Minding Your Own Business: Creating a Strong Attorney-Client Relationship
8.9.2024
Lawyers strive for two key goals: providing excellent and efficient legal services while maximizing profitability. While the former is crucial for client satisfaction and professional reputation, the latter ensures sustainability and growth for law firms. One often overlooked tool in achieving both objectives is the lawyer engagement letter. The same way attorneys create strong contractual relationships for their clients’ interests, attorney engagement letters with clients are the bedrock of a fruitful attorney-client relationship, setting the stage for clear communication, defined expectations and a smooth legal process. Crafting a well-structured engagement letter that anticipates how the attorney-client relationship can be tested not only helps prevent misunderstandings but can also significantly impact an attorney’s profitability.
Understanding the Importance of Engagement Letters
An engagement letter serves as a contractual agreement between a lawyer and a client, laying out the terms and conditions of their legal representation. While not always legally required, a well-drafted engagement letter is essential for several reasons.[1]
Clarity and Expectations
By clearly defining the scope of legal services, timelines, responsibilities and potential outcomes, engagement letters ensure that both parties have a mutual understanding of the terms of engagement. This clarity helps manage client expectations and reduces the likelihood of misunderstandings or disputes down the line.
Risk Management
Engagement letters can serve as a shield against malpractice claims or fee disputes. By clearly documenting the agreed-upon terms, including any limitations of the lawyer’s responsibilities and liabilities, these letters provide a clear record of the client’s consent and understanding of what the lawyer’s role will be while mitigating potential legal risks.
Fee Agreements
One of the most critical aspects of engagement letters is outlining the fee structure and payment terms. By clearly defining the attorney’s hourly rates, flat fees, retainer fees, billing procedures and any additional costs or expenses, lawyers can avoid ambiguity and ensure timely payment for their services.
Strategies To Insulate Attorney Profit
The engagement agreement not only provides clarity on the terms and conditions of the engagement but can also be leveraged to insulate attorney profitability. In this section, we discuss some of the ways in which an attorney can structure the engagement agreement to insulate profitability.
Detailed Scope of Services
One of the most important tasks is to thoughtfully draft the scope of services covered by the engagement agreement. Since engagement agreements may not be protected by attorney-client privilege, an attorney must be careful not to be overly detailed in the description of the scope of services.[2] Nonetheless, tasks and deliverables included in the representation should be specified with sufficient detail so that there is no ambiguity as to what is covered. Ambiguity in the scope of services can lead to a situation where the client expects unanticipated work to be performed without corresponding compensation, leading to lower attorney profitability.
Another factor to consider is whether the prospective client is expected to be a one-time client or a repeat client. For a one-time client, the scope of services should be narrow and specific. For clients who are expected to be a repeat client, an attorney may want to create a primary engagement letter, with sub-agreements for later matters. Regardless, an engagement letter should state that no legal services other than those specified in the engagement agreement will be performed without a mutual written agreement to expand the representation.
Clear Fee Structures
The foundation of a profitable engagement letter lies in a clear and transparent fee structure. The fee structure can be a traditional hourly fee structure, a flat fee structure, a contingency fee or some other hybrid arrangement. By offering clients options that align with their needs and budget, attorneys can attract a diverse array of clients while ensuring predictable revenue streams.
When drafting an engagement agreement, it is important to clearly identify rates, whether it is an hourly rate, contingency fee or a flat fee (or combination). For hourly fee engagements, the engagement agreement should specify the hourly rate of the attorney with primary responsibility for the matter, as well as the rate of anyone else working on the matter (e.g., other attorneys or paralegals). It is important to include a clause that says that rates may change over the course of the engagement and that the client will be notified as rates change. For flat fee engagements, only the amount of the flat fee needs to be included in the engagement agreement, so it is even more critical to be clear about what services will be performed for the flat fee. For contingency fee arrangements, the method used to calculate the fee should be clearly delineated in detail, including whether disbursements are included in the contingency fee.
Regardless of the fee structure of a particular engagement, a law firm should establish standard billing practices. Most law firms bill their clients in tenths of hours (i.e., six-minute increments), while others choose to bill in 15-minute increments. While summary invoices may be appropriate and acceptable for some clients, attorneys should always keep detailed records of time spent on each matter in case there is a future fee dispute or for cases in which attorneys’ fees may be reimbursable to the client by another party. Attorneys should always discuss the type of fee with clients in addition to sending the written engagement agreement to be sure the client understands the fee structure.
Expense Reimbursement
The engagement letter should also be explicit that the fee structures, whether flat or hourly, do not include expenses, court filing fees, expert witness fees or travel expenses. Marking up expenses charged to clients is discouraged as it jeopardizes the attorney-client relationship and is unethical in many cases.[3] The engagement letter should also authorize the lawyer to incur such expenses on behalf of the client and establish procedures for obtaining client approval for significant expenses.
