly not an exhaustive list of topics which ought to be addressed in a letter of engagement, but the Master Policy brokers, Lockton, have produced a helpful guide on this, and it is worth reviewing this before updating any existing terms of business.

Limiting liability

It is good business practice to include a limit of liability in our contracts with our clients. Legal practices should consider their insured limit of indemnity and tailor their letters of engagement accordingly, to minimise the risk of being liable for an amount in excess of their insurance cover.

As with all contracts, limitation clauses will have to survive the reasonableness test in the Unfair Contract Terms Act 1977. This may include a situation where a cap on an organisation’s limit of liability is significantly below the value of the transaction it is advising on. Such a cap may be open to challenge if it were ever sought to be relied on.

It’s worth noting that the Law Society of Scotland considers that liability should not be capped below the minimum level of Master Policy cover (currently set at £2 million), and also that doing so would almost certainly be considered unsatisfactory professional conduct (see para 4.05 of Law, Practice and Conduct for Solicitors).

To ensure any terms containing liability limitations are sound, they should be set out expressly, as ambiguous terms are more likely to be construed by the courts in favour of the weaker negotiating party (likely the client). To avoid “unfairness” under the 1977 Act, terms and conditions must also be reasonable in all the circumstances, bearing in mind the identity of your client and nature and extent of your relationship with them.

Scope of the instruction

What we undertake to do for our client dictates to a large extent the duties incumbent upon us. Landmark cases on the scope of a professional’s duty have had, and will continue to have, repercussions across all professions. 

The Supreme Court in Manchester Building Society v Grant Thornton LLP [2021] UKSC 20 built on the principle that determines whether damages for negligence are recoverable, holding that there must be a link between the loss suffered by a client and the scope of the duties assumed by the (allegedly) negligent professional advising them. The court will consider exactly what risks the professional’s advice was intended to protect against, taking into account the relationship between the two parties. This highlights the importance of carefully considering the purpose of your instruction and ensuring that is clearly documented. 

As important as setting out what you will do for a client, is being clear on anything you specifically will not advise on. Unfortunately, the Master Policy is regularly engaged in respect of claims where a solicitor has provided advice beyond the originally intended scope of their instruction. Particularly prone to this trap is advice relating to tax. It is quite common for terms of business to exclude tax advice, but since many solicitors have some understanding of it, and a desire to help clients as much as possible, there is a risk of straying into commenting on matters beyond their expertise and intended scope. We frequently see such advice being given ad hoc, or verbally, without an appreciation of the potential repercussions. Even if such advice was specifically excluded by the terms of business, should a solicitor go on to advise on it, even if informally, they may be held liable for losses incurred by their client should that advice transpire to be negligent.

A client’s “end goal” might be modified due to any number of factors, and such a change of tack can result in work being undertaken which was not as originally set out. Known as “mission creep”, this can be particularly difficult to identify when the change occurs organically or gradually. There is nothing untoward about this in itself, but if the engagement documentation no longer adequately addresses the current instruction, it could leave the professional firm vulnerable should a dispute later materialise and they require to fall back on the recorded terms of their instruction.

It is helpful to include a clause in a letter of engagement which states that, should a client’s instruction vary, greater time and cost may be incurred. This however is no substitute for regularly reassessing whether the scope of instruction is accurately documented and whether a fresh letter of engagement requires to be issued.

Existing clients

Repeat instructions are usually welcome and indicate that a client is happy with the service they are receiving, but can make it easier to overlook issuing appropriate engagement documentation. Some practices might be repeatedly instructed by the same client for the same type of work (e.g. high volume recovery litigation), and issuing repeat information at the outset of each new matter can fall down or off the “to do” list. Engagement letters with any relevant T&Cs attached constitute our contract with our client, but they are matter specific, so if an engagement letter is not issued for each new matter, the contract is open to greater interpretation. In these situations, an “umbrella” or “framework” contract with the client should be considered.

Some professionals undertaking several instructions for the same private individual might worry that issuing contractual documentation on each new instruction could frustrate clients. Experience shows this is more common with sole traders or small firms across professions beyond solicitors, but highlighting that you are obliged to issue such material by the Law Society of Scotland should help minimise any awkwardness. Ultimately the consequences of not complying with this rule could significantly outweigh any perceived short-term benefit.

One size does not fit all

There is no “one size fits all” approach when it comes to documenting an engagement with clients as, for the most part, each instruction is unique. Having a template available is a useful starting point and can help ensure compliance with rule B4 when we are otherwise focused on getting on with the job. However, seek to avoid over-reliance on templates, as the importance of issuing a client and matter specific letter of engagement cannot be overstated.

It follows naturally that any template should be revisited on a regular basis to ensure it still meets requirements. Delegating this task to a few select individuals or a committee can help ensure the task does not become lost in the plethora of administration involved in running a legal practice. Updates may be required more frequently, but it is wise to diary a time to revisit letters of engagement at least annually. That might be at the beginning of a new financial year, ahead of insurance renewal, or following any increase in the hourly rates charged.

Getting your scope of business accurately captured first time around is the goal, but there are various elements which can frustrate that. As some of the examples mentioned above demonstrate, it is useful to reconsider the terms of your instruction regularly, and if necessary, supplement a previously issued letter of engagement. Ensuring the whole organisation understands the importance of this can go a long way to securing timeous issue and revisiting at appropriate stages.

Setting out specific expectations and boundaries in engagement letters can serve to protect professionals in the event of any future misunderstandings that could lead to a complaint or claim.