Engagement letters

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You probably know about the ethics rule that prohibits lawyers from trying to prospectively limit their liability to clients (or at least I hope you do!).  You can find it in your state’s version of Model Rule 1.8(h).

In an interesting twist, the Utah Ethics Advisory Committee recently opined that it’s permissible to include a provision in a retainer agreement requiring the client to indemnify the lawyer against third party claims against the lawyer arising from the client’s own “behavior or negligence.”

Narrow reading — but not alone

The Utah committee said that an indemnification provision against liability, loss and expense to the lawyer caused by third-party claims arising from client’s conduct “is not specifically prohibited by the rules.”

While Utah’s Rule 1.8(h) (identical to the Model Rule) bars prospective limitation of liability to a client for malpractice, the committee said, “it does not address the specific question of whether an attorney may include an indemnification provision for claims brought by third parties.”  Therefore, such a provision “is not prohibited on its face.”

Third-party indemnification provisions might be helpful in representations involving opinion letters — for example, providing a legal opinion on behalf of a lessor, which is to be given to and relied on by the lessee.  The lawyer would be benefitted by being able to seek indemnification from the lessor client against later claims by the lessee.

Few state ethics committees seem to have addressed the issue of third-party indemnification.  But the New York State Bar Association, in a 2013 opinion, has approved the concept in the context of opinion letters.  And a 2005 Oregon opinion advised that a lawyer asked to investigate a client’s employee could seek indemnity from the client against subsequent claims by the employee against the lawyer.

Insurance deductible?  Not so fast

What about using such an indemnification provision to hold a client responsible for the lawyer’s malpractice insurance deductible if the client unsuccessfully sues the lawyer for malpractice?

The Utah committee also considered that question, and concluded that Rule 1.8(h) doesn’t expressly bar that scenario, because “requiring payment for an unsuccessful malpractice claim, on its face, does not limit liability for malpractice.”  But trying to use indemnification to extract payment from the client for your malpractice insurance deductible may be misconduct under other rules, said the committee.  Rule 8.4(d) bars engaging in conduct that is “prejudicial to the administration of justice.”  An agreement that would make a client (or, by then, presumably a former client) responsible for paying your deductible after the client loses a malpractice case against you, could “have a chilling effect on a client’s pursuit of a malpractice claim and would thus be prejudicial to the administration of justice,” the committee advised.

Client communication

In any event, client communication is key.  To say the least, “the average client may not understand what indemnification is or in what specific circumstances it could be applied.”  Sophisticated clients might, but your best bet is clear explanation and understanding.  Model Rule 1.4(b) (“Communication”) requires you to “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.”

That would seem to apply to the client’s decision to agree to indemnify you for anything.

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Note:  My co-editors and I are thrilled that the ABA Journal has again honored The Law for Lawyers Today as one of its “Web 100,” putting us among the 35 best legal blogs in the U.S.  Read the magazine’s announcement here.  We’re very proud, and we promise to keep bringing you fresh and lively news and comment from “Legal Ethics World.”  Thanks for reading!

BeartrapWe’ve blogged about this before, but if you need any more reasons to be sure that you document who your client is and is not, see the Oregon court of appeals opinion in Lahn v. Vaisbort.

“I represent only your brother”

In Lahn, the lawyer had represented the plaintiff, her brother and another individual as lenders in a series of private loans to a California-based real estate development corporation.  In a 2004 loan-rollover, the lawyer exchanged e-mails with the plaintiff and provided her with an inter-creditor agreement for the proposed transaction.

The lawyer wrote that plaintiff was encouraged “to seek independent counsel to review these and any documents in connection with this matter.  Please remember, as it is expressly stated in the Inter Creditor Agreement, we are representing [your brother] in the transaction.”  The inter-creditor agreement likewise reiterated that in this transaction, the lawyer was solely representing the brother as lender.

400K down the drain

After the loan closed in 2005, the trust deed was never recorded as to the commercial lots that had been promised as collateral for the loan, leaving plaintiff and the other two lenders unsecured.  By that time, plaintiff had loaned $400,000 to the development company.

Three years later, the development company went south, and was unable to repay the loan from plaintiff.  Secured lenders foreclosed on the property — but plaintiff’s unsecured loan was effectively uncollectable.

