What is an 'Engagement Letter'

An engagement letter is a written agreement that defines the legal relationship between a client and professional company. The letter details the terms, conditions, and compensation arrangement of the professional relationship.

BREAKING DOWN 'Engagement Letter'

An engagement letter often serves the same purpose as a traditional contract. It is essential to fully detail the scope of the engagement and identify contingencies, deadlines, and compensation arrangements. Ensuring the accuracy of the agreement prevents discrepancies and adverse legal consequences during the professional relationship. 

Use of an Engagement Letter

A variety of professional situations will use engagement letters. Examples of relationships include those arrangements between a client and an accountant, auditor, or attorney. Clients can range from an individual to large-size corporations. The engagement letter defines the terms of the professional business relationship and the scope of the work that will be completed. It provides guidance regarding liabilities that each party will either accept or reject.  The engagement letter also identifies the ability to use or disclose tax information.

When an individual or business secures the services of an attorney, the attorney's responsibility to the client is generally broad. If the relationship is to be limited, it should be confirmed in a written agreement. By instituting an engagement letter, the scope provides limits regarding how the attorney should respond to the client and the areas of expertise in which they will present services. 

Engagement Letter Scope and Dispute Clauses

The engagement letter will outline the scope of each party’s expectations and responsibilities. It includes details regarding specific tasks to be completed and provides a timeline for the completion of the work. The engagement letter's scope should cover the related cost and fee in conjunction with project milestones.

An engagement letter may include a clause regarding mediation or binding arbitration for the relationship. This clause will provide guidance regarding how to manage any disputes arising between the parties involved. The dispute clause can help interested parties avoid formal and costly legal proceedings.

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