A Properly Drafted Engagement Letter Can Help Defend Legal Malpractice Claims

At ALPS, we strongly encourage you to use engagement letters — so much so that if a claim is made against you and handled under certain policy forms, ALPS will reduce your deductible if your file contains an engagement letter.  It is also worth taking some time to ensure that you and the client are on the same page. Below are a couple of examples of legal malpractice cases in which having a proper engagement letter could have assisted in the defense of the claim. 

Case Example #1 

This example is taken from a case in which a business tried to hold an outside counsel responsible for losses the company sustained in its investments. In sum, for several years the Insured had served as outside counsel for the company, pursuant to an engagement letter. Although the Insured attempted to discreetly identify the distinct legal issues in which he would assist the company, the Insured unfortunately also stated that his firm would also render legal services as to “all other matters assigned” by the company.   

The company was suffering from an internal conflict among its board of directors to the extent that the company’s bank filed an interpleader action as it was unclear from whom the bank was to take direction as to the investment funds which amounted to approximately $18MM. The Board eventually resolved its dispute and outside counsel assisted the company in resolving the interpleader action, eventually getting it dismissed.  Unknown to the Insured, the Board also decided to switch its investment accounts to a new wealth manager.  The Insured attorney performed discreet tasks in assisting in the transition to the new wealth manager. The Company’s investments did well until the market plummeted and the Company lost some $10MM. By this time, the prior Board had changed, and the Company sued the Insured alleging that the Insured negligently failed to protect the Company from changing its wealth manager and that the Insured should have warned the Company of numerous problems associated with investing with this new wealth manager.   

Despite the engagement letter which attempted to discreetly identify the specific legal issues, two issues arose. The first is the language of the retainer agreement as to “all other matters assigned.” The second is that the Insured went ahead and performed discreet tasks on the switching of wealth managers without a new engagement letter. The combination of these two issues led to a denial of the MSJ, with the court ruling that there was an issue of fact as to whether the Insured had agreed to advise the Company on the switch of the wealth advisors. The lesson from this case is that even with long-term clients, it is important to have a specific engagement letter for each matter or group of matters.  Further, if you are going to do additional work outside of the specific engagement letter, you should at least memorialize what you are and (more importantly) what you are not going to do. 

Case Example #2 

Clients’ bank accounts were being garnished to satisfy a foreign judgment creditor. They retained the Insured to file bankruptcy, stating they wanted to file on October 10th because October 10th was the last day they could contest the garnishment. The retainer agreement in this case charged a $10,000 flat fee for the preparation and filing of a Chapter 7 bankruptcy petition and limited the scope of work to “Basic legal services to include research of various issues relative to your case, preparation and filing of your bankruptcy petition, attendance at the 341 meeting(s) of creditors, and preparation and mailing of all required notices and following up with the trustee assigned your case should he or she ask for additional information relative to your petition.” The Clients also carried significant tax debts but assured the Insured that their tax accountant had concluded that the tax debts were dischargeable. The insured noted in the file that the amount was sizeable and that someone should do a dischargeability analysis, that he had not performed such an analysis, and was relying upon the client’s tax accountant.   

Insured filed the bankruptcy on October 10th and the Clients were eventually discharged. After the discharge, however, the Clients received notice from the IRS that they still owed taxes. As it turns out, in order for these taxes to have been discharged, the bankruptcy needed to be filed after October 15th.  After negotiations, this claim was settled. 

The lesson from this situation is that when there are other professionals involved in providing services to Clients, it is important to document the tasks of each. Here, the Clients assured the Insured that their tax accountant had told them the tax debt was dischargeable. Although the Insured spotted the issue and in fact wrote it down in the file, he never followed up directly with the tax accountant or referenced the issue in his engagement letter.   

Hopefully, these two legal malpractice case examples will encourage you to draft your engagement letters as carefully as you would draft a pleading or other type of contract.