What is an Engagement Letter?

An engagement letter is a written document that determines the legal relationship between two parties, such as a professional company and a client. The engagement letter outlines all the requirements, terms, conditions and other related information which are mandatory for the professional relationship.

How does an Engagement Letter Work?

An engagement letter must be comprehensive to covers all aspects related to business activities. The purpose of the engagement letter is the same as that of a traditional contract. The scope of an engagement letter is not limited. Many professionals use engagement letters to ensure the performance of business activities. For instance, manufacturers, exporters, insurers, accountants, and auditors may arrange engagement letters and form a professional relationship with the clients. An engagement letter determines the scope of the work, such as completion time, contingencies, estimated cost, and other related activities. Also, it defines who will be liable for a loss which incurs due to uncertain events and issues guidelines to accept or reject liabilities. For instance, if the company hires services of an investment firm to guide them to make investment in stock market and other financial assets, they should outline the scope of the professional relationship. Generally, financial firms perform numerous functions for clients. If the company wants limited services from the financial firm, it would need to define and describe them in a written agreement. In this case, both can utilize an engagement letter to define the relationship. In addition, an engagement letter may include a clause to cover mediation and arbitration in case of dispute. The clause may include guidance regarding how to settle dispute or any conflicts that may arise between parties to the business. The clause often stresses on stakeholders to avoid legal process which are lengthy and has higher cost.