Use of Engagement Agreements to Reduce Malpractice Claims By: Thomas P. Sukowicz, Director of Lawyers' Risk Management Services, Hinshaw & Culbertson, LLP

Some malpractice claims are made against lawyers by persons the lawyers did not consider to be their clients, but who believed that the lawyer was representing them or looking out for their interests.  Other claims are made because the clients believed that the lawyer was representing them in all claims pertaining to an injury or occurrence, when the lawyers only intended to represent the clients in certain specific claims.  These and other claims may be avoided by the use of engagement agreements and non-engagement letters.

Engagement Agreements

While virtually all state ethics rules require that contingent fee agreements be in writing, some states require that all fee agreements be in writing when the matter involves more than a certain minimum dollar amount.  For example, California Business and Professional Code, Section 6148(a), requires that contracts for attorney services (other than contingent fee contracts) must be in writing when the total cost to the client, including attorney fees will exceed $1,000.  All parties must sign the agreement.  Failure to obtain the client's signature renders the agreement voidable at the option of the client.

In March 2002, New York adopted a rule requiring written engagement agreements in all matters in which the fee to be charged is expected to be $3,000 or more.  The agreements must explain the scope of the legal services to be provided, the fees to be charged, the anticipated expenses, the billing practices of the attorney and, where applicable, notice of the client's right to arbitration of fee disputes. 22 N.Y. Comp. Codes R & Regs. tit. 22, §§ 1215.1 – 2.

Even in jurisdictions in which written fee agreements are not required, it is a good idea to use them.  Many claims can be prevented if a writing exists clearly stating 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.

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.  For example, in the case of Bartholomew v. Bartholomew, 611 So.2d 85 (Fla.App. 2 Dist.1992), the court considered the claim of the husband and co-shareholder of a company that the attorney for the wife and the corporation also represented the husband.  The husband stated that he had spoken with the attorney “several times on the golf course” during which time he “felt . . . freely [sic] to talk just business in general.”  While the court in this case found that the husband did not have a sufficient basis for a reasonable belief that the attorney represented him, it is conceivable that if the husband had discussed more than just "business in general" with the attorney, the result may have been different.

The Bartholomew court held that one test for determining the existence of an attorney-client relationship is 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 reasonable belief may not become an issue if the lawyer puts in writing at the outset of the representation exactly who he is representing.  For example, when the lawyer agreed to represent the corporation, he could have sent an engagement letter stating that he only represents the corporation and not either of the shareholders, unless a shareholder specifically retains him for representation in a matter.  In Bartholomew the wife also retained the attorney to represent her.  A similar letter to the client stating that the lawyer's representation of the wife was limited to the specific matter for which he was retained and he was only representing the wife in that matter.

Without a clear understanding as to the identity 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.  In Kotzur v. Kelly, 791 S.W.2d 254 (Tex. App. 1990), the court found that an attorney may be liable for negligence to a person who believes the attorney is representing him when the lawyer fails to make it clear that he is not representing that party.  In that case, 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, 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 that are not represented by their own attorneys, it is prudent to put in writing who the lawyer is representing, and who he is not representing.  Such a writing could prevent a non-client from even making a claim that the lawyer represented that non-client.  In the Kotzur case, if the lawyer had sent a letter to the father indicating that he was only engaged to represent the father in the transfer of the land, it would have achieved two goals.  It would have clarified for the lawyer exactly who his client was, and it would have made it clear to his client, as well.  Although the client might have shared that information with his sons, the lawyer could also have sent a non-engagement letter to the sons, as is discussed below.

Scope of the Representation

A recent Kansas Supreme Court decision illustrates the importance of specifying the scope of the representation in an engagement agreement to avoid claims of a duty a law firm did not intend to assume.  In Kansas Public Employees Retirement System v. Kutak Rock, 44 P.3d 407 (Kan. 2002), the plaintiff had managed a state employees’ retirement fund.  Initially, the plaintiff engaged Reimer & Koger Associates, Inc. (“R&K”) to provide investment-counseling services.  R&K engaged Kutak Rock to act as its counsel for plaintiff’s investment.  Later, plaintiff sued Kutak Rock to recover investment losses in a food service company, which became bankrupt.

The court held that the scope of the attorney's duty was "commensurate with his or her undertaking."  The law firm’s engagement letter specified the drafting, negotiating and preparation of the preliminary agreement for purchase by R&K on behalf of plaintiff. The letter expressly said, “In addition, we will perform such due diligence inquiries and activities as may be required by the investors in connection with its investment.” The disputed issue was whether the “due diligence” included financial advice.  The Kutak lawyer testified that the only due diligence he had agreed to undertake was to review the corporate documents and verify that the corporation was in good standing. No one had asked Kutak Rock to review R&K’s due diligence, nor did the law firm do so.  Although the trial court concluded that the law firm did not owe a duty to review the financially advisability, the litigation may have been avoided altogether if the engagement agreement had explicitly stated that the due diligence to be performed by the law firm did not include financial advice.

