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| 4 minutes read

Here and There: Legal Opinions

An occasional look at differences in practice between the US and the United Kingdom

Legal opinions are a mainstay of transaction finance practice all over the world.  Lenders seek assurance from legal counsel that their borrowers have the needed power and are acting with the requisite authority when entering into borrowing arrangements. They seek comfort that documents have been duly executed and are enforceable and that liens are appropriately created and recorded in the correct governmental offices. More bespoke transactions require more elaborate opinion coverage. But there are a few aspects of US legal opinion practice that differ from opinion practice in the United Kingdom and other jurisdictions, and these tend to create disconnects with opinion recipients and reviewers who do not regularly receive opinions under US law.

One such difference is that US opinions are “third party” legal opinions, given to the lender by a law firm acting on behalf of the borrower. In the United Kingdom and EU jurisdictions, the legal opinion is given to the bank by its own counsel.  While the legal conclusions set forth in both a direct and a third-party legal opinion may ultimately be the same, certain assumptions and limitations will necessarily differ.  One such difference that we see often centers around opinion disclosure versus opinion reliance.  In non-US jurisdictions, where a law firm provides an opinion to its own client, an attorney client privilege attaches to the legal opinion.  That privilege can protect the opinion from discovery in subsequent litigation, among other benefits.  The privilege is lost, however, if the legal opinion is shared outside the attorney/client relationship.  Many non-US banks and counsel are therefore concerned with limiting disclosure of opinions.  When this discussion is simply by and between a bank and its own counsel there is generally alignment on the need for limited distribution, as well as extent of the limitations themselves.

But when a non-US lender seeks to apply its checklist of disclosure limitations to a third-party legal opinion provided by its borrower’s counsel, there can be disconnects and unintended confusion.  In this instance, there is no attorney/client privilege concern.  Rather, the US law firm, having given its imprimatur to a party other than its own client, wants to limit the universe of persons with a legal right to rely upon it.  US law firm opinions, therefore, will focus more on reliance language and less on disclosure.  Against this backdrop, we have seen situations where a non-US bank requests a canned paragraph limiting disclosure to be inserted in an opinion that had no limitations on disclosure in the first instance, but fails to request reliance rights for persons who would generally need them, such as assignees.  The goal in reviewing a third-party legal opinion from a US firm should be to ensure that reliance, and to a lesser extent disclosure, is limited and only extended to the appropriate parties.  

Another set of considerations unique to US legal opinion practice arises from the multi-jurisdictional nature of practice in the US generally.  In non-US jurisdictions, there is generally one set of national laws – English law, Cayman law and so forth.  In the US, we have Federal law as well as the laws of the fifty states/commonwealths, plus territories.  Without delving into all of the nuances of the Federal system and preemption, in a typical secured lending transaction matters such as bankruptcy, tax, securities and ERISA will be governed by Federal law, while power and authority, enforceability and lien creation are governed by applicable state law.  Frequently more than one jurisdiction’s law will be involved.  A transaction may be done by a Delaware entity, under New York law and with a California bank account being pledged.  Non-US lenders and borrowers are sometimes surprised to see a preponderance of law firms acting on a single transaction.  But, since lawyers are licensed by the individual states and firms will only allow opinions to be issued in jurisdictions where it has an office with appropriately licensed lawyers, it is often necessary to enlist counsel in different jurisdictions to provide appropriate coverage of all relevant legal issues.  

Most US firms, either with or without a Delaware office, will cover a limited number of Delaware legal points related to core power and authority matters for a client formed under Delaware law given the overwhelming number of entities formed in Delaware.  Many will not, however, address legal questions related to submission to jurisdiction and enforcement of out-of-state or foreign judgments.  Given that each separate opining law firm will inevitably have to review the same document at a cost to the borrower, it will sometimes be necessary to consider limiting the scope of opinions requested to the core questions of power, authority, enforceability, and perfection that can be given by a firm opining in one or two jurisdictions where it maintains licenses.   Restrictions on the scope of permitted opinions are imposed by each US firm’s opinion policy and enforced by an opinion committee that reviews every opinion issued to ensure consistency and limit exposure to liability.

On any given transaction, the opinion requirement may differ, of course.  We give and receive opinions on both sides of the pond, and often are dealing with other global firms and banks who are well-versed in the distinctions between US and non-US practice.  But, we are happy to assist when questions arise for lenders or borrowers who do not deal with US legal opinions on a regular basis


fund finance, finance, legal opinion, here and there