Engagement Letters for Professional Services – A Valuable Tool That May Come with a Price


By: Seth Kirby
In 2009, the Georgia Court of Appeals confirmed with resounding clarity that all professional malpractice claims sounding in contract were governed by a four-year statute of limitations.  All was right with the world.  Professionals and their insurers could rest easy that their exposure to liability for professional negligence would cease four years after a transaction was completed, absent the existence of a continuing duty, given that the time period runs from the date of the alleged error.
The clarity regarding the applicable statute of limitations for professional malpractice claims was short lived, however, as the Georgia Supreme Court reversed the decision in 2010.  In Newell Recycling of Atlanta, Inc. v. Jordan Jones & Goulding, Inc., the Supreme Court held that the six-year statute of limitations governs professional malpractice claims based on the breach of a complete written contract for professional services.  The Supreme Court was less than clear on what would constitute a complete contract with regard to this statute of limitations analysis.
The dispute in Newell concerned an engineering firm’s allegedly defective design of an automobile shredding facility.  The engagement of the engineering firm was confirmed by a letter enclosing a nine-page draft scope of work that set forth the tasks to be accomplished by the firm in various phases and which proposed to bill the client on an hourly basis for completed tasks.  It set forth an estimated budget for the first three phases of the work, but did not itemize the exact hourly fee to be charged for the work performed.  On remand earlier this year, the Court of Appeals reviewed these facts and concluded that the documents evidencing this engagement was not a complete contract because it failed to set forth the essential element of consideration.  Since the engagement letter failed to set forth the hourly rate to be charged, it was partially oral, and the action was barred by the four-year statute of limitations.
Establishing an enforceable written contract is not always simple, but the establishment of a contract rarely turns on the basic element of consideration.  Consideration is nothing more than conferring a benefit upon another.  The agreement to pay money in exchange for services to be rendered constitutes consideration.  It could be argued that an amount of consideration is inadequate, or that the parties failed to mutually assent to the terms of agreement if the exact price is not known, but it would seem that an estimate of the costs to be charged for services to be rendered should be enough to show that consideration would flow between the parties and satisfy this basic element.  Nevertheless, the Court of Appeals relied upon the failure of the documents to state an exact hourly rate to conclude that they did not constitute a complete contract.
What then, can be learned from the Newell saga?  Attorneys and other professionals are frequently advised to memorialize the terms of their retentions through the use of an engagement letter.  An effective engagement letter sets forth the identity of client, discusses the scope and goals of the planned engagement, discloses how the professional will be compensated for their services, and may define when the representation will end.  The more detail that is included in such letters, the more they appear to constitute complete written contracts.  In Newell, the court may have stretched to find that the documents at issue did not constitute a contract.  Future cases may not enjoy the same result.
Effective engagement letters remain a valuable tool in protecting professionals against future claims of malpractice by defining the scope of services to be provided and by clearly explaining the fees to be charged for those services.  They avoid ambiguity between the parties and reduce the possibility that revisionist history will create previously undisclosed obligations, goals and expectations.  Given the analysis set forth in Newell, such letters may be used to extend the viability of professional negligence claims for an additional two years.  A professional’s use of engagement letters may now carry a price, but it is a price worth paying to ensure that the terms of their engagements are clearly understood from the outset — reducing risk on the front end, rather than waiting for the clock to run out on the back end.