Third-party Legal Opinions: an Introduction to Customary Practice

• Publication year: 2022
• Citation: Vol. 35

35 Creighton L. Rev. 153. THIRD-PARTY LEGAL OPINIONS: AN INTRODUCTION TO CUSTOMARY PRACTICE

Creighton Law Review

Vol. 35

KOLEY JESSEN, P.C. LEGAL OPINION COMMITTEE(fn*)

INTRODUCTION

A request to provide a legal opinion to a non-client third party has become routine and is now a part of many attorneys' practice. Providing these "third-party" legal opinions is a troubling, and relatively new,(fn1) aspect of the practice of law. The opining lawyer must consider a number of issues to ensure that the opinion given is accurate and, in doing so, that the opining lawyer limits risk that he or she will become financially liable for some defect in the transaction. In essence, thirdparty legal opinions have the effect of injecting lawyers into the transaction.(fn2) This occurs when the party requiring the opinion insists thatthe opinion mimic the representations and warranties in the transaction agreement - in effect, guaranteeing the accuracy and completeness of an aspect of the business deal as a substitute or supplement to the opinion recipient's own due diligence. It also occurs when the opinion recipient refuses to accept common qualifications to the opinions. In both cases, the attorney giving the opinion is placed in a position of accepting increased liability exposure so that the client's transaction will close, or rejecting increased liability exposure at the risk of jeopardizing the client's transaction. Some in our firm remain convinced that, by their very nature, third-party legal opinions are offensive. However, they are unavoidable in modern commercial practice and we must find the most appropriate approach to deal with this difficult area.

As discussed below, the format of third-party legal opinions has changed dramatically over the last decade, which indicates that this is an area of law that attorneys worry about. This has certainly been an area of continuing concern for our law firm and, after much deliberation and analysis, our firm has adopted the new "customary practice" form of legal opinion for use when opining on transactions and transactional documents.

For many years, our firm adopted portions or all of the Accord(fn3) when giving legal opinions. Additionally, our firm believed it was necessary to make certain assumptions with respect to, and to carve out certain limitations, qualifications and exceptions from, many opinions. Thus, many of our firm's legal opinions (like many other firms) contained multiple pages of text to address assumptions, limitations, qualifications and exceptions with regard to the one page of actual opinions being given! By doing so, we were trying to be thorough, accurate and follow guidance provided by various bar associations, commission reports, scholarly writings by various authorities on the subject and examples of opinions that we had received from other firms. In developing such a "standard" form of legal opinion, our firm's legal opinion committee obtained the highest level of comfort possible in striving to ensure that our third-party legal opinions were accurate and our firm's potential financial liability for the opinions given was minimal. Despite that level of comfort, there is always (and probably always will be) a certain level of discomfort when giving a third-party legal opinion because of the inherent risk associated with opining on various matters to a third party. raises the costs of consummating corporate transactions." Id. at 751. Consequently, in light of the above, third-party legal opinions often inject lawyers into transactions where they have no business being.

This article is intended to provide practitioners with what our firm believes is the current state of third-party legal opinion practice. In doing so, we will review the purpose and history of third-party legal opinions, and then we will present the recent development of the "customary practice" form of legal opinions. Finally, we will explain the reasons for our firm's adoption of the customary practice principles for our opinions. In doing so, we are not holding ourselves out as more knowledgeable than any other attorneys or firms that are engaged in transactional practice; rather, we are merely sharing the results of the research which led our firm to this significant change of direction in its third-party legal opinion practice. If any practitioners find the information contained in this article to be useful in their own practice, then we believe our time in writing this article was well spent.

PURPOSE OF OPINIONS

It is only in the last forty years or so that attorneys have been asked to give an opinion to persons other than their own clients.(fn4) Such an opinion is generally known as a "third-party legal opinion" and it is often given in business transactions such as transactions between (i) sellers and purchasers of a business or (ii) borrowers and lenders. In a typical third-party legal opinion scenario, the purchaser or lender requires a lawyer or law firm for the seller or borrower to provide an opinion as to certain characteristics of its client and as to certain aspects of the transaction as a condition to closing. Specifically, the attorney representing the seller or borrower must generally opine certain things about the client's existence, capacity and authority, and that the transaction documents will be enforceable against the seller or borrower and not violate other agreements to which the seller or borrower may be bound. Thus, third-party legal opinion practice developed to the point where attorneys who are "almost never a signatory to the agreement calling for the opinion" nevertheless become a party to the transaction based solely on their opinion with regard to their client's conduct or authority as set forth in the transaction documents.(fn5)

The role, scope and purpose of a third-party legal opinion has been summarized as follows:

One of the frequently stated purposes of such an opinion is to disable the opining lawyer from attacking the validity of the transaction. If the lawyer said the agreement is enforceable in the Third Party Legal Opinion delivered at closing, the lawyer's effectiveness in later attacking the agreement wouldbe severely compromised, and the client of such lawyer, disadvantaged. . . . Another stated purