After the conflicts check is completed, the next step is to draft an appropriate letter of engagement. The purpose of this is to confirm the scope of representation, discuss who you will be reporting to and reporting expectations (including frequency and information provided i.e.: accountings and status reports), to set forth the methods of communicating, including availability to clients, preferred methods [phone/fax/email], preferred methods for receipt of information, and to chart out what the fiduciary’s responsibilities are, and billing practices. From a risk management perspective this letter is critically important.
Engagement letters help manage client expectations and avoid misunderstandings that could leave the Fiduciary exposed later on. Many Fiduciaries, especially those with a long-standing relationship with a particular client, will balk at sending such letters, under the theory that the client would be offended by such a correspondence or that such a correspondence is unnecessary because of the nature of the relationship. Such excuses are not credible in today’s business environment. First, almost all clients will transact the purchase of goods and services via written agreement. Thus, the fact that a letter has been sent confirming the services to be performed and the manner on which the Fiduciary will seek reimbursement for such services is hardly a threat- in fact it is something that a client should actually expect to see, as it is largely for their benefit. The letter can be drafted in a such a way that incorporates the Fiduciaries’ familiarity with the client and the client’s business, while making clear exactly what the Fiduciary will (or will not) be doing in connection with a particular representation, so that there is no misunderstanding of the scope of the services to be performed.
Engagement letters are the first opportunity that a Fiduciary has to minimize any potential disputes with Clients and/or their family members/persons at interest. Because of the nature of the engagement and the condition of the Clients (mental and physical) most claims are filed by persons’ interested [both positively and negatively] in issues affecting the Client. We recommend that a Fiduciary identify all possible stakeholders or interested persons at the onset, and forward them a copy of the engagement letter. (1) It is important to give all interested persons sufficient time to contact you and discuss the planned course of action or raise objections if applicable. Resolving a potential conflict prior to the commencement of a complicated or life altering decision on behalf of the Client is the essence of risk management.
Some real-life examples of engagement letters preventing disputes from arising and working effectively to outline the Fiduciary’s role and responsibilities at the time of engagement/appointment include the following (names changed to protect confidentiality):
The Insured, Mrs. Carlson, was engaged by Mr. Wilson to assist with managing his finances. It was Mrs. Carlson’s responsibility to pay certain expenses and not others. Mrs. Carlson memorialized her payee responsibilities in an engagement letter to Mr. Wilson outlining the specific entities she was responsible for issuing payment to, the process of issuing payment, and from which funding source the payments would be made. Mr. Wilson signed the engagement letter confirming his understanding of Mrs. Carlson’s role.
The signed engagement letter prevented Mr. Wilson from later disputing the (since inflated) expectations he had regarding Mrs. Carlson engagement and which payments and from which funding sources he anticipated the payments would be made.
The Insured, Mr. Frank, was appointed as Guardian of the Person and Property of Mr. Lewis. Following his appointment, Mr. Frank drafted an engagement letter outlining a care plan for Mr. Lewis. The care plan included: the transfer of Mr. Lewis from his home to an assisted living facility, the names of entities and individuals whom Mr. Frank anticipated engaging to assist with the care of Mr. Lewis and his property, the various options available to Mr. Lewis regarding maintaining his home versus selling/renting the asset, and an inventory of current assets/incomes/and future anticipated expenses and how Mr. Frank anticipated to manage them. This engagement letter was provided to the Court and all interested family members.
The engagement letter specifically outlined a care plan for Mr. Lewis and clearly memorialized Mr. Frank’s intentions for the future care of Mr. Lewis and management of his property. This document was submitted to the Court and forwarded to interested family members, so that they knew the plan of action prior to commencement. This prevented future claims alleging mismanagement of resources and not acting in Mr. Lewis’ best interests. All interested family members were given an opportunity to contact Mr. Frank and discuss their concerns prior to commencement of the care plan.
The Insured, James Smith, was appointed to act as temporary trustee of the Mr. Davis & Mrs. Jones Trust pending resolution of a trust dispute between Mrs. Jones and Mr. Davis Jr. (Mr. Davis’ son from a prior marriage). Mrs. Jones filed a petition alleging that the Insured breached his fiduciary duties by “colluding” with Mr. Davis Jr. and Mr. Davis Jr.’s attorney in order to pressure Mrs. Jones to settle the trust dispute with Mr. Davis Jr. Mrs. Jones requested that the Court remove the Insured as temporary trustee, reinstate Mrs. Jones as trustee, and compel the Insured to redress breach of trust by payment of money damages, surcharge, attorney fees and costs. The Insured had strong defenses demonstrating that he did not breach his fiduciary duties, had taken no action that would warrant his removal, and that there was no justification for any surcharge of the temporary trustee. Nonetheless, while it appeared that the claims against the Assured were frivolous and lacked factual support, given the complicated “factual issues” a jury would need to resolve, it was a realistic threat that the Insured could have been held liable to the trust.
The Insured began his appointment as temporary trustee of the Trust in the midst of a trust dispute amongst family members. This should have been his first warning sign. Had the Insured drafted an engagement letter setting forth the exact scope of his representation and the work he planned on performing on behalf of the Trust in anticipation of performing the services, this would have helped prevent Mrs. Jones from later asserting a claim for breach of services. The Insured should have obtained all interested parties signatures on the engagement letter, to confirm their understanding of his role and responsibilities.
The Insured, Mr. Freed, was engaged by Mrs. Wilson to assist with the payment of her bills. Mr. Wilson was responsible for funding the account out of which the Insured was requested to make payments from. Although Mr. Freed was not responsible for transferring money into the account, this understanding was verbal (not reduced to writing). One day, Mr. Freed received an invoice for the payment of Mrs. Wilson’s property insurance; however he was unable to pay the invoice because of lack of funds in the account. As a result the property insurance policy lapsed and thereafter significant flooding and water damage occurred. The property damage claim was denied as the property insurance policy had lapsed. Mrs. Wilson filed a claim for negligence against Mr. Freed.
The Insured could have prevented this claim by memorializing his obligations for the payment of Mrs. Wilson’s bills in an engagement letter to Mrs. Wilson in which he specifically set forth what he was not responsible for – i.e. funding the account. By failing to do so, Mr. Freed opened himself up to being sued for the subsequent lapse in the property insurance policy and the damages that resulted because of his purported negligence. It is now “word against word” as to what the agreement actually was.
(1) We recommend speaking with the Client, the Court and/or an Fiduciary prior to issuing an engagement letter to “all interested persons” to make sure that no privacy rights of the Client are violated.