Engagement letters: a practical approach
Concluding a two-part article, Lockton provides some valuable tips on how to get best effect from your engagement letters
In our previous article we noted that properly scoping the work to be carried out has numerous risk management benefits. In particular, we drew attention to scope creep within an engagement that is set out in very broad terms. Without the significant steps involved being outlined, a client may not recognise some activities as additional (chargeable) work, or worse, they may believe that they are already being delivered by the solicitor when, in fact, this is not the case.
In this follow-on article we look at the practicalities and efficiencies in producing engagement letters, reviewing:
- how to make the most of re-working elements;
- how to develop an engagement letter from scratch;
- how to improve readability for maximum impact.
Re-working scopes of work
The scope of services section is where careful planning can avoid wheel reinvention through clever re-working. Before drafting your next scope of work, ask yourself the following:
- What are the individual steps I will be taking in this transaction?
- Can I easily summarise these steps?
- Are these steps the same in other similar transactions?
- How much of my work is of a similar (not necessarily identical) nature?
- Can I reuse the basic building blocks of this scope of work again?
- Can I create a template with a variety of scopes and then tailor them to a similar matter in future?
- Can I do the same exercise in relation to any excluded matters?
- Would creating a template for this save me time in the long run?
Engagement letters should be easy to use. Although there will always be a necessary amount of customisation once you’ve gone through your thought process on the specific matter, it is important to streamline those parts of the process which can be standardised. There is no “one size fits all” engagement letter, but what percentage of terms in an engagement letter could be reused? It is likely that a large amount of content will apply to all clients; or to similar transactions.
Perhaps as much as 80 or 90% of an engagement letter’s content may be reusable. By limiting the amount of changes required and creating templates for each service the firm provides, a significant amount of rework can be avoided. This then leaves a much smaller percentage of each individual engagement letter requiring customisation. Taking the time away from chargeable work to develop these templates can be a challenge. However, since the issue of engagement letters is mandatory and, in any event, can significantly assist in risk management, it is worth spending the time streamlining the process as much as possible.
An engagement letter from scratch
Rule B4 sets out some of the main mandatory requirements regarding the content of a letter of engagement (generically referred to as “terms of business” in the rules). Those include:
- an outline of the work to be undertaken;
- an estimate of the total fee or the basis on which the fee will be charged (including VAT and outlays);
- details of any contribution towards advice and assistance/legal aid, and details of the effect of preservation or recovery of property;
- who will be doing the work; and
- who the client should contact with concerns or complaints.
When combined with the other requirements found in the rules, there is a significant amount of information to communicate to clients.
While there are no hard and fast rules on how to present information to clients, many firms take the view that it is easier to identify standard terms, which apply to all engagements and separate these from terms that will be specific to the client or a particular transaction. This approach relies on a set of standalone terms and conditions which can either be annexed to the engagement letter or referred to and published on the firm’s website. The effect of this is to shorten the engagement letter itself, which may make it a more readable document. When the client accepts the engagement letter, they are also agreeing to the terms and conditions.
It is for individual firms to decide how that split should be handled. Firms may wish to consider which of the following matters could be placed into a standardised document:
- basis of charging (including a note of different chargeout rates for individuals);
- alternative dispute resolution procedures;
- retention of records policies;
- intellectual property, ownership of client files;
- a reference to being insured through the Master Policy;
- client protection fund reference;
- reference to being regulated by the Law Society of Scotland;
- explanation of where clients’ monies are held;
- policy on interest payments from invested funds;
- AML requirements;
- complaints procedure;
- identity of the client relations manager;
- SLCC contact details and role;
- confirming the firm’s bank details and that those details will not be altered at short notice or by email – this helps to counter client account fraud.
Readability of engagement letters
The Bar Standards Board and others have undertaken qualitative research into engagement letters in England (October 2016). That research aims to understand how clients responded to engagement letters and how these could be made more effective and fit for purpose. Perhaps unsurprisingly, the research showed a mixed level of engagement with the content of these letters.
Respondents to the study (mainly individuals) generally reported that the initial communications from firms (typically letters of engagement) tended to be somewhat complex and difficult to read, were unnecessarily lengthy and included largely generic information. Respondents also tended to find that it was difficult to pick out key information due to a lack of signposting, unfamiliar terminology and dense text. Given the amount of information that has to be communicated to clients at the outset of a matter, it is not altogether a shock that clients can be overwhelmed by the volume of text that is presented to them.
The findings seemed to suggest that there was a potential disconnect between what information was being prioritised by a firm and the information that was deemed useful by the recipient (see box below).
While clients still wanted to be referred to key regulatory information, that was not such an immediate priority for them. The engagement letters which formed part of the survey tended to favour more generic information. The research would seem to be supportive of an approach where customised, client-centric information is provided in an engagement letter with necessary (but not perhaps immediately relevant) information being addressed separately (perhaps within standard terms of business).
Again, perhaps unsurprisingly, the research found that the tone of the first page of the letter of engagement was essential to prompt effective communication, as clients’ attention would rapidly diminish. There was a noticeable drop-off in time spent reading later pages of the engagement letter. The research is interesting because it highlights the difference in approach between viewing engagement letters as a risk management tool and as a compliance exercise. The risk management benefits of the engagement letter are likely to be increased if the letter makes an impression on the client and effectively communicates information to them.
The research highlighted eight principles to help deliver engagement letters which resonated with the recipients. These were:
- A clear purpose. Demonstrate the reason for the letter and the importance of reading it.
- Short. If it is not feasible to keep the engagement letter very short, break information down into digestible paragraphs.
- Plain English. The use of complex language, complex sentence structure or heavily caveated sentences should be minimised.
- Prioritise. The letter should anticipate the information which will be most relevant to the client.
- Personalised. Focus on that individual’s transaction and try to exclude generic information.
- Easy to read. Avoid small fonts and densely spaced paragraphs. Headings, bullet points and tables can assist in making the document easier to read.
- Highlight key information. Make it easier for clients to focus on key points using bold text or headers.
- Consider additional opportunities to engage. This refers to following up the initial engagement letter with other detailed communications.
While some of the recommendations may have more appeal than others, the eight principles may provide some helpful pointers for practices if they are reviewing/revising their letters of engagement.
Focusing on issues of readability also helps with risk management – if a letter is readable and focused on the recipient, the potential for successful claims can be reduced. For instance, an engagement letter addressed to an inexperienced and unsophisticated client may well need a different approach than that used for a commercially astute client. Although an English case, Lyons v Fox Williams  EWHC 2427 (QB) demonstrated that the commercial sophistication and previous experience of the client was crucial in limiting the scope of duty owed by the solicitors. The engagement letter in that case had clearly identified the scope of work to include review of only one of two insurance policies under which the claimant might have been covered. The court held that the solicitor had no duty to analyse the content of the second policy although they were aware of its existence.
Since practices may have been making amendments to terms of engagement letters in light of issues such as GDPR, there may be merit in looking at the structure and language used in letters of engagement. There is nothing to be lost in asking the question whether a more effective initial communication could be developed by putting some (if not all) of the above principles into practice.
Gail Cook is a client executive within Lockton’s Master Policy team. She has 30 years’ experience in the field of professions underwriting and risk management and is the main Lockton contact for risk management matters. She can be reached on 0131 345 5571 or email@example.com
Letters: what clients want?
Respondent clients wanted to be immediately directed to information such as:
- the identity of a named contact person
- the scope of the work
- the associated fees
- any actions required by them
Engagement letters in the survey tended to focus on:
- terms of business
- regulatory information
- cancellation rates
- complaints procedures