Poorly Drafted Engagement Letter Spells Trouble

A good engagement letter can help you avoid a malpractice claim, but a poorly worded one can cause trouble.

That happened recently in Georgia, where an appellate court struck down a key clause in an engagement letter, saying it was ambiguous and not sufficiently prominent to put the opposing party on notice of its terms.

At issue in Warren Averett, LLC v. Landcastle Acquisition Corp was an engagement letter from an accounting firm, not a law firm. But the court’s holding – that a limitation of liability provision was “unenforceable as a matter of law” because it was not explicit and clear – is instructive for lawyers as well.

According to the court, the clause was defective under Georgia law because:

• It was not capitalized, italicized, or set in bold type for emphasis.
• It was the same font size as the rest of the contract.
• It was not “set off in a separate section that specifically addressed liability or recoverable damages, with a bold, underlined, capitalized, or italicized specific heading, such as ‘Limitation on Liability’ or ‘DAMAGES.’”
• It was not in “a prominent place within the contracts to emphasize the importance of the provision’s limitation on recoverable damages, such as being adjacent to another similarly significant provision or being next to the parties’ signature lines.”

Important takeaways for lawyers: make sure your engagement agreements are clear, explicit and understandable to the client. Consider going over the agreement in detail with the client, perhaps even having them sign and date key sections to acknowledge their understanding and consent.

Engagement Letter Defense Rejected

Here’s a summary of Warren Averett, LLC v. Landcastle Acquisition Corp. from Seth Laver of Professional Liability Matters:

“Accountant conducted year-end audits for its client, a law firm. When law firm discovered that its managing partner had allegedly embezzled in excess of $15 million, it sued Accountant for breach of contract, professional negligence and gross negligence. Accountant filed a motion for partial summary judgment contending that a provision within the parties’ contract limited any recoverable damages to the amount of professional fees paid to Accountant, which amounted to about $87,000.

The clause states: Should you become dissatisfied with our services at any time, we ask that you bring your dissatisfaction to our attention promptly. If you remain dissatisfied, it is agreed that you will participate in non-binding mediation under the commercial mediation rules of the American Arbitration Association before you assert any claim. In any event, no claim shall be asserted which is in excess of the lesser of actual damages incurred or professional fees paid to us for the engagement.

In response, the plaintiff filed a cross-motion arguing that the clause was unenforceable as a matter of law because it was not sufficiently prominent to provide notice and it was ambiguous and insufficiently explicit as to whether it applied to the claims for professional negligence and gross negligence. The court agreed and concluded that the clause was unenforceable due to its ‘lack of prominence among the surrounding terms, the ambiguous scope of the provision, and its invalidity as to the … claim for gross negligence.’”

Read the full blogpost in Professional Liability Matters here.

Get This Practice Guide from Lawyers Mutual

“A well-drafted engagement letter is the first step in establishing a professional relationship with the client and is an effective way of meeting the duty to communicate with clients,” according to Lawyers Mutual. “Many potential claims and/or grievances can be avoided with the adoption of a firmwide policy to use an engagement letter for each new representation. Whenever a new matter is opened, an engagement letter should be drafted to avoid misunderstandings, to build the attorney-client relationship, and to establish evidence of both the scope of the engagement and the fees to be charged for the firm’s services.”

Download Lawyers Mutual’s free Attorney-Clients Agreement Toolkit here.