The City of London Law Society has recently published an updated guide on the questions and issues to be considered and addressed when law firms are providing legal opinions to lenders on banking & finance transactions (the CLLS Guide).
What is a legal opinion?
A legal opinion expresses legal conclusions about and/or legal analysis of a finance transaction. Most opinions given to lenders on finance deals will:
- state whether as a legal matter the borrower has the ability to enter into the finance transaction in question and perform its obligations under the relevant finance documents
- inform the recipient of the opinion about the legal effect of finance documents
- identify legal risks that the recipient might want to consider
99 times out of a 100 on a larger deal a lender will require a legal opinion as a pre-condition to making a loan to the borrower (aka a “condition precedent”).
What does a typical legal opinion say?
- That the borrower has the capacity and authority to enter into the transaction
- That the finance documents are legal, valid, binding and enforceable against the borrower
- That there is no stamp duty payable on or as a result of entering into the finance documents
- That the governing law and jurisdiction clauses are valid choices by the borrower
These opinions and others are subject to assumptions (i.e. things that the law firm cannot check without an unreasonable amount of enquiry, e.g. factual matters) and legal matters that qualify an opinion (e.g. insolvency and the meaning of “enforceable” in English law).
We give legal opinions to lenders to reassure them that the legal effect of their finance deal is what they expect it to be, and it is fair to say that legal opinions are, in many respects, fairly standard. But there are situations where legal opinions can involve considerable discussion and difficulty. These discussions and difficulties tend to revolve around who has to give an opinion and what that opinion should cover. This is where the CLLS Guide often comes in to help.
Importance of the CLLS Guide
The CLLS Guide is a “go to” publication for a lot of lawyers working on finance deals where a tricky opinion point arises. This is because, although it does not promulgate a set of rules or a “code of conduct” for opinion providers and recipients, it explains some of the issues that may arise on opinions and how they can be dealt with. This saves time and costs for the borrower and the lender.
The updated version of the CLLS Guide is available here, but for the benefit of our readers the key “take away” points are:
- law firm 1 should not ask law firm 2 to give an opinion or address an issue that law firm 1 would not be prepared to give or address if the roles were reversed – this is the so-called “golden rule”
- market practice differs across jurisdictions, in particular the US and the UK, and this can give rise to divergent expectations over who will give a legal opinion and what it should say. The commercial and pragmatic solution put forward in the CLLS Guide is to allow opinions to follow their “home” market practice. For example, English law opinions to follow English practice and New York law opinions to follow New York practice
- opinions should be provided in a consistent and recognisable format and language
- law firms should consider their professional conduct rules when deciding to provide a “cross table” legal opinion, e.g. the borrower’s lawyer giving an opinion to the lender
- the question of who may receive and/or rely on an opinion is often transaction specific and/or a matter or negotiation – in short, there are no hard and fast rules
Jonathan Porteous, Head of Banking & Finance at Stevens & Bolton, comments: “The CLLS Guide is a really helpful source of knowledge and wisdom on legal opinions. If the lawyers involved in a finance transaction have read and digested it this really can help to reduce friction and misunderstandings which frequently crop up on the scope of, and reliance by others on, legal opinions. For those of you who have not looked at it, it is definitely worth a read.”
Andrew Dodds