American Bar Association
Forum on the Construction Industry
___________________________________________________
Engagement
Letters
and
Litigation
– Making Sure the Roles are Defined
John F. Hoehner,
Esq.
Vice President &
Director, Global Litigation
Jacobs Engineering Group Inc.
Herbert H. Gray, III, Esq.
Ragsdale
Beals Seigler Patterson & Gray, LLP
Presented at the
2009 Fall Meeting
“The Two-Way
Street of Construction Counseling: Learning from the Ins and Outs”
October 15-16,
2009
___________________________________________________
© 2009 American Bar Association
Engagement Letters
It is of critical importance to establish ground rules and expectations
at the start of outside counsel’s engagement.
The failure to do so will only lead to misunderstandings and hard
feelings at a later time, possibly at the worst of times. Further, for those who are interested in
creating or maintaining a long-term relationship with outside counsel, this
failure will invariably have an adverse impact on that prospective alliance.
That said, the ground rules and expectations of the engagement should be
largely set by in-house counsel. After
all, in-house counsel is the point of contact for and the manifestation of the
client. It is also in-house counsel who
manages outside counsel’s performance both as to how the latter handles the
assignment in a technical fashion and as to how he or she projects himself or
herself as the “public face” of the client company.
The engagement letter must contain a distilled description of the
expectations of the parties and therefore must touch upon many elements of the
proposed representation. These elements
include budgeting and cost, evaluative assessment, reporting, litigation
practices, the handling of settlement overtures and expectations and general
professional demeanor, and staffing. Each will be addressed individually herein.
The terms of the engagement letter should be “professional”. Confrontational or accusatory language will
serve only to get the relationship on the wrong foot from the beginning. After all, you are trusting this particular
outside counsel to make the best judgments for you and your employer; if
outside counsel enters the relationship in a paranoid or defensive posture,
decisions may become more centered on the relationship itself rather than the
best interest of the company client. On
the other extreme, engagement letters
should not be overly informal. Remember:
(i) that the engagement letter, like all contracts, may one day be subject to
review by a court or other finder of fact as to exactly what the arrangements
were between the parties; and (ii) that you may not be present to explain what
the terms of the letter “really meant”.
An engagement letter should be drafted as any contract would be – on the
premise that none of the parties at the table may be present when a critical
interpretation of the contract occurs.
Cost control, and the ability of
in-house counsel to forecast accurately those costs for Management, is of
principal concern. The engagement letter
must accordingly impress upon outside counsel the need for an accurate budget
which counsel is ready to commit to and to live by. If outside counsel qualifies its budget by
including a contingency for unidentified circumstances, the particulars of that
qualification should be explored and addressed.
Many times costs attendant to those circumstances may be quantified in
whole or in part, thereby further ensuring the accuracy of the budgeting
process.
The budget should provide an estimate of the total cost of the
assignment through final resolution. In the case of litigation, it must take
into account out-of-pocket costs such as expert witness fees, fees associated
with ADR and the estimated cost of other services that outside vendors counsel
would perform work on the matter. A
budget that projects these costs on a quarterly basis would be most useful, and
the budget should give an indication of the type of work that is expected to
generate that quarterly cost. A
reminder to outside counsel that in-house counsel will not authorize the
payment of any invoice that exceeds the approved budget would serve as a
healthy reminder for outside counsel that the forecast must be accurate and
honest.
The engagement letter must also address in-house counsel’s expectations
relative to travel and expenses; reimbursement for computerized research,
research services and extensive copying; reimbursement for the computerization
of documents; and costs associated with routine secretarial work (it should never be billed in the first place),
word processing, computer operators and office supplies.
The engagement letter, especially
in the case of litigation, must also require an Early Case Assessment from
counsel within a time certain – whether or not counsel will have had a chance
to conduct all the discovery and deposition taking that might have been
contemplated at the outset. The purpose
of the assessment is to give in-house counsel and Management an early
opportunity to identify a path forward to, hopefully, and early and reasonable
resolution. Among the expectations of
outside counsel is that he or she possesses sufficient experience, judgment and
expertise to perform this evaluation.
Requiring an initial assessment within 60 to 90 days after the initial
engagement is not unreasonable, provided in-house counsel remembers that the
primary purpose of such is to assist counsel and Management in identifying options for early
resolution of the dispute. In this
initial assessment, outside counsel needs to summarize the facts, the
applicable law and the key issues he anticipates encountering, and needs to
identify the range of potential outcomes and related probabilities based upon
the then available information. This is
a risk assessment and should provide a range of alternative strategies for
resolving the dispute and set forth a recommended strategy for going
forward.
In the case of litigation, the budget and Early Case Assessment are both
part of an overall Litigation Plan. This
Plan should be developed in consultation with in-house counsel, since it is
in-house counsel who has the job of selling it to Management. The Plan needs to touch upon every aspect of
the contemplated task ahead, including the possibility of dispositive motions
(dismissal, summary judgment, etc.) and jurisdictional and forum-related
motions (transfer, removal, venue, consolidation), as well as investigations
and necessary discovery.
The engagement letter should also require outside counsel to update the
Plan with an established frequency.
Monthly is too frequent, but quarterly is not. The Plan can and should be modified as the
case progresses, but each modification should reflect counsel’s best judgment
in anticipating and planning activities which will be necessary to proceed
through trial -- taking into account anticipated pleadings, settlement
discussions, motion practice, discovery, legal and fact research, trial
preparation and, of course, trial and the likely cost of these activities.
If the client company has work performed by persons who either are
subcontractors or suppliers or have another relationship with the company,
in-house counsel needs to remember that, in these instances, it is extremely
likely that his company may need to be defended and indemnified by such a third
party. Indeed, the company could be an
additional insured on various insurance policies. One of outside counsel’s first duties should
be to perform enough research into the facts and contract documents to
determine whether the assigned matter could be tendered to a third party and/or
its insurer.
In the case of litigation, ground rules must also be established with
outside counsel relative to such matters as motion practice. In this regard, outside counsel should be
directed to submit all proposed pleadings, motions and other papers to in-house
counsel for review and comment before they are served upon other parties or
filed with the court. Draft answers to
interrogatories should be prepared in consultation with in-house counsel and,
unless there are good strategic reasons to the contrary, counsel should be told
at the time of engagement that the company will retain the originals of all
company documents. All document
productions should be conducted at the various corporate offices involved with
the claim. Outside counsel also needs to
know that company personnel need the maximum possible lead-time for producing
documents, for producing themselves for depositions and for participating in
other discovery techniques.
Of particular importance, counsel needs to know at the time of
engagement that in-house counsel will be the focal point for communications
with Management and that only through in-house counsel will the availability,
use and assignment of company employees be coordinated.
In litigation assignments, counsel must also be reined in early relative
to the affirmative pursuit of discovery.
It may be wise to point out that the use of written discovery may be of
limited usefulness and may seldom be very cost beneficial. On the other hand, full document discovery of
the opposition and analysis thereof followed by the depositions of key
witnesses and experts is usually very effective. A shotgun approach of deposing every possible
witness regardless of materiality is to be avoided. In preparing the discovery portion of the
Litigation Plan, counsel should be directed to work closely with in-house
counsel so that the latter will have the opportunity to provide timely and
meaningful input at each step of the discovery process.
When it comes to defending the client company, outside counsel must be
cognizant of the advisability of commencing settlement discussions at very
early stages of the claim. This is why
an Early Case Assessment is so important, and the exploration of settlement
discussions, or ADR, at early stages of a dispute is often beneficial both to
the client and its adversary. There is nothing more frustrating than spending
more in litigation costs than the settlement value of a claim. All of that said, however, counsel should
never be permitted to undertake any discussions in this regard or indirectly
imply any interest in settlement, without in-house counsel’s prior approval.
Though some counsel may chafe at the thought, in both litigation and
non-litigation scenarios, counsel needs to be reminded of the need to maintain
a cooperative spirit with his adversaries or counterparts, where appropriate
and possible. To a large degree, the
cost and expense of a lawsuit or the realization of the most favorable
contractual terms can often depend on the relationship between counsel and
opposing counsel. Accordingly, at the
time of engagement, counsel must commit to professional conduct and the
development of a cordial and cooperative spirit with opposing counsel so that
company's position is not prejudiced.
The client company is not only purchasing legal knowledge, skill and
expertise, it is also purchasing professionalism.
As for charges for legal services, services of outside counsel (unless
another basis for setting legal fees is agreed to in advance in writing) should
be made on the basis of counsel’s standard hourly rate in effect as of the date
of the company's request for legal services.
The applicable hourly rates should be set forth explicitly in the
engagement letter, and counsel should agree as a condition of the
engagement that changes in rates must be
communicated in writing in advance of the contemplated change to in-house
counsel. The engagement letter should
also affirmatively provide that no billing will be accepted at a new hourly
rate unless the change was communicated to and accepted by the client company
prior to the services being performed.
In the current economic times, alternative fee arrangements may be worth
considering. For example, instead of a
straight billable hour arrangement,
depending on the particulars of the case a lowered hourly rate plus a
contingency “kicker” may be an acceptable alternative. A firm which would not have taken a matter
on a straight contingency basis in the past may well be inclined to do so in
order to keep its attorneys employed.
Outside firms are also feeling the pinch of the economy. The downturn may present an opportunity to
purchase legal services at a value to you and your employer.
Finally, at engagement counsel should know that in-house counsel’s
company expects counsel to use good judgment in staffing the project so as to
provide excellent service without unnecessary expense. Counsel should be reminded that project
staffing is a matter of judgment and that this judgment is a principal reason
why counsel was retained. Counsel should
be directed that in-house counsel expects basic research, the collection of documents,
the summarization of testimony and the like to be done by junior lawyers or,
when appropriate, paralegals to contain costs.
And though it is sometimes a sore point with outside counsel, the
engagement letter should specifically provide that generally only one attorney
from the retained firm should attend meetings, hearings, arguments and
depositions. In the event outside
counsel believes additional lawyers to be necessary for a task, in-house
counsel must first be consulted, and approve the additional staffing.
An additional staffing problem is the question of who bears the cost of
educating new lawyers to a file, be they partners, associates, paralegals or
some hybrid. While this has always been
an issue, particularly in large firms, in the current economic downturn it has
become more common. As firms retrench
and reorganize, the lawyers working on your matter may no longer be employed by
the retained firm. Outside counsel
should be made aware from the beginning, perhaps in the engagement letter
itself, of the expectation that the process of bringing the new lawyer
up-to-speed should be efficient and that the cost of that process is not to be
borne solely, or even largely, by the client.
It is virtually impossible to catch this on a law firm invoice. The better practice is to communicate the
expectation that when new timekeepers are added to a file, those additions
should be expressly be brought to the attention of in-house counsel.
Many firms are now making use of contract lawyers to perform such tasks
as research and drafting and document review.
The engagement letter should reflect the use of this practice. More importantly, outside counsel should understand that while
this practice may well be a part of the staffing of a matter, the markup by the
firm on the direct costs of employing the contract lawyers must be reasonable
and should not in and of itself be considered a major profit center for the
outside firm.
A close to the engagement letter with this observation is appropriate:
The company has retained you because the company values your expertise
and abilities. This Department wants to
get the full benefit of them. If for one
reason or another you wish to follow a different procedure, let this office
know and an attempt will be made to try to work out an arrangement that is
satisfactory and consistent with the principles described above.
Even though lawyers are supposed to be effective communicators, we do
not always communicate as well as we should.
The engagement letter provides both an opportunity to communicate and
define expectations between you and outside counsel, and also a template for
those expectations. Do not be afraid to
address difficult issues. Since those
issues will probably arise during the course of your relationship with outside
counsel, it is much better to address them at the beginning of the
representation.
Litigation – Making Sure the Roles are
Defined
With the exception of insurance companies, few businesses staff litigation with in-house attorneys. It is virtually assured that you will be in
the business of hiring outside counsel to represent your employer in litigated
matters. What issues are involved in
managing the lawyers who are handling cases, and what is your role in the
litigation process?
Many of the considerations that are involved have been addressed in
other segments of this paper and program, e.g. the selection of particular
outside counsel and the terms of engagement of that counsel. There are a few major considerations that
do, however, merit mentioning or re-mentioning, as the case may be.
Anytime two professionals are involved in a process, it is critical to
ensure that the roles of the professionals are defined. This is certainly the case when working with
outside litigation counsel. It is
critical that you proactively make the determinations as to who is going to do
what, and that the results of those determinations are communicated to outside
litigation counsel.
An example of this arises from the issue of addressing insurance coverage
and its role in any particular piece of litigation. On occasion and in the heat of the moment,
even the most experienced in-house counsel may overlook the advisability or
requirement of notifying the carrier of a particular occurrence. The results of such a failure can, of course,
be catastrophic in that there may ultimately be a denial of coverage for
failure to timely notify the insurance carrier.
If outside counsel has been retained by you, do not assume that he will
notify the carrier or carriers involved; rather that obligation should be taken
on by in-house counsel. Your assuming
that responsibility ensures that it will not fall through the crack in the
floor. Also, although this is a topic
for another seminar on insurance coverage, do not make the decision to alert
only one carrier if it is possible that multiple coverages and multiple layers
of coverage may be involved. Notify any
and every carrier that could conceivably be involved. It is much better here to be safe than sorry.
Assuming insurance coverage does exist for a particular loss such as a
tort lying in negligence or a design defect, and if circumstances per the
policy of insurance dictate that the carrier will select counsel, managing
counsel retained by an insurance carrier can present a new and different set of
issues. First, while counsel is
defending your employer, he is generally not being paid by your employer; yet
you must remember, and outside counsel must remember, that his loyalty lies
with you and your employer, not with the carrier that engaged him. In any
event, and if only for this reason, outside counsel’s activities should conform
to your protocols and those activities must be coordinated through the office
of in-house counsel. Although outside
counsel may not recognize it, you as in-house counsel have much more influence
over the attitudes and involvement of company client employees that outside
counsel does.
This is certainly not to say that counsel should ignore the
carrier. Quite the contrary, he has an
obligation to keep the carrier informed and involved. His ethics, however, demand that he first and
foremost serve the insured, and any conflicts between the insured and the
carrier must be resolved to the satisfaction of the insured – you and your
employer. If this is a concept that
outside counsel cannot grasp, you should object to his selection by the
carrier.
A common communications problem can result when outside counsel is used
to communicating not with in-house counsel, but with an insurance adjuster. Appropriate steps should be taken at the
commencement of the representation to ensure that in-house counsel receives
copies of all reports given to the carrier and is made a party to all
communications between counsel and any adjusters.
Another very important consideration is to examine from whom (and to
whom) indemnity obligations arise. In
the event of a failure due to design or construction defect, it is very likely
that the contracts between the parties shift or share the responsibility for
the loss among various parties. It is critical to examine the contracts to
discover where the obligations arise, and to ensure that a demand is timely
made for whatever indemnity obligations might arise. Again, though you may direct counsel to be
the messenger, assume this review obligation yourself – do not assume that
outside counsel is going to do it since he may or may not have a grasp of the
contractual rights, privileges, duties and obligations.
There are instances which call for hiring litigation counsel with
particular substantive expertise.
Experienced “construction” lawyers generally have a pretty good
knowledge of the construction business.
That knowledge should, of course, include a strong working understanding
of the traditional risk allocations under construction contracts. It may not, though, and in many cases will
not, include any understanding of environmental issues, employment issues or
taxation issues, all of which can arise in the course of construction.
Remember that it is your responsibility to ensure that proper
representation has been engaged whatever the legal issues of the particular
case might be. If a matter involves not
only construction law issues, but also environmental questions, try to ensure
that the environmental issues are addressed straight up – and not just as an
aside to the construction issues. If
additional counsel should be added, take the lead in ensuring that
happens. Many lawyers believe they are
capable of litigating any and every kind of dispute that might arise. Many lawyers are wrong in that regard.
Other specialized areas of
litigation include bankruptcy, employment, taxation, workman’s compensation,
licensing, landlord/tenant and statutory rights and remedies such as those
under the Clean Water Acts. The question
of coverage under an insurance policy may be sufficiently technical that the
expertise of an insurance coverage law specialist may be required. Most construction lawyers have enough sense
to avoid trying to untangle the rules regarding preferential payments by a
Chapter 7 Debtor , but again, it is your obligation to ensure that your
employer is properly represented.
In the end, no matter what the legal
issues may be, it is your responsibility to actively manage and direct outside
counsel. Your employer will hold you
accountable, and will be looking to you when, and if, outside counsel fails to
generate the “right” result. Don’t lose
sight of the fact that your effectiveness as in-house counsel may well be in
part measured by the effectiveness of the outside counsel you have
retained. That effectiveness will be
greatly enhanced by properly identifying the roles and expectations of outside
counsel.