Plaintiff sued the lawyer, asserting that he had negligently represented her in relation to the loan agreement, including failing to advise, investigate and disclose.  The trial court granted summary judgment in favor of the lawyer on that claim, although without explaining its reasoning.

“No objective basis”

The court of appeals did a better job, expressly concluding that “there was no objective basis upon which a reasonable fact-finder could conclude that a lawyer-client relationship existed between plaintiff and defendant” in the loan transaction.

Oregon’s courts have seldom concluded that a lawyer has duties to third-party non-clients; so no lawyer-client relationship here spelled no duty to the plaintiff.

Even though the lawyer had represented the plaintiff in other matters, the court wrote, “the uncontested fact remains that he told plaintiff, directly and in writing,” that he solely represented her brother in the transaction, and that she was encouraged to seek independent counsel to review the inter-creditor agreement.  The inter-creditor agreement reiterated the same fact.

Further, even if there could be a question of fact on whether the plaintiff subjectively believed that she had a lawyer-client relationship with the defendant lawyer as to the transaction, that belief was not objectively reasonable — because of the documented statements to the contrary.

Document, document, document

Of course, the best way to document the identity of your client is in an engagement letter that leaves no doubt about who you do and do not represent.  And here, where an engagement letter was not an option, the savvy lawyer avoided malpractice liability by effectively documenting who his client was not.  Take a lesson from Lahn, and be clear on this point.

 

locally grown red round grunge stamp on whiteIf you only agree to be “local counsel” in a matter, you can rest assured that your limited undertaking also limits the scope of your duties — right?   Wrong — as a recent disciplinary case and recent ethics opinion point out.

No “local counsel exception” to conduct rules

If your law school friend is serving as “national counsel” for a company defending product liability cases all over the country, you would naturally welcome a call asking you and your firm to serve as “local counsel” in your state in a claim against the company filed on your home turf.

In taking up the opportunity your friend is offering, you might make some assumptions — you might even regard these assumptions as “customary” in your bailiwick.  You might assume, for example, that your firm is only going to be a “mail drop,” and therefore you have no duty to know or advise on the substantive local law at play.  You might also assume that your duty to communicate is limited to interchanges with “national counsel.”  In fact, since you might never have any contact with the company itself, you might even designate the “national counsel” firm as the “client” in your billing system.

These assumptions may be “customary,” but they almost certainly lack any basis in your state’s version of the Model Rules of Professional Conduct — which make no distinctions between “local counsel” and “primary counsel” when it comes to the duties arising from the attorney-client relationship.

Cautionary tale

Disciplinary Counsel v. Broyles, decided October 29, illustrates how thinking of yourself as “only” local counsel can lead you astray.  The Ohio lawyer in the case drew a public reprimand for his conflict of interest in representing a couple in defending a foreclosure action brought by a lender.  The conflict consisted of the fact that nine months earlier, a law firm had hired the lawyer to be “local counsel” in representing the same lender against the same couple in obtaining a default judgment in the same foreclosure case against them.

The consent to discipline that the parties filed in the disciplinary case details that after the lender demanded the lawyer’s disqualification in the foreclosure suit, the court granted the motion, and the lawyer appealed.

On appeal, the lawyer argued that he was only providing local counsel services to the law firm that had hired him (which is where he sent his fee invoice) — and that he had never represented the lender.  He said “that he was providing a service to the law firm and not to [the lender] as he had no authority to make any representations to the court and did not advocate for any position in the case.”  There was no case law to support that contention, and the appeals court held that the lender was the client, and reasonably believed itself to be.

Bottom line:  the lawyer not only got disqualified from the foreclosure case based on his confusion about who his client was, but also was embarrassed with a public reprimand based on the violation of Ohio’s version of Model Rule 1.9 on former-client conflicts.

Ethics opinion guidance

In June, the Committee on Professional Ethics of the Association of the Bar for the City of New York issued an ethics opinion underscoring that lawyers who act as local counsel must adhere to the same ethics rules as lead counsel.  “An attorney who agrees to act as local counsel may be subjected to obligations and risks that she does not anticipate or intend to assume,” the Committee said.  If there are to be any limits on the scope of local counsel’s work, “it is the attorney’s obligation to communicate [them] to the client … rather than to rely on undefined terms, such as ‘local counsel.’  Preferably, local counsel will enter into an independent written retainer agreement with the client.”

