/cropped-image-of-insurance-agent-discussing-with-client-at-desk-1036263996-cbf1154ac68e40a2a861cdfa106b11dc.jpg "Engagement Letter Definition 1")
What Is an Engagement Letter?
An engagement letter is a written settlement that describes the enterprise relationship to be entered into by a shopper and an organization. The letter particulars the scope of the settlement, its phrases, and prices. The aim of an engagement letter is to set expectations on each side of the settlement.
Key Takeaways
- An engagement letter defines a enterprise relationship between two events.
- A letter of engagement limits the duties of the corporate, straight or by inference.
- A variety of companies together with attorneys, auditors, accountants, and consultants use engagement letters routinely, whether or not their shoppers are people or giant companies.
How an Engagement Letter Works
A letter of engagement serves the identical objective as a contract between two events. Nevertheless, its format is much less formal than a contract and it usually avoids authorized jargon.
The letter is meant to briefly however precisely describe the companies to be delivered, the phrases and circumstances, the deadline or deadlines, and the compensation. A letter of engagement is a authorized doc and binding in a enterprise deal.
An engagement letter is much less formal than a contract, however nonetheless a legally binding doc that can be utilized in a courtroom of regulation.
An engagement letter additionally serves to restrict the scope of the corporate’s companies. For instance, when a person or enterprise secures the companies of an legal professional, the letter may describe the particular objective or space of experience through which their companies can be utilized.
A contractor who hires an legal professional to attract up a land buy can not name the legal professional for recommendation about his divorce. The engagement letter is not going to state that truth as baldly, however the which means can be clear.
An engagement letter would not change into legally binding till it’s signed by all events.
Benefits of an Engagement Letter
Setting expectations is vital. The shopper will get the reassurance of figuring out when a service can be accomplished, and the way a lot it should value. The letter additionally makes it clear if different prices are concerned that aren’t lined within the settlement, akin to required software program that have to be bought individually by the shopper.
The enterprise has set boundaries on the work that’s anticipated to be carried out. That is supposed to stop “scope creep,” one thing that each tax accountant and legal professional dreads. The letter may additionally cite companies that lie outdoors the present settlement however could also be added sooner or later as wanted, with an estimate of the prices of those additions.
An engagement letter might embrace a clause concerning mediation or binding arbitration for the connection. This clause supplies steering for managing any disputes arising between the events.
Particular Issues
If the connection is long-term, many corporations require their engagement letter to be up to date and signed once more by the shopper yearly.
This enables for any adjustments within the enterprise relationship over time and strengthens the authorized standing of the doc. It additionally reminds the shopper of the scope of the settlement, maybe forestalling “scope creep.”
Who Prepares the Letter of Engagement?
The engagement letter is drafted by the corporate rendering the service, usually with the assistance of a lawyer.
Is an Engagement Letter the Identical as a Contract?
Engagement letters are much less formal and usually shorter than a standard contract. Nevertheless, additionally they share some vital traits, akin to being legally binding and designed to cut back legal responsibility.
When Ought to an Engagement Letter Be Despatched?
Engagement letters must be offered to the shopper originally of the connection earlier than work commences. They need to additionally periodically be reissued, particularly when the scope of companies adjustments.
How Usually Ought to Engagement Letters Be Up to date?
To play it secure, corporations usually require their engagement letter to be up to date and signed on an annual foundation. A brand new one ought to all the time be issued if the scope of companies adjustments. Nevertheless, even when the settlement stays the identical, it will probably nonetheless be sensible to redraft an engagement letter to extend the authorized standing of the doc.
The Backside Line
Corporations providing a service can face all types of issues in the event that they don’t lay out their boundaries in a written, legally binding contract. Engagement letters primarily assist defend corporations from lawsuits whereas providing clients readability over what companies they will count on to obtain and when. Briefly, they search to keep away from misunderstandings and mainly operate as a less expensive, less complicated different to an everyday contract.