An engagement letter is a contract between a professional service provider and their client that outlines the terms and conditions of the engagement. It is a critical document that clarifies the scope of services to be provided, the fee structure, the responsibilities of both parties, and any other pertinent details. In order to ensure a successful engagement, there are several must-haves that should be included in any engagement letter.
- Scope of work: The scope of work is the foundation of the engagement letter. It defines the work that the professional service provider will perform and provides a clear understanding of the expectations of both parties. It is important to be specific in defining the scope of work to avoid misunderstandings and to ensure that both parties are in agreement on what services will be provided. However, from the point of view of the client, it is beneficial to include a catch-all phrase such as “and any other services ancillary to the above” at the end of the scope to ensure that unforeseen tasks which are related to the service can also be included without the necessity of signing a new engagement letter.
- Fees and invoicing: The fees and invoicing arrangements should be clearly outlined in the engagement letter to avoid confusion and disputes. It is important to specify whether hourly rate or fixed fee method will be used, expenses that will be included in the fee or charged separately and if a cap on expenses should be introduced, which would require the professional service provider to obtain consent to incur expenses above a certain limit. Particular it is important to state when invoices will be issued and due for payment. This is vital to avoid payment of late payment interest charges. By providing clear billing arrangements, the client will have a better understanding of the costs associated with the engagement and the service provider will be aware of when they would receive payment for services rendered.
- Termination clause: The termination clause is important because it provides a clear understanding of the circumstances under which either party may terminate the engagement. It is important to specify the notice period required before termination can take effect to avoid any disruption to ongoing work. The termination clause should also outline any penalties or fees associated with early termination, if applicable.
- Confidentiality: Confidentiality is an important consideration in any engagement, especially if the professional service provider will be working with sensitive or proprietary information. The confidentiality clause should outline the obligations of both parties to maintain the confidentiality of any information shared during the engagement, as well as any exceptions to this obligation.
- Intellectual property: This is required in engagement letters for services which require the generation of reports by the service provider. Intellectual property ownership is an important consideration in any engagement that involves the creation of intellectual property, such as copyrights, patents, or trademarks. The engagement letter should specify ownership and usage rights to avoid disputes over ownership or usage rights at a later stage. It should also state if these rights will be transferred to the client upon conclusion of the services or if any conditions must be fulfilled before the rights are transferred.
- Limitation of liability: The limitation of liability clause is important because it helps to protect the professional service provider from claims or damages that may arise from the engagement. The clause may include a cap on liability or a waiver of liability for certain types of damages e.g., indirect loss, loss of profits, loss of goodwill etc. By including this clause, the professional service provider can limit their exposure to potential liabilities. From the perspective of the client, the absence of this clause is beneficial because it means that the liability of the service provider will be unlimited. If the clause is to be retained, the client, in protecting itself must ensure that the cap is not too low to offer any reasonable protection in the event of breach. For example, liability should never be capped at the amount of the fees payable under the engagement letter. The carveouts for the limitation of liability should also be wide enough to exclude liability for fraud, fraudulent misrepresentation, wilful default and gross negligence from the cap. Note that there are acts for which liability cannot be legally excluded.
- Duration: It is important to include a timeframe in the engagement letter to ensure that both parties are aware of when the work is expected to be completed. This can help to manage expectations and avoid any delays in the engagement. It is also of particular importance to the service provider if invoices can only be issued upon completion of the services.
- Indemnification: The indemnification clause specifies the obligations of each party in the event of a claim or dispute arising from the engagement. This may include the professional service provider agreeing to indemnify the client against any damages arising from their work, or the client agreeing to indemnify the professional service provider against any claims arising from their use of the work.
- Client responsibilities: From the perspective of the service provider, expressly setting out the client’s responsibilities is important as it ensures that the service provider gets adequate support from the client to carry out its services. It also serves as a defence for the service provider in the event that it is not able to fulfil its responsibilities due to the client not fulfilling its duties under the engagement letter. The client’s responsibilities should be clearly outlined to avoid any confusion over what is expected of them during the engagement. This may include providing necessary information or access to facilities, reviewing and approving work in a timely manner, and paying fees on time.
- Professional indemnity insurance requirements: Depending on the nature of the engagement, it may be important to specify the indemnity insurance requirements that the service provider must have in place. It is important to ensure, particularly from the client’s perspective that the value of the insurance is at least equal to the maximum cap on liability stated in the engagement letter so that in the event that the service provider defaults and is unable to pay, the insurance provider will step in to reimburse the client.
- Dispute resolution: The dispute resolution clause outlines the process for resolving any disputes that may arise during the engagement. The parties may choose mediation or arbitration, which can help to resolve disputes quickly and cost-effectively or the traditional adjudication in court. By including this clause, both parties can agree on a fair and efficient process for resolving any disputes that may arise.
While the above are crucial clauses to have in an engagement letter, there are some other good-to-have clauses that parties can include based on their preferences, the services to be provided and the level of access that service provider will have into the client’s business. For example, if the service provider will have access to employee records or liaise with a lot of employees of the client in performing its services, it may be beneficial for the client to insist on a non-solicitation clause. Another example is if the client does not want the service provider to perform the same service for other entities operating within the same industry, in which case, an exclusivity clause may be required. Below are some of these ancillary clauses:
- Non-compete and non-solicitation: If applicable, the engagement letter may include non-compete and non-solicitation clauses to protect the interests of both parties. This may include a restriction on the professional service provider from providing similar services to the client’s competitors, or a restriction on the client from hiring the professional service provider’s employees and vice versa.
- Governing law: The governing law clause specifies the jurisdiction and laws that will apply to the engagement. This is important to avoid confusion over the legal system that will be used to resolve any disputes, and to ensure that both parties are aware of the laws that will apply to the engagement.
- Representations and warranties: The engagement letter may include representations and warranties from both parties, which are statements that they make to each other about their abilities, resources, or obligations. These statements can help to establish trust and confidence between the parties.
- Amendments: The engagement letter should include a clause that outlines the process for amending the terms of the agreement. Amendments are typically valid if in writing and signed by both parties. It is important that each party to the engagement letter is prohibited from having the ability to unilaterally amend the engagement letter and this can help to ensure that any changes to the engagement are made in a transparent and fair manner.
- Successors and assigns: The engagement letter may specify whether the agreement can be assigned to another party in the event of a merger or acquisition, or if it will terminate upon a change in ownership, or if prior consent of the other party is required before assigning obligations.
- Signatures: The signatures of both parties are important to indicate their agreement to the terms and conditions outlined in the engagement letter. By signing the engagement letter, both parties acknowledge their obligations and responsibilities, and provide a legal record of the engagement.
In conclusion, an engagement letter is a critical document that outlines the terms and conditions of a professional service engagement. To ensure a successful engagement, there are several must-haves that should be included in any engagement letter. These include a clear scope of services, fee structure, responsibilities of the parties, term and termination provisions, confidentiality and non-disclosure obligations, intellectual property rights, limitation of liability provisions, dispute resolution procedures governing law provisions etc. The must-haves in any engagement letter are important because they provide a clear understanding of the expectations and obligations of both parties, and help to avoid misunderstandings and disputes. By including these elements in an engagement letter, both parties can enter into an engagement with clarity and confidence, which can help to build a strong and successful working relationship.
