Law firms will usually send out detailed engagement letters to new clients, and may also send shorter engagement letters to existing clients when those existing clients instruct the firm on new matters. Doing so can help firms to evidence their compliance with their obligations under the SRA Standards and Regulations.

Engagement letter: this is a letter between a client and their advisor that sets out the scope of the work to be carried out and the terms governing their working relationship.

Firms may also deal with engagement letters when working with other professional advisers, for instance if the firm instructs (or is instructed by) third party law firms in other jurisdictions (typically referred to as “local counsel”), external consultants or tax accountants to advise on particular aspects of a legal matter. In addition, clients may ask their lawyers for advice on the terms of an engagement letter that they have received from another party, for example if the client has received an engagement letter from a bank whilst seeking financial advice or looking to raise finance.

The information contained in an engagement letter can help to ensure that the parties understand how their working relationship will operate moving forwards, and can provide an important point of reference in the future if a dispute arises in connection with the engagement. Engagement letters may be heavily tailored and/or negotiated depending on the relationship between the parties and the nature of the matter in respect of which one party is engaging the other. The party that is being “engaged” (e.g. hired or retained) will typically have their own standard form engagement letter, and this will usually provide the starting point from a drafting perspective. 

Practical tip: if the firm is being engaged by one of a group of companies or funds, be sure to check that you are addressing the engagement letter to the correct “client” entity. In addition, if you are printing an engagement letter onto headed paper, make sure that you use the right version of the firm’s headed paper (e.g. a version with the firm’s current logo and up-to-date contact details).

Key engagement letter provisions

Below, we have summarised some of the key provisions that are usually contained within engagement letters, although in practice the terms will very much depend on the nature of the engagement.

Nature and scope

Engagement letters will usually define the nature and scope of the services that the party being engaged will carry out. They may also clarify which services will not be provided as part of the engagement.

Duration/timetable

Engagement letters will usually set out the duration for which the parties envision that the working relationship will continue, as well as how and under which circumstances the engagement can be terminated. Where the engagement relates to a distinct piece of work, the engagement letter may also set out a more specific timetable covering which services will be provided at different stages of the matter.

The teams/advisers involved

Where applicable, engagement letters may set out the names and roles of the teams and/or individuals that will be responsible for carrying out and supervising the work.

Fees and expenses

Fee structure

Engagement letters will set out the fee structure that has been agreed between the parties, including any hourly rates, fixed fees, success fees, discounts and fee caps. Fee structures and rates will likely differ significantly between firms and across different industries. Fees might be charged based on agreed hourly rates. In such circumstances, firms will typically set out the rates of the individuals who will be involved and provide an estimate of what the total bill will amount to. Although fee estimates aren’t binding, greatly exceeding a fee estimate is likely to have a negative impact on the client relationship and might result in the client challenging the fees. 

The parties might instead agree to a fixed fee, or hourly rates that are subject to an overall fee cap. However, fixed fee and capped fee arrangements can result in a significant degree of risk for a service provider, as it might mean they won’t be sufficiently remunerated if the matter escalates and far more work is consequently needed than had originally been envisaged. For this reason, fixed fee and capped fee arrangements are typically subject to strict assumptions, various caveats and an understanding that the firm can charge additional fees for work that is later required by the client but is beyond the scope of the initial brief. To cover such circumstances, the parties might agree in the engagement letter that the service provider’s usual hourly rates will apply in respect of any such additional work.

Firms might also charge fees that are contingent on the achievement of some form of success or milestone. For example, a law firm acting for a bidder in an auction might initially charge a discounted hourly rate, with the parties agreeing that if the bidder is successful and completes the acquisition, the law firm will then be entitled to an uplift on the total fees generated in connection with that matter. Similarly, if a firm is working on a dispute, the parties might agree that the firm will be entitled to an additional sum if the dispute resolves in the client’s favour.

Assumptions

As alluded to above, assumptions can be an incredibly important part of the fee structure that is agreed in an engagement letter. If the work carried out fails to align with the assumptions, the service provider may have grounds to argue that they are entitled to charge additional fees in respect of the services provided (particularly in the context of fixed or capped fee arrangements). The following are examples of the types of assumptions that might be included in law firm engagement letters: 

• Negotiations will not be protracted. 
• The documents drafted will be substantially based on market-standard documents (e.g. the LMA for finance transactions). 
• There will be no more than a certain number of “turns” (i.e. major re-drafts) of each document.
• There will be no physical meetings, with all interactions being conducted by email or teleconference. 
• The term of the engagement will not exceed a specific duration of time from the date on which the letter is signed.
• The client will pay all necessary third-party fees and expenses.

Expenses, VAT and fee updates

Engagement letters will also typically set out who is responsible for the cost of any expenses that arise in connection with the engagement (e.g. legal disbursements and travel expenses) and specify whether any fees quoted include VAT. In addition, engagement letters usually include provisions requiring advisers to circulate regular updates regarding the fees that they have already generated (these are sometimes referred to in practice as “work-in-progress” or “WIP” updates). 

Practical tip: if you are drafting an engagement letter using a standard form template (or a previous precedent), ensure that any fee rates included in the template/precedent are up to date before sending it out. 

Warranties, undertakings and indemnities

The party being engaged may require their client, in an engagement letter, to warrant or undertake that the client’s instructions have been/will be correctly authorised; the client will comply with all relevant laws and regulations; and the client will maintain any authorisations and permissions needed to enable the adviser to carry out its services. The engagement letter may also include an indemnity in favour of the adviser to cover circumstances where the client is to blame for any losses incurred by the adviser in connection with the engagement (although this will depend on the parties’ bargaining power).

Limitations of liability

Engagement letters will usually include limitations on the liability of the party being engaged.

Fiduciary duties

The default legal position is that an adviser owes certain “fiduciary duties” (i.e. duties of trust and confidence) to their clients, for instance the duty to avoid conflicts of interest. Advisers may try to expressly exclude such duties in an engagement letter, for example to enable them to work for other clients whose interests might conflict with the engager’s.

The provision of information

Engagement letters will typically govern the flow of information between the parties. They may for instance include undertakings from the client that the information it will provide to the service provider will be true, accurate and not misleading (meaning the adviser is protected if it provides advice on the basis of incorrect information and is subsequently sued by a third party as a result). Confidentiality obligations may also be expressly included.

Terms of business

Advisers usually incorporate their own terms of business into engagement letters, e.g. by attaching them as a schedule.

Practical tip: if you are attaching a firm’s standard terms of business to an engagement letter, make sure that you use the most up-to-date terms. Note that if you’re reviewing an engagement letter that contains a counterparty’s standard terms of business (for example, if your firm is engaging the services of an accountancy firm in connection with a deal), it’s unlikely that the counterparty will accept amendments to its standard terms (although this will depend on the bargaining power between the parties). 

Complaints

Engagement letters will also typically set out (or cross refer to) the engaged adviser’s complaints procedure.