If a lawyer only intends to handle one aspect of a client’s matter, and not others, it is the lawyer's responsibility to make sure the client understands the limitation of the engagement.  That was the holding of the court in Nichols v. Keller, 15 Cal.App.4th 1672, 19 Cal.Rptr.2d 601 (1993).  In that case, the court held that a Workers’ Compensation attorney may be liable for malpractice for failure to advise the client about possible third party actions.  Although the attorney may limit his representation to the Workers’ Compensation claim, he should advise the client that there may be other remedies that the attorney will not investigate or pursue and that the client should consult other counsel on those matters.  This advice should be included in the engagement agreement.

If a lawyer intends to limit his representation of a client, it is not enough that his engagement agreement states the matter that he is handling and is silent as to the other aspects of the client’s matter.  This occurs in cases such as Workers' Compensation claims where the lawyer may have the client sign a pre-printed form retainer agreement that is silent as to third party claims.  In Campbell v. Fine, Olin & Anderson, P.C., 168 Misc.2d 305, 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.  This is what occurred in Atkin v. Tittle & Tittle, 730 So.2d 376 (Fla.App. 3 Dist., 1999), in which a lawyer represented the purchasers of a vacant lot.  The couple told the lawyer that they wanted to build a single family home on the lot.  The lawyer was concerned about whether the clients could build a house on the lot without violating the contiguous lot rule in that jurisdiction.  He carefully included a contingency regarding that issue in the contract to purchase the lot.  Later, the couple was told that the lot was not zoned for a single family house and the couple sued the lawyer for malpractice.  The court held that the lawyer had undertaken to determine lot buildability, as evidenced by his concern about the contiguous lot rule.  Because he undertook to advise the clients regarding lot buildability, he was obligated to determine if the lot was zoned for a single family house, even though the lawyer was not specifically retained to render land use and zoning opinions.  Again, 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.

Included with the scope of the representation may be a section outlining the work to be performed and the timeframe within which certain aspects of the representation expect to be completed.  This will help the client form realistic expectations about what will happen during the representation, and avoid complaints arising from a client's unrealistic expectations being unmet.

Conflicts of Interest

Sometimes a lawyer may be asked to represent one or more clients in a matter when that representation may present conflicts of interest.  For example, in litigation against a corporation and its subsidiaries, the law firm may be able to represent only one of the entities because it has a conflict in representing the others as a result of adversity with another client. 

In another case, there may be litigation in which a corporation and an officer, director or employee have been named as defendants.  Because the interests of the corporation and the officer, director or shareholder may be potentially adverse, 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.  Or the law firm may cite the conflict as the reason why it will represent only the corporate entity. 

Sometimes the law firm will seek a waiver of future conflicts arising out of the representation of a corporate client's officer, director or employee.  The engagement agreement may disclose that the corporation is the firm's primary client and the firm will represent the officer, director or employee only as long as there is no conflict.  If a conflict arises in the future, the individual client consents to the firm continuing to represent the corporation, although not in the same matter in which the firm represented the individual.

Staffing

Unless you are a sole practitioner, the engagement agreement should identify the attorney who will be primarily responsible for the matter and any other attorney who will be assigned to the matter.  If you intend to use other professional staff, outside experts or consultants, identify those persons and explain their role in the representation.

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, faxes and e-mail communications will be answered 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 whether the client needs to 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.  Problems can be avoided by clearly expressing to the client what his or her obligations are with respect to the legal matter.  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

Disputes over fees frequently lead to legal malpractice claims.  Often, fee disputes may be avoided if the amount or rate of the fee to be charged and the manner in which the fee will be collected are clearly set out in a written engagement agreement.  Again, telling the client what he or she should reasonably expect will help the client avoid forming unrealistic expectations.  Clients with unrealistic expectations usually end up unhappy at some point and the focus of the unhappiness becomes the lawyer.

The retainer agreement should clearly state the basis on which fees will be charged.  As noted at the beginning of this article, some states require that fee agreements be in writing.  Make the agreement clear and unambiguous, as ambiguities will be resolved in the client's favor.

If the fee will be hourly, specify the respective billing rates of all lawyers and other professional staff who will be working on the matter.  If the fee is contingent, ABA Model Rule 1.5 and 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.

In all cases, inform the client of the kinds of costs for which the client will be responsible and when the client will be expected to pay or reimburse the firm for those costs.

If the client will be required to pay a retainer or fee advance, state the amount to be paid, the manner in which the firm will draw on the funds, and the point at which the retainer or advance must be replenished. 

The engagement agreement should also inform the client of the consequences of non-payment of fees when expected.  For example, if the client will be billed monthly at an  hourly rate, state what will happen if the client does not pay the bill on time.  Consequences may include the charging of interest on past due fees (as long as it does not violate any rules or laws in your jurisdiction) and may result in the firm's withdrawal.

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 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.

Editor: Brian Gedeon (BHGedeon@duanemorris.com) (This publication is the property of the Atlanta Association of Legal Administrators. Reproduction or reprint without prior permission is strictly prohibited. Click here to request reprint permission.)

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