Risk management issues which should be addressed by practices drafting or reviewing terms of engagement
The Solicitors (Scotland) (Client Communication) Practice Rules 2005, passed at the Society’s Annual General Meeting in March, make it compulsory, with some exceptions, for solicitors to issue terms of engagement to clients in all areas of work. Hitherto terms of engagement have only required to be issued in domestic conveyancing transactions. Practices will no doubt wish to take the opportunity to review their existing procedures to ensure compliance with the new rules. However, when conducting that review, it is also an opportune moment to consider the risk management points which they should seek to address in their terms of engagement. This article discusses these risk management points. The provisions of the Practice Rules themselves are outwith the scope of the article.
Identify your client
In most cases the identity of the client is self-evident. However, sometimes you will need to be explicit for whom you are acting. For example, in a partnership dispute, are you acting for the partnership or one or more of the partners? On occasions you need to be alive to the possibility that there may be an expectation, which may well be unreasonable, on the part of other parties involved in a transaction, that you are acting for them when you are not.
The minority shareholders of a limited company intimated a claim against solicitors on the ground that the solicitors had failed to protect their interests in relation to a company reorganisation. The partner responsible for the transaction was quite clear in his own mind that the firm was always acting only for the majority shareholders.
In these situations, it may be advisable to send a letter of non-engagement to those non-clients, to make it clear that you are not acting for them and thereby minimise the risk of having to defend a claim at the instance of non-clients who perceive that you have failed to protect their interest.
Identify the person(s) authorised to give you instructions. That is particularly important if you are acting for a limited company, limited liability partnership or partnership, but this issue also needs to be addressed where you are acting for more than one client, such as husband and wife or trustees.
AB & Co acted for all the owners of a tenement building in a dispute with building contractors. The firm communicated with and took instructions from the factors for the property and reported to them regularly throughout the dispute but did not communicate with the owners at all. Later there was a complaint from some of the owners that AB & Co had not kept them fully informed of developments and in particular about the level of costs already incurred and likely to be incurred in the future. AB & Co had assumed that the factors would report to the owners. That assumption turned out to have been misplaced when it emerged that the factors had been expecting the solicitors to communicate with the owners directly.
State how you will accept instructions from the client. If instructions are accepted by telephone, should you specify that written confirmation of all instructions given orally will be required? Some practices do not accept instructions by email. Any restrictions of this kind should be clearly stated in the terms of engagement.
Scope of work
Misunderstandings between solicitor and client as to the precise scope of the engagement are a frequent cause of claims and complaints. Consider the following case study:
AB & Co acted for a client in the subscription of shares in a company, which, it transpired had no assets. The client alleged that the firm should have advised him not to invest in the company. The firm denied they were instructed to give the client commercial advice but were only advising on the terms of the subscription agreement.
The scope of the work you are to carry out for the client should be set out in the terms of engagement. Of equal importance, but often overlooked, you need to set out clearly any exclusions, limitations or qualifications. The misunderstanding illustrated in the case study could have been avoided if it had been clearly stated at the outset of the transaction that commercial advice and commercial corporate finance advice in particular were excluded from the engagement.
Be careful that you do not say one thing and do another. For example, you may routinely exclude tax advice in your terms of engagement. However, you may be acting for clients in matters which have tax implications, such as drafting or revising tax warranties and indemnities in a share sale and purchase transaction, property transactions where there may be VAT issues, or drafting a will where there may be IHT considerations. In these circumstances, you may have to amend your “no tax advice” clause to make that clear that you will be drafting or revising documentation in reliance on information and advice given by the client’s tax advisers.
Some solicitors say nothing in their terms of engagement about timescales. They argue that it is impossible to give a timescale. How long is a piece of string? Such an approach misses the opportunity to manage the client’s expectations. From a risk management point of view, one reason terms of engagement are important is to avoid claims and complaints by managing clients’ expectations and reducing the scope for misunderstandings. Perceived or alleged delays are a frequent cause of claims and complaints even where there is no actual delay on the part of the solicitor. Remember that clients often have their own (often misguided) notion about how long a piece of legal work should take – and this is often linked to other actions which they intend to take and which they fail to mention to you. Even if you cannot state how long a matter will take, say so and keep the client informed as the matter progresses. Make it clear to the client that he should not take any action in other matters dependent on the outcome of the matter without specific reference to you.
Mr A alleges that he lost a lot of money when he had to cancel his wedding reception and honeymoon because of his solicitor’s alleged delay in finalising his divorce. A’s solicitors’ explanation is that the divorce action had taken no longer than normal. Furthermore, the solicitors could not understand why A had gone ahead and committed himself to wedding plans without contacting them to ascertain when the extract decree of divorce might be issued.
No guaranteed outcome
Clients are bound to have an idea of what it is they want to achieve in instructing you to carry out a piece of work – tax mitigation, for example. It may or may not coincide with your own perception of the position. Indeed on occasion the result the client wants may not be achievable. In order to manage expectations, ascertain the client’s objectives, and consider reflecting these in the terms of engagement. Where appropriate, make it clear that the outcome is not guaranteed.
Who will be handling the work
Tell the client who will be handling his work, who to contact if that person is unavailable and the name of the supervising partner (if different).
The client should be made aware of what is expected of him, for example the need to give information and instructions promptly when required, the need to be available to execute documents, and the need to remain in contact, particularly if critical dates are to be met.
Fees and outlays
Many disputes with clients about fees can be traced to poor engagement procedures. The fees and outlays to be charged or the basis on which they are to be charged (including VAT), and the circumstances in which those charges may vary, should be clearly disclosed. Large bills, sometimes rendered at the end of a matter, or at a time when the client is not expecting to be billed, can cause particular problems. Billing arrangements clearly set out in the terms of engagement, including any provisions for deposits payable in advance, interim fee notes and recovery of outlays, can forestall this kind of problem.
Practices now have to appoint a client relations partner – see the Solicitors (Scotland) (Client Relations Partner) Practice Rules 2005, passed at the Society’s Annual General Meeting, which came into force on 1 June 2005. Clients should know how and to whom they should make a complaint if dissatisfied. The procedure for making complaints could be set out or referred to in the terms of engagement.
Limitation of liability
Following the example of other professions, particularly accountants, some firms seek, in their terms of engagement, to limit the practice’s liability. Practices which are structured as limited liability partnerships or limited companies may also seek, in their terms of engagement, to have clients acknowledge that any claim they may have can only be pursued against the practice entity itself, excluding any liability on the part of individual members or directors.
The legality, enforceability and effectiveness of any clause purporting to exclude or limit liability are beyond the scope of this article.
Termination of engagement
Sometimes difficulties can arise if the engagement is not terminated, as in the following case study.
AB & Co were acting for a client in pursuing an action of damages for personal injuries sustained in a road traffic accident. As the expiry of the triennium approached, they found it impossible to obtain instructions from their client, who failed to respond to six letters they had sent him. Some weeks after the action had become time barred, they received intimation of a claim against them from new solicitors acting for the client.
In order to manage clients and their expectations better than in the above case study, it would be advisable to set out the client’s responsibilities in the terms of engagement and also state the circumstances in which the solicitors would be entitled to terminate the engagement, and follow this through by sending the client a letter of dis-engagement.
Acceptance by client
It is desirable that the client should be asked to sign and return one copy of the terms of engagement in order to prove, in the event of a dispute, that the client has received and accepted them. There will inevitably be situations where the signed copy of the terms of engagement is not returned promptly, if at all. Should you carry out any work for the client before you have received back the signed terms of engagement? This is for each firm to decide. Whatever policy is decided, the client needs to be told so that there is no doubt about the position.