I had a potential client call me who wanted to sue her prior tax preparer. The tax preparer clearly made a series of bone head mistakes (one example was including a Schedule C on an 1120). These mistakes resulted in the taxpayer being audited and found liable for tax and penalties, in the amount of $16,000+. The taxpayer wanted retribution!
The tax preparation services firm was a small firm. I asked the taxpayer what she knew about the firm. I asked her, did she think the preparer had insurance? She wasn’t sure. In fact, she didn’t know much about the firm other than the tax preparer prepared returns and made promises to e file the return on time (they didn’t). I asked the taxpayer if there was an engagement letter with the tax preparer. The taxpayer said no. In asking about the Engagement Letter what I was looking for was an Attorneys’ Fees Clause in the Engagement Letter. An Attorneys’ Fees Clause, simply states that if one party must take legal action to enforce the agreement between the parties then the wining party is awarded attorneys fees and cost. California Civil Code § 1717, allows for a suing party to recover their attorneys fees as a reimbursement only if the contract has an “Attorneys’ Fee Clause” (Other states have similar clauses).
We all make mistakes. But which mistake is going to make you a target for an attorney. It probably isn’t your actual mistake, but it is more likely Your Engagement Letter! The very first thing the attorney is going to read is – your Engagement Letter. Does your Engagement Letter have an “Attorneys’ Fee Clause”? Remember an Attorneys’ Fee Clause cuts both ways even if it is written one sided (i.e. only allowing you to recover fees against your). The Courts interpret any one sided clause in a contract to apply to both parties even if written just for one party. I have seen cases where an attorney sued for an infraction of $4,200 and yet was awarded $42,000 in attorney’s fees for collecting the $4,200. I suggest taking out the “Attorneys Fees Clause” in your Engagement Letter if you have it. Yes, you will give up your right to collect attorneys’ fees if you have to chase a client for fees. But how many clients do you end up chasing for fees? It is probably more likely you will be the target rather than the other way around.
What can you do if you do have the “Attorneys’ Fees Clause” in your Engagement Letter and you become a target? Most states allow you to seriously limit the amount of the attorneys’ fees the other side can collect if you make a written offer to make the other party whole. By doing this the opposing attorney may not be recover any attorneys’ fees after the date that you made the offer to make the client whole. It may initially hurt to make this offer, but in the long run it is better than getting stuck with a $42,000 legal fee bill on a $4,200 mistake.
Other helpful clauses for an Engagement Letter are:
- Venue Clause: (limiting the county that a lawsuit can be brought. Credit Card Companies use Delaware all the time. This prevents many people living throughout the country from suing a Credit Card Company because the customer does not want to go to Delaware.)
- Specific Job description Clause: Itemize what you were hired for.
- Integration Clause: All agreements and terms between the tax preparer and the client are within the Engagement Letter an nowhere else (your disgruntled client can’t make up additional tasks/areas that you were going to perform).
- Arbitration Clause
Of course the best course is to have insurance but not everybody carries insurance, do they? And if you do you don’t necessary want to use it. Remember if you don’t have an Attorneys’ Fees Clause in your Engagement Letter you can not be held responsible for the disgruntled client’s legal fees and cost.
If you have any questions or thoughts let me know.