Types of Retainers
An unfortunate reality for law firms is that all too often clients simply do not pay their legal fees, and lawyers are left either writing off significant sums or bringing an action against the non-paying client to recover the fees owed. The traditional way to prevent this is to require a retainer fee at the outset of the relationship. A retainer fee can safeguard a firm against non-payment and provide a steady cash flow. The amount of the retainer fee will vary depending on the matter.
With rising instances of clients failing to pay fees, “evergreen retainers” have become all but standard. Unlike the traditional retainer that is depleted as services are rendered, an evergreen retainer agreement requires that the client replenish the retainer to the full original amount as fees and expenses are charged against the retainer. The engagement agreement can state that failure to replenish the retainer to the original amount will result in work stoppage or withdrawal (subject to applicable ethics or professional conduct rules).[4] The engagement letter should state that any unused retainer will be returned to the client at the end of the matter.
If a retainer fee is required, the engagement agreement should be accompanied by a separate retainer invoice, which states the amount of the retainer fee and payment instructions. The engagement agreement should also state that the engagement begins only after the engagement agreement is signed and the retainer fee has been received.
Billing and Payment Terms
Establishing explicit billing and payment terms is crucial for protecting attorney profit. The engagement agreement should specify when invoices will be issued (e.g., monthly), when payment is expected (e.g., immediately or within 30 days) and any late fees or interest charged for overdue payments. Consider implementing automated reminder invoice systems to streamline the invoicing process and reduce administrative overhead.
Indemnification Clause
In order to protect the firm from third-party liability, many lawyers include in their standard engagement agreement an indemnification clause, which states that the client agrees to indemnify or compensate the firm for losses incurred due to damages or liabilities resulting from the client’s actions or failures to act. Of course, a client cannot be required to indemnify the law firm if there is an allegation of malpractice or misconduct by the attorney.
Termination and Withdrawal
Sometimes, it becomes necessary for the engagement to be terminated before the matter is concluded. A client is free to terminate the engagement at any time. However, the engagement letter should clearly state that the client is responsible for the payment of all fees and expenses incurred to the date of termination.
The engagement letter should also include the circumstances under which the attorney may terminate the representation, including non-payment of fees and expenses. In litigation cases, an attorney may not be able to withdraw from a case without court approval. Rather than engaging in motion practice in order to withdraw from a case in the event of non-payment, it would be prudent for the engagement agreement to state that the client agrees to promptly execute a Notice of Substitution of Counsel with the court if the attorney needs to withdraw for non-payment of fees.
Dispute Resolution
Despite best efforts to avoid litigation, fee disputes sometimes end up in litigation. In New York, Part 137 of the Rules of the Chief Administrator of the Courts (22 N.Y.C.R.R.) provides for the mechanism for arbitrating fee disputes.[5]
In the event that the client chooses not to participate in a Part 137 arbitration, or if the dispute is not eligible for arbitration under Part 137, it is a good idea to include terms regarding the dispute resolution process, forum and venue clauses. Many law firms include an arbitration clause and choose either JAMS or AAA as the forum, but fee dispute cases can also be brought in court.
Conclusion
Effective lawyer engagement agreements are more than just contractual formalities; they are powerful tools for protecting attorney profit while fostering positive client relationships. By clearly defining the scope of legal services, establishing transparent fee arrangements and setting clear expectations for communication and billing, lawyers can streamline their practice operations, minimize legal risks and enhance profitability. Investing time and resources in crafting comprehensive and client-friendly engagement letters is a strategic imperative for law firms seeking sustainable growth and success in today’s competitive legal landscape.
Sheila Tendy is the owner of Tendy Law Office, which serves as outside general counsel to corporations and not-for-profits. This article appears in One on One, the publication of the General Practice Section. For more information, please visit NYSBA.ORG/GEN.
Endnotes
[1]. The rules for when written letters of engagement are generally required – or not required – are found in Part 1215 of the Joint Order of the Appellate Divisions (22 N.Y.C.R.R.). Special rules regarding engagement letters apply to certain types of matters, such as domestic relations matters. See, e.g., Part 1400 of the Joint Rules of the Appellate Divisions (22 N.Y.C.R.R.).
[2]. See, e.g., HK Capital LLC v. Rise Development Partners LLC, 74 Misc. 3d 1201(A), at *2 (Sup. Ct., Kings Co. 2022).
[3]. Whether a marked-up fee is ethically permissible depends on whether the fee is for legal or non-legal services and the reasonableness of markup. See American Bar Association Formal Opinion 08-451 (2008).
[4]. See Rule 1.16(c) of the New York Rules of Professional Conduct (22 N.Y.C.R.R. Part 1200).
[5]. The full text of Part 137 is available at http://ww2.nycourts.gov/sites/default/files/document/files/2018-04/NyclaRules.pdf.
