There are certain instances where a lawyer is required to enter into a written fee contract, or engagement agreement, with a client. They include where the client is an individual and the fees and costs are expected to exceed $1,000 (Cal Bus. & Prof. Code § 6148(a)) and where the lawyer takes on the matter under a contingency fee arrangement (id. at § 6147). By contrast, where a client is a corporation, and the matter is not a contingency arrangement, neither the State Bar Act nor the Rules of Professional Conduct require a written engagement agreement. Regardless of whether it’s required, a lawyer is well served by entering into a written engagement agreement. There are several issues every engagement agreement should address.
Identification of Client. One of the most important aspects of an engagement agreement is the identification of the client. While in many cases it may be obvious who the client is, in many other cases it may not be. For example, where the president of a corporation or other organization hires a lawyer to represent the organization, the client is the organization and not the president or any other officer, shareholder, employee, or another individual constituent of the organization. See Rule of Prof. Conduct 1.13(a). Yet, because the president is the one instructing the lawyer, the president may believe he also is a client. Clarifying in writing, in the engagement agreement, that the client to whom the lawyer owes duties is only the corporation, and not anyone else, including the president, will help avoid a later claim by the president or other constituent that they believed the lawyer also represented them. Many a legal malpractice action or disqualification motion could have been avoided had the lawyer simply clarified who was – and, just as importantly, who was not – the client.
Where a lawyer meets with two individuals, only one of whom ends up hiring the lawyer, the engagement agreement generally will only be sent to the individual who becomes the client. In that case, while it is still important to clarify who is and is not the client, the non-client likely will not even see the engagement agreement. For example, suppose a husband and wife come to the lawyer’s office to discuss an issue with the family business. The husband alone ends up engaging the lawyer. Although the lawyer’s engagement agreement with the husband may clarify that the wife is not her client, the wife may not ever see that engagement agreement (and almost certainly will not be asked to sign it). In that instance, the lawyer should (and probably is required to) not only document the lawyer’s representation of husband in writing but also document the non-representation of wife in writing. This so-called “I am not your lawyer” letter informs the wife in writing that the lawyer is not looking out for her interests. Thus, if and when a dispute later arises between the husband and wife, the wife cannot claim she thought the lawyer represented her, or that she expected the lawyer to be looking out for her interests. Similarly, should the husband wish to retain the lawyer to represent him adverse to the wife, the lawyer would be allowed to take on that representation, having never represented the wife. In the absence of an “I am not your lawyer” letter, these scenarios can become much more complicated and problematic.
Scope of the Lawyer’s Representation. Yet another purpose of a written engagement letter is to document the scope of the lawyer’s engagement. In the litigation context, it often is clear what the scope of the lawyer’s duties are – to prosecute or defend an action through settlement, judgment, or dismissal. In other settings, however, the scope might not be evident. For instance, suppose a client negotiates a transaction in which it is purchasing another business. The client then hires the lawyer to document the transaction, including any agreements with a lending source. Two years later, the acquired business turns out to be a bust, and the client turns on the lawyer, accusing her of failing to conduct sufficient due diligence on the acquired company. The lawyer, however, was not hired to conduct due diligence or otherwise analyze the worth of the acquisition target.
If the lawyer’s engagement agreement simply states that the scope of the representation is to represent the client in connection with the acquisition of the target company, the client no doubt will argue (and maybe even convince itself) that the lawyer was hired to perform a whole range of services, including conducting due diligence and analyzing and advising on the merits of the potential acquisition. It will be the lawyer’s word against the client’s, which usually does not go well for the lawyer. If, on the other hand, the lawyer has defined the scope of the engagement as documenting the transaction negotiated by the client itself, and specifically excludes conducting due diligence or otherwise advising the client on the merits of the potential acquisition, the client will not be able to make that argument. Defining what is – and is not – within the scope of the engagement could prevent a big headache for the lawyer.
Other Important Terms. There are many other terms a lawyer must or should include in an engagement agreement – terms that often never get documented or even considered in the absence of such an agreement. For example, both Sections 6147 and 6148 require that the fee agreement include the fee rate, and also how other charges and expenses might be the client’s responsibility. See Cal. Bus. & Prof. Code §§ 6147(a)(1)-(3), 6148(a). Even when those sections are not applicable, that information should be included. And, although the client will learn the hourly rate upon receiving the first bill, that may be after substantial work has been done, and fees incurred. That would not be a good time for the client to first learn this.
Other terms that should be included are how quickly the client is expected to pay its bill, whether or not late charges will accrue on outstanding balances, and how and where any disputes will be resolved. And, of course, if any conflicts exist, those, too, need to be explained. Failure to include these provisions in a written agreement with the client leaves way too many issues to chance, all to the likely eventual detriment of the lawyer.
Documenting the End of the Engagement: Termination Letter. Finally, as important as an engagement agreement is, so too is a termination letter. Again, in the case of litigation, it may be obvious when the representation has concluded. But in many representations, it is not so obvious. Even where several months pass without the lawyer performing any services for the client, the client still may reasonably believe the representation is ongoing. And the client’s reasonable expectations often will be determinative. If something goes wrong during those several months, then you better believe the client will claim the lawyer should have been looking out for the client’s interests.
Relatedly, a lawyer may not take on a representation adverse to a current client. See Rule of Prof. Conduct 1.7. But if the lawyer fails to formally terminate the representation, a dispute may arise over whether the client remained a current client or was a former client. In the latter case, the lawyer could be adverse to the former client as long as the former and current representations were not substantially related. See id. Rule 1.9. A lawyer is not allowed to be adverse to a current client, however, absent that client’s informed written consent. See Rule of Prof. Conduct 1.7(a). Thus, a lawyer may lose out on a good case if the lawyer failed to expressly terminate a prior representation when it actually was over.
There is nothing in the State Bar Act or the Rules of Professional Conduct that requires a lawyer to send a termination letter at the conclusion of a representation. Nonetheless, lawyers are well served by documenting the end of the relationship, just as they are well served by documenting the beginning of the relationship, whether or not it is required. Just because you don’t have to do something doesn’t mean you shouldn’t.
Scott Garner is a partner with Umberg/Zipser LLP in Irvine, California, where his practice focuses on complex business litigation, with a particular emphasis on the representation of lawyers and law firms. Mr. Garner is a member of the California Lawyers Association Ethics Committee, Co-Chair of the Orange County Bar Association’s Professionalism and Ethics Committee, a former Chair of the State Bar of California’s Committee on Professional Responsibility and Conduct, and the current President of the Orange County Bar Association. He can be reached at sgarner@umbergzipser.com.