January 19, 2017

How Can U.S. and Non-U.S. Lawyers Work Together to Improve Opinion Practice in Cross-Border Transactions?

Ettore A. Santucci

The Legal Opinions Committee of the ABA Business Law Section recently published a report on cross-border closing opinions (the ABA Report). The City of London Law Society (CLLS) and the Toronto Interfirm Opinion Group (TOROG) have also published reports providing guidance for English and Canadian lawyers on closing opinions. In addition, lawyers in the Netherlands, Germany, and other countries have significant experience reviewing, and responding to requests for, closing opinions from counsel to U.S., English, and Canadian parties to business transactions. Nevertheless, the absence of a shared conceptual framework among lawyers in different jurisdictions often gives rise to misunderstandings due to differences among legal systems and language barriers (even when documents are in English). A program presented at the Spring 2016 ABA Business Law Section meeting in Montréal brought together opinion practitioners from the United States, Canada, the Netherlands and England to discuss how to make cross-border opinion practice more efficient and less contentious.

The premise of the program was that lawyers and their clients would benefit from consensus on recurring issues in transactions where opinion givers and recipients are from different jurisdictions, given that it is unlikely that a body of “supra-national” cross-border customary opinion practice will develop any time soon. The topics included: Which specific opinions should not be requested or given? What assumptions, qualifications or exceptions are appropriate in the cross-border context? How do different national laws interact and impact opinion practice? How do we account for the peculiarities of international transactions? How do opinion givers deal with the risk that their opinion will be litigated in a foreign jurisdiction? Can there be agreement on standard limitations on the liability of the opinion giver?

Not so long ago the practice of giving closing opinions to nonclients (so-called third-party legal opinions) was restricted to the United States. For example, in England the lender typically would receive an opinion that a loan agreement was valid, binding, and enforceable from its own counsel, whereas in the United States, it would be the borrower’s counsel that gives that opinion to the lender. Over the past decade, the practice of giving third-party legal opinions in cross-border transactions has spread beyond the United States, raising the question: Would it be helpful to establish some degree of uniformity in the opinion practice? It is critical, however, to strike the right balance between uniformity and respect for national practice, especially as it becomes more common that the governing law in cross-border transactions is not  U.S. or English law—jurisdictions where third-party opinions have been most common—but rather the law of another country.

The program panel agreed on a number of core principles:

  • although parties must look primarily to advice from their own counsel to help structure financial transactions, negotiate agreements, and deal with potential legal issues, there are situations where requesting third-party closing opinions to complement that advice makes sense;
  • weighing the benefits of third-party legal opinions against the cost is critical;
  • third-party closing opinions should be limited to specific legal issues that involve the exercise of professional judgment by the opinion giver;
  • opinions are expressions of professional judgment, not guarantees that a court will reach the same conclusions as the opinion giver;
  • the specifics of a transaction may require exceptions or make it impossible to give an opinion; in such cases, if the parties wish to consummate the transaction, they must do so by accepting the risk or restructuring the terms which cause the opinion problem, not by attempting to coerce an unwilling opinion giver; and
  • the meaning of an opinion must be understood in light of the customary practice in the jurisdiction of the lawyer giving it, which also shapes the diligence required to issue the opinion.

This last point is particularly important because, in some jurisdictions, customary practice may be to squeeze everything believed relevant into the four corners of the opinion letter, whereas in other jurisdictions (such as the United States) opinions may take a more streamlined form based on an understanding among the parties that matters not expressed in the opinion letter nevertheless are to be read into it. Customary practice in the United States also relies on a “golden rule” that: (1) an opinion should not be requested by counsel for the recipient if such counsel would not give the opinion if it represented the opinion giver’s client; and (2) the recipient should not be denied an opinion that lawyers experienced in the matter would commonly give in comparable circumstances.

Although the United States approach to legal opinions has its limitations, there is ever growing agreement on what third-party legal opinions should cover and what assumptions, exceptions, and qualifications are appropriate; there is no such custom in most foreign jurisdictions.  Given the lack of a customary practice in cross-border transactions, applying the golden rule is even more difficult because counsel to a recipient in one jurisdiction may request an opinion that is commonly given in that jurisdiction, but not in the jurisdiction of the opinion giver. In addition, the golden rule is based on the premise that the roles of counsel for the opinion giver and the recipient could be reversed in a subsequent transaction, but this role reversal may not be as realistic in the cross-border context as it is in the U.S. domestic context. Nevertheless, the panelists agreed on a core tenet that should always apply: a closing opinion should be neither a bargaining chip between the parties, nor a zero-sum game; instead, it should be an exercise in professionalism with a limited purpose.

In light of the foregoing, the panel considered whether it makes sense to form a small working group, drawn from the growing community of lawyers active in cross-border transactions who deal regularly with third-party closing opinions to: (1) identify key practices in the most recurring jurisdictions; (2) define some broad archetypes of closing opinions; (3) define the most common areas of friction; and (4) develop common guidance to make giving and receiving cross-border opinions more consistent and less costly. The panel also considered whether the “charter” of such a cross-border working group should extend to closing opinions that counsel gives to its own client in connection with specific transactions, which may be functionally equivalent in some jurisdictions to third-party legal opinions. Developing a common lexicon might be especially helpful to in-house counsel which may have less experience than outside counsel in the area of opinion practice and may have to ensure that client checklists are met in circumstances where such lists and the law of the opinion giver’s jurisdiction may be at odds.

The interaction among members of the panel clearly illustrated both commonalities and differences among jurisdictions. For example, Canadian practitioners have led the way in developing guidance for giving and receiving cross-border opinions because many transactions involving Canadian clients have links to London or the United States, resulting in a fairly robust cross-border opinion practice in Canada. TOROG, which has been widely followed, has been instrumental in creating standard practices among Canadian law firms. Consequently, model opinion language and customary practice for Canadian lawyers engaged in transnational transactions has developed over the last 15 years and evolved into a fairly well-established body of guidance, which generally is consistent with U.S. practice. There are, however, recurring points of friction, particularly with English recipients, such as opinions in the financing context on bank regulatory matters, tax opinions, and, to a lesser extent, insolvency and creditor priority opinions. A Canadian lawyer pointed out that there are occasional requests for what he called “broad-form enforceability opinions:” an opinion under Canadian law on the enforceability in Canada of a document governed by foreign law (e.g., a loan agreement governed by English law with Canadian borrowers). The ABA Report refers to this kind of opinion as an “as if” enforceability opinion and takes a firm stand against giving such an opinion in cross-border transactions. Although Canadian lawyers sometimes give “as if” opinions, often in combination with opinions covering local enforceability of security interests in collateral located in Canada, the consensus is that Canadian lawyers would not have difficulty accepting the guidance in the ABA Report.

It also became apparent during the panel discussion that Dutch lawyers habitually give opinions to recipients in other jurisdictions when their clients engage in cross-border transactions. In the context of financing transactions involving Dutch borrowers, Dutch firms often face the issue of who should give a closing opinion that the loan agreement is valid, binding, and enforceable-- lender’s counsel, as is the practice in London, or borrower’s counsel, as is the practice in the United States. Dutch lawyers tend to adopt a practical approach: when the transaction involves a U.S. lender, Dutch counsel representing the borrower is prepared to give the enforceability opinion, but when the transaction involves a U.K. lender, London practice is followed. Using both practices, however, can create difficulties for Dutch lawyers who do not participate regularly in cross-border transactions. Apparently, Belgian and Luxemburg law firms adhere to the English practice of borrower’s counsel giving opinions only on matters such as their client’s corporate status, power, and authority, whereas lender’s counsel gives enforceability and choice-of-law opinions. There seems to be well-established market practices among BeNeLux firms on giving most of the opinions discussed in the ABA Report, although friction sometimes arises on who can rely on the opinion and on limitations on the liability of the opinion giver. With respect to “as if” enforceability opinions, an experienced Dutch practitioner remarked that for the last 15–20 years, Dutch firms have given them when pressed but with significant qualifications that end up eroding coverage to something like “we are not really saying that the foreign law agreement is enforceable in the Netherlands, rather that, if the lender goes to a Dutch court, some remedy will be available.” Again, in this context there was support for the ABA Report’s position against giving “as if” enforceability opinions in cross-border transactions because they are costly and rather meaningless. Apparently, while Dutch firms generally are willing to give tax opinions in financing transactions, they often refuse to give (without facing much resistance) no-conflict, no-violation-of-law and no-litigation opinions. Some Dutch firms give a no-violation opinion limited to violations that would cause the contract to be unenforceable.

A lawyer familiar with both English and U.S. opinion practice made the point that many of the opinions identified by the panel as contentious are routine in the United Kingdom, which can result in friction when English lawyers are faced with different practice for cross-border opinions. She remarked that European lawyers have developed ways to accommodate those requests over 20 years of transactions among parties who share the commonalities of the European Union; therefore English lawyers are sometimes surprised when they face resistance from U.S. or Canadian lawyers. The conversations that ensue can be difficult, but are necessary, as evidenced by United States customary practice on issues such as withholding-tax opinions and “as-if” enforceability opinions. She also pointed out that for transactions involving English lenders, it is the in-house lawyers’ responsibility to confirm that their “standard checklist” of required items is fully satisfied; therefore, when U.S. borrower’s counsel refuses to cover an item on the list, much time can be spent explaining to the lenders’ in-house counsel how else those matters can be addressed. Similar issues arise in other countries with respect to certifications, for example, when a notary must be involved in the closing and certain matters which U.S. counsel typically does not cover (such as factual matters) must be addressed to the notary’s satisfaction.

Based on the views expressed by both panelists and members of the audience who practice in different jurisdictions, there was a consensus that a working group of lawyers experienced in requesting and preparing closing opinions in cross-border transactions could productively undertake an effort to build a common lexicon to bridge conceptual divides on issues that often make the negotiation of opinions time-consuming and unnecessarily acrimonious, such as:

  • the differences in approach between common law and civil law practitioners;
  • the nature and function of “true” closing opinions versus reasoned legal opinions versus the lawyer’s responsibility for due diligence reports;
  • the rights of opinion recipients versus those of nonaddressees who are given access to or allowed limited reliance on the opinion versus those of future assignees who are permitted to rely on a previously given opinion; and
  • the role of factual assumptions versus reliance on certificates of clients or public officials versus knowledge-based factual confirmations.

The working group could also work toward developing common ground on foundational matters, such as:

  • whether uniform structures can be developed for third-party closing opinions in common types of transactions;
  • how far assumptions can be taken (“I have no reason to doubt X” versus “I wash my hands of X regardless of reasonableness.”);
  • whether assumptions relate to only facts or can extend to legal matters;
  • how assumptions, qualifications, and exceptions differ;
  • when is disclosure to the opinion recipient appropriate if the law is uncertain;
  • whether choice-of-law and forum-selection clauses should be included in opinions; and
  • what fair limitations could be placed on the liability of opinion givers.

It was agreed that the working group’s analysis would transcend the law of individual jurisdictions and focus on ways for lawyers across jurisdictions to better communicate about opinion issues and that, to discover common ground, it may help to take a step back and ask:  What are we trying to accomplish by asking counsel to client A in jurisdiction X to provide a legal opinion at closing to client B in jurisdiction Y who is represented by its own counsel in the transaction (who may or may not be familiar with the law of jurisdiction X)? Sometimes practitioners fail to address this basic question; focusing on it could allow both counsel and their clients to determine whether it is worthwhile to spend client A’s money on specific opinions or on a third-party opinion generally. The answer may be “yes,” but there may also be more efficient ways to satisfy client B’s concerns. On the other hand, in cross-border transactions, client B may fear unexpected results under the law of jurisdiction X and may not have its own counsel in that jurisdiction; then a third-party opinion covering agreed-upon aspects of the transaction, framed by an understanding of the customary diligence expected of the opinion giver and balanced by reasonable assumptions, qualifications, and exceptions, could be the right answer. Nevertheless, cross-border opinions are often significantly more costly than similar domestic opinions, and should not go beyond what is justified by a rigorous cost-benefit analysis. Moreover, the opinion giver cannot be expected to assume risk when it is not possible to reach “opinion-level” legal certainty on a particular issue.

The difficulty of this last point is illustrated by one member of the panel having witnessed increasing requests, primarily from civil law jurisdictions, for so-called “certifications” by counsel for a U.S. party, possibly because in those jurisdictions a notary may be responsible for certifying both the facts underpinning the transaction and the law that makes the contract valid, binding, and enforceable. When a third-party opinion is seen as part of the record before the notary, the distinction between factual confirmations and legal conclusions can blur. Although the request for a certification may be understandable, it puts the U.S. opinion giver in a difficult position because as a matter of U.S. customary practice, it is standard for a U.S. lawyer is to rely on a secretary’s or officer’s certificate without taking responsibility for the facts. That practice may be seen as problematic, at least in the eye of the recipient, because it lacks a “professional imprimatur.”

It seems important for the working group to grapple with the extent to which different jurisdictions may allow third-party opinions to be based on “customary practice” being read into the opinion without having to spell out every detail within the four corners of the document. For example, the CLLS report reads that all matters upon which an opinion is based are to be set out within the text of the opinion letter.  By contrast, U.S. practitioners generally have moved toward avoiding expressing in opinion letters those matters which are well understood as a matter of customary practice. English lawyers in the audience pointed out, however, that the CLLS report represents one version of London opinion practice and, although useful and helpful, is not as authoritative as some U.S. bar groups’ reports. A Canadian lawyer on the panel pointed out that Canadian practitioners do not tend to rely heavily on unstated assumptions and scope limitations. The working group could analyze whether the courts of different jurisdictions might be willing to consider customary practice as one of the sources of evidence for resolving disputes over third-party legal opinions. If judges recognize something as “customary practice” and are prepared to use it as a benchmark for interpreting an opinion, then expert testimony would become relevant. That could be helpful, but the agreement on use of customary practice must be such as to avoid the definition of “customary practice” degenerating into a battle of the experts, where judges are left to decide whether to prefer one interpretation over another or reject all of them and do their best based solely on the wording of the opinion.

Knowing how different jurisdictions deal with this important aspect of opinion practice would lay a foundation for further work on cross-border opinions. The U.S. practitioners on the panel pointed out that they spend significant time thinking about customary practice with beneficial effects. First, customary practice can be invoked when counsel is asked to do something out of the ordinary or to give an opinion covering novel or unsettled areas of the law. Secondly, it establishes the work opinion preparers must do to support particular opinions. Thirdly, it helps define which assumptions or limitations are commonly understood to apply, whether they are stated or not. The “duly authorized” opinion offers a good example: would Canadian or English lawyers feel a need to state what U.S. lawyers typically do not (“we are only covering the requirements of the corporation law of the jurisdiction in which the company is organized, and we are not covering regulatory or other requirements that the company might have to satisfy, even though they may be applicable and relevant, despite what the opinion recipient might think if he or she simply relied on the plain meaning of the words ‘duly authorized’ without more”) because unlike U.S. lawyers they do not rely on customary practice to determine how opinion recipients should understand the scope of the words “duly authorized” in a third-party legal opinion?

Although non-U.S. lawyers on the panel generally agreed that practitioners in their jurisdiction often do have an understanding of what is covered in a legal opinion and what opinion preparers are doing to support the statements made in an opinion, what makes non-U.S. lawyers uncomfortable about relying on a customary practice concept is the wide range of contexts in which opinions are given. For example, finance lawyers may share an understanding that opinions in lending transactions do not cover tax or bank regulatory issues unless they are covered expressly, but lawyers operating in other transactional settings may lack a common understanding of what is or is not covered. As a general matter, then, an opinion giver in Canada, for example, would not be comfortable saying that an express statement with respect to the matters not covered is needed “because in Canada there is no customary practice which implies a scope limitation,” but rather would decide whether to add one based on the circumstances. It is also the case that there is limited case law in Canada on opinions.  The discussion ended with consensus that, even if one starts from the position that there is no reliable customary practice and things must be spelled out, the reality is that the terms lawyers use in closing opinions are laden with special legal meaning, and no matter how much one tries, it is not possible to spell everything out. Thus, this looks like a productive area of analysis for a cross-jurisdictional working group.