This emphasizes the central role of the engagement letter, and the best practice of making the retention agreement directly with the client — not with “lead counsel.”  If you intend to limit your role to certain tasks, or a certain phase of the matter, you had better lay that out clearly at the beginning of the representation and get the client’s consent in writing.

As always, communication and documentation are the keys to avoiding unpleasant and potentially expensive surprises.

 

Limits signRule 1.2(c) of the Model Rules of Professional Conduct permits lawyers to enter into limited-scope engagements, in which you can agree with the client that you will be providing only certain designated legal services, and not the full scope of services that might ordinarily be expected in an engagement of that sort.  The rule is a way to help clients control costs when all they want or need is limited representation.

Over at The Legal Profession Blog, there is a report about a disciplinary case in which the Minnesota Supreme Court invoked Rule 1.2 in reversing a lawyer’s admonishment for conduct prejudicial to the administration of justice.

The lawyer had agreed with his client in a collaborative divorce case that the scope of services would include the lawyer’s appearance at only one hearing, in exchange for a flat fee.  When the lawyer failed to appear at subsequent post-divorce-decree hearings, the trial court filed a disciplinary complaint, although it had previously noted after the first hearing that the lawyer was no longer counsel of record.

The disciplinary panel found that the lawyer should have informed the court that his agreement with the client excluded court appearances.  On review, the state supreme court disagreed, in large part because the client “instructed [the lawyer] not to attend the hearings pursuant to the terms of a limited-scope legal representation, the propriety of which” was unchallenged.

The reversal of the lawyer’s admonishment is the right outcome here; there was no suggestion that the limitation on the scope of the services was unreasonable, or that the client’s informed consent was lacking.

According to Prof. Mike Frisch, at The Legal Profession Blog, disciplinary opinions acknowledging the efficacy of Rule 1.2 are not common.  This one underscores the advantage of a clear engagement letter, and the importance of describing just what services you will and will not provide.  That’s a good watchword for any engagement — here, it helped save a lawyer from discipline.

 

Everyone wants to avoid disputes with clients, and a good way to do that is with an engagement letter that lays out the agreed scope of your legal services.  Disagreements over the intended parameters of the representation can be ugly — and they can land you in disciplinary trouble or lead to a malpractice claim.

But with engagement letters, it’s not just what you say — it’s what you do.  Even a good letter limiting your representation to a specific task can lead to problems if your later conduct doesn’t line up with the agreement.  An Ohio lawyer’s license was recently suspended for a year (stayed on condition) when his actions led his client to reasonably believe he would do work that wasn’t described in the engagement letter — and he failed to do that work.

In Cleveland Metropolitan Bar Ass’n v. Fonda, the client’s truck had been repossessed.  The lawyer agreed to write a letter to the dealer aimed at getting the truck back or getting a refund — and an engagement letter set out his agreement with the client to do just those tasks.  The dealer failed to respond, and after some delay the lawyer told the client that he was still working on the case and that it would be “headed to court soon.”

The lawyer also took an additional $100 filing fee from the client.  He never presented a new agreement to the client that would cover the additional work; he also never cashed the filing-fee check or did any further work on the matter.  For the next two-and-a-half years, the matter just sat there, with no communication between the lawyer and the client.

The Ohio Supreme Court found that the lawyer failed to reasonably communicate with the client and that he also failed to pursue the client’s objective — consisting of the extra work — with reasonable diligence.

Under Ohio law, the client’s “reasonable belief” is the key to whether you have formed a client relationship in a particular matter, which can impose duties on you.

Even though the lawyer in the Fonda case tried to limit the scope of his representation in a written agreement, the court held that “his actions … conveyed a different message.”  By telling the client that the case would soon go to court, accepting the filing fee and not entering in to a new agreement for the extra work, the lawyer led the client to reasonably believe that the lawyer was going to do that extra work.

The take-away from the Fonda case:  be aware that if you go beyond the scope of your engagement agreement with the client, your conduct may alter the limits of the agreement, raising additional duties that you may never have intended to take on.