The first of a two-part article from Lockton provides a reminder of the benefits that can be derived from well-considered engagement letters

In the same way that a lifebelt can mean the difference between swimming and sinking, an effective engagement letter can help ease the sinking feeling that occurs when faced with a claim notification. The lack of a properly scoped letter of engagement has been identified by Master Policy insurers as a key element in successful claims against professionals. A robust engagement letter may protect your practice from a claim, or mitigate any loss.

Engagement letters are often seen as time-consuming administration. Some practitioners doubtless see them as merely a compliance box to tick. If that is how they are viewed in your practice, could it be missing out on the advantages and risk management benefits of properly crafted engagement letters? Have you considered methods to simplify your engagement processes to maximise the value that you can get from an engagement letter and reduce the element of non-chargeable time spent creating them?

In this, the first of a two-part article, we go back to basics and look at:

  • the benefits they can deliver;
  • considerations in scoping engagements;
  • their function as a risk management tool.  

In part 2, in next month’s Journal, we will look at:

  • how to make the most of reworking elements;
  • how to develop an engagement letter from scratch;
  • how to improve readability for maximum impact.

A benefit, not a burden

At your initial meeting, you will have discussed the client’s requirements, the services your firm can provide and what the client can expect to receive. Then comes the process of writing up that client’s transaction into an engagement letter. Many individuals regard that step as an administrative burden or a compliance necessity. Rather than viewing an engagement letter as a non-value-added activity, think of the positive business benefits that it can deliver. A properly drafted engagement letter can be a powerful tool to:

  • help summarise client discussions;
  • manage expectations;
  • set out services;
  • increase transparency to the client;
  • help clients understand fees and the value being delivered by the practice;
  • avoid awkward conversations on fee increases;
  • avoid misunderstandings.

This leaves more time for actually delivering the service and obtaining payment rather than resolving complaints or miscommunication.

Scoping services

Properly scoping the services to be provided is probably the most important part of the entire engagement letter. It is vital to be clear what your services include, in order to prevent “scope creep” and prevent the client developing unreasonable expectations about services which are to be delivered. 

The scope also explains to the client what you will be doing in order to achieve their desired outcome. This provides more transparency in the relationship and helps clients understand how the fee is justified. If the client can see what is being delivered, you can effectively communicate the value of your services. Most clients cannot be expected to understand what a transaction involves or the detailed work that may have to take place. The scope of services is an easy way to explain that to the client and make the client appreciate the value being delivered.

Clients who pursue claims will often seek to paint a picture of failures to warn of certain risks ancillary to the matter and of scope creep (with an attendant adoption of liability on the practice’s part). Awareness of the risks of scope creep, coupled with clarity in the engagement process, will significantly reduce the chances of a successful claim against a practice.

Exclusions – why use them?

Equally important in your scope of services is describing work that you are not going to undertake for the client. Obviously, this has to be approached sensibly – you would not necessarily be excluding work such as preparing a will when the underlying transaction was to advise on a contract. 

Using specific exclusions to create clarity of understanding around what is included in your remit serves several purposes:

Prevents advice gaps. To avoid a situation where the client believes that your practice has taken responsibility for a particular piece of work when it has not.

Manages client expectations. Helps your client understand what is being delivered as a service and the limitations of advice.

Avoids scope creep. Well-intentioned actions that can expand the scope of services can change the risk profile of the initial transaction. Some clients, keen to get value for money, may try to squeeze additional work from their solicitor. This may, for example, lead to accepting work on the limit of a practitioner’s core competencies, or perhaps outside their field of expertise. If additional services are required, confirm this with the client in writing. For entirely new services, issue a new engagement letter, where you can properly consider the scope of those services. Excessively broad scopes should be avoided (even where the details of the matter are not clear at the point of engagement), because this may inadvertently give rise to a duty to advise on issues peripheral to the matter, which could increase the practice’s risk exposure.

Avoids free work. Listing excluded work may serve as an aide-memoire to discuss fees for additional work with the client. Consider describing any add-on services that you perceive the client may need and advise that these will form a separate scope of work.

A risk management tool 

What are the principal risk management functions of a letter of engagement? Leaving aside the mandatory elements that have to be included in an engagement letter, it is useful to reduce engagement letters to their basic functions in order to understand their importance.

It is almost an inevitability that the vicissitudes of practice may give rise to miscommunication and claims. However, the likelihood of successful claims against a practice should be reduced considerably by a robust approach to the engagement process including a letter of engagement which is clear and which helps effectively manage risk, rather than simply serving a proforma purpose. 

The process of drafting and issuing a comprehensive engagement letter should not be onerous and the value in doing so will become all too apparent if/when you have to defend your practice against a claim. 

In part 2 of this article, next month, we look at some practical issues involved in drafting letters of engagement.

The Author
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 
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