What is an 'Engagement Letter'

An engagement letter is a written agreement to perform services in exchange for compensation. Engagement letters are traditionally used by certain professional service firms, particularly in the fields of finance, accounting, law and consulting, to define the specifics of the business relationship. The letter is usually sent by the service firm to an officer of the engaging company, and once the officer has signed it, the letter serves as a contract.

BREAKING DOWN 'Engagement Letter'

Since an engagement letter serves the same purpose as a traditional contract, it is important to carefully lay out the scope of the engagement, any contingencies that must be addressed, completion deadlines and compensation arrangements. Ensuring that these details are correct at the outset helps to avoid costly misunderstandings later on in the assignment. Since an engagement letter is more informal by its nature, it can be a good way to establish a written agreement when the parties would otherwise be reluctant to enter into a full contract.

Use of an Engagement Letter

Engagement letters are used in a variety of professional situations. This can include, but is not limited to, arrangements between a client and an accountant, auditor or lawyer. Clients can range from individuals to large-size corporations, as long as it is defined within the agreement. The engagement letter spells out the terms of the business arrangement and the scope of the work, and provides guidance regarding any liabilities that will or will not be accepted by each involved party.

In cases in which an individual or business has secured the services of a lawyer, the lawyer’s responsibility to the client is generally considered fairly broad unless the two parties agree to a more limited relationship in writing. By instituting an engagement letter, the scope can provide limits regarding how the lawyer is expected to respond to the client and in which areas of expertise.

Defining the Scope

The scope clearly defines each party’s expectations regarding what is included within the project plan and who will be responsible for what. It includes details regarding the specific tasks that will be completed and provides a timeline for the completion of the work. If costs must be met or fees must be paid at the completion of particular project milestones, the scope within the engagement letter can include funding information in conjunction with the timeline.

Dispute Management Clauses

An engagement letter may include a clause regarding mediation or binding arbitration. This clause provides guidance regarding how to manage any disputes that may arise between the parties involved, and is designed to help avoid more formal legal proceedings.

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