Claims on the Master Policy have arisen where a more rigorous approach to terms of engagement could have prevented them. Here are some illustrative points to bear in mind
Once a practice has decided to take on a new client or new work, terms of engagement have a key role in managing the firm/client relationship – including the client’s expectations. A well-crafted letter of engagement can be a very effective risk management tool by providing absolute clarity for both parties as to what is – and equally what is not – to be done as part of the contract for legal services, thereby minimising the risk of complaints and claims.
Who is the client?
When framing terms of engagement for a piece of work, start by being clear about who is your client – is it the company or an individual shareholder or director? In a partnership situation, is it the partnership itself or just one of the individual partners? In the case of a married couple, is the firm’s client both spouses, or one of them only? In multi-party situations, if you have a concern that there is a party whose interests you are not representing but who might misunderstand that, consider issuing a letter to that party making the position clear.
Scope of the work
You may be clear what work is included within the scope of the engagement, but is the client? It is quite reasonable for a solicitor to decline to deal with any particularly specialised area, provided they make it clear from the outset. There are instances of claims in relation to tax planning and tax advice aspects of property and commercial transactions, and in some of these it is not entirely clear whether the solicitors had undertaken to provide advice on the tax matters. Was the position apparent from terms of engagement, scoping letters or other content of the file?
In a recent high-value claim, lack of clarity regarding the scope of the firm’s engagement proved to be a critical factor. The letter of engagement in connection with the purchase of a business went into considerable detail regarding the services to be provided and excluded. It was, however, entirely silent on the subject of tax advice. The solicitor concerned had been entirely clear in his own mind that tax advice was not to be part of the firm’s responsibilities. It was the firm’s practice never to provide tax advice, and its view was that the clients could not have assumed that tax advice was to be provided by the firm. Accountants were working for the clients in tandem, and dealing with tax issues.
As the transaction developed, it was decided that instead of a purchase of the business assets it would be more appropriate to enter into a share purchase agreement. Ultimately, this resulted in substantial corporation tax consequences for the clients, who pursued a claim for their tax liability against the solicitors. While the solicitors had assumed that the accountants would be dealing with all tax issues, it was later discovered that the accountants had restricted their advice to capital gains implications, specifically (and contractually) excluding any responsibility for corporation tax matters. The solicitors’ failure to exclude responsibility for tax advice left them exposed to a substantial claim.
Wherever there could be scope for misunderstandings, be clear regarding the firm’s responsibility for any post-completion matters, for example, applying for licences, serving notices or issuing reminders prompting the client to take time-critical actions. Experience suggests that it is especially important to be clear about responsibilities where critical dates are concerned, and to maintain consistency within the practice as to the policy adopted.
A firm had acted for a client in commercial matters only. He then instructed the firm to handle his late mother’s executry.
After six months, he complained of “unacceptable delay” and threatened to take all of his business elsewhere.
More often than not, it is impossible to be accurate in forecasting how long a piece of work might take, but it is likely that the client will have their own expectations of timescale. Preconceived expectations may be partially managed by including in terms of engagement an indication of minimum timescales and an explanation of factors beyond the firm’s control which are capable of impacting on timescale. Of course, this is only one part of managing the client’s expectations regarding timescales, and the client ought to be kept updated from time to time, particularly if earlier indicated timescales are not going to be achieved.
Fees, costs and billing
Fee disputes are a common cause of complaints and, in some cases, an underlying factor in claims alleging negligence. Experience points to the importance of being clear in terms of engagement about fees and expenses, billing and payment arrangements; being clear regarding changes in these points (for example if the scope of the work changes mid-engagement); documenting those changes; and making sure to bill in accordance with what has been agreed/documented.
Terms of engagement are the ideal opportunity, at the outset, to set out clearly how, how often and when you will communicate with the client. They are also an opportunity to specify the respective responsibilities of the parties, including client responsibilities (for example, giving instructions timeously when requested, the manner in which instructions must be provided, and informing you of any change of contact details such as address, mobile phone number or email address). Clients should also be asked to advise you of any long absences when they are to be out of the country and perhaps uncontactable, particularly where time-sensitive work is involved.
Could any of the problems described in the case study examples happen to you? This article has addressed only an overview of risk and risk management points related to terms of engagement. For further information, you may wish to refer to the Marsh eLearning module “Terms of Engagement – their importance in risk management”, available on the Marsh website for Scottish solicitors (for a reminder of your log-in details, please contact Nada Jardaneh at email@example.com for assistance).
When evaluating your approach to terms of engagement, you may wish to consider the following points:
- Identify the client, using proper legal names for individuals and business entities.
- Confirm the specific purposes for which the firm has been instructed and set out the scope of the service(s) you will be providing.
- Refer to any work you are expressly instructed not to deal with or which you are not proposing to undertake.
- Confirm the name and status of the person dealing with the matter and the name of the partner responsible for overall supervision.
- Describe the steps that will be taken to complete the work, and the anticipated timescales.
- State the responsibilities and what is expected of the client in terms of information and participation.
- Outline the correct method by which instructions should be provided.
- Highlight any applicable limitation periods and the consequences if they are missed.
- Explain any potential conflicts of interest and any issues of client confidentiality.
- Provide estimates of fees and expenses, and explain the payment of costs, disbursements and other charges.
- Explain the billing cycle and payment expectations including interest, if applicable, and the consequences of unpaid bills, as appropriate.
- Explain the firm’s complaints procedure and identify the person to whom complaints should be addressed.
Nada Jardaneh and Marsh
Nada Jardaneh is a former solicitor in private practice, who works in the Finpro (Financial and Professional Risks) National Practice at Marsh, a global leader in insurance broking and risk management.
The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.
Marsh Ltd is authorised and regulated by the Financial Conduct Authority for insurance mediation activities only.