The final topic the panel discussed was whether part of the effort to find common ground should address uncertainty around litigation with respect to cross-border opinions. In the United States it has been well settled for many years that opinions are neither contracts nor guarantees, and liability is predicated on the doctrine of negligent misrepresentation without any limits on liability. English lawyers routinely limit their liability to the opinion recipient, specify the choice of English law to cover disputes regarding the opinion, and insist on jurisdiction in England. That is not the practice in the United States, although all three topics increasingly have been the subject of debate. In the Netherlands, choice of Dutch law and Dutch forum selection are seen as noncontroversial because there is a strong sentiment that, when a Dutch firm renders an opinion on Dutch law, the recipient should not have the right to sue that firm in an English or U.S. court if that is where the opinion recipient happens to be. The same seems to be true in Canada, at least according to the TOROG report. There may be a compelling counterpoint, however: when a firm from jurisdiction X gives an opinion to a party in jurisdiction Y, the recipient might not be sympathetic to the concept that litigation should always take place in jurisdiction X, at least when there are significant contacts between the transaction and jurisdiction Y.

Even more complicated are issues relating to limitations on the liability of opinion givers because there is such a difference in understanding among jurisdictions as to the standards of liability of lawyers in general and of opinion givers to nonclient recipients in particular. For example, Dutch law provides that one of the considerations in awarding damages in a tort claim is what kind of insurance is in place. Thus, for a Dutch lawyer to limit liability to insurance proceeds, particularly where Dutch professional rules speak to appropriate levels of insurance coverage for lawyers, is absolutely uncontroversial. In England, lawyers mostly give opinions to their own clients, so liability is governed by the terms of engagement but for third-party opinions, where there are no such terms, opinion givers worry about potentially uncapped liability, particularly when the opinion is addressed to a party in a foreign jurisdiction and that party may turn out to have larger or broader claims than the opinion giver’s own client would not have if it were receiving the opinion. For that reason, English lawyers spell out a number of restrictions on the rights of a nonclient recipient in their opinions. It appears that it is rare in Canada for the opinion to get into matters such as forum selection, limitation of liability, and limitations on reliance principally as a result of limited experience with lawsuits against opinion givers. Moreover, it is not clear that Canadian case law on the liability of lawyers would always be favorable for opinion givers, so leaving the issue vague may be an attractive option as compared to agreeing expressly to governing-law and forum-selection language in cross-border opinions, particularly because those clauses might permit opinion recipients to bring contract-based claims, which might be a worse result.

The panel only scratched the surface on a host of other meaningful issues for lawyers who request or give legal opinions in cross-border transactions. It is undeniable that there are many substantive and procedural differences in opinion practices in different countries. Although there is no “right way,” it was agreed that understanding the differences and, ideally, promoting some measure of convergence where consistent with the legal regime of the opinion giver would seem like a worthwhile exercise. The Legal Opinions Committee of the ABA Business Law Section has authorized its leadership to pursue formation of a cross-border working group as a useful first step toward reducing the difficulties encountered in rendering opinions in cross-border transactions. Although this may be a small first step in what will be, at best, a long journey, U.S. lawyers look back at the very first attempt in Silverado, California, to deal in U.S. domestic opinion practice with many of the issues (which over the years have been resolved) with which we now wrestle anew in cross-border transactions as evidence that the journey can be successful.

This new journey is well worth undertaking for the benefit of all lawyers involved in cross-border transactions, as well as their respective clients.  The fact that lawyers from, for example, the U.S. and Germany who are active in transnational transactions operate without the benefit of a largely shared conceptual framework in the same way as lawyers from New York and California is important, but need not force us to throw up our hands. We must be attentive to the tension between different legal systems, how international financial markets operate, and the fact that language barriers in legal analysis are still present even when everybody communicates in English. Nevertheless, the possibilities are exciting.

Ettore A. Santucci

Ettore A. Santucci is a partner in Goodwin Procter LLP’s Business Law Department, where he focuses on the capital markets, cross-border transactions, and mergers and acquisitions. Mr. Santucci serves as chair of the ABA Section of Business Law’s Committee on Legal Opinions and was the reporter for the Committee’s report on cross-border legal opinions of U.S. counsel. He is also a member of the TriBar Opinion Committee and of the American Law Institute. He has been listed in Chambers Global, Chambers USA, U.S. News-Best Lawyers and The Legal 500 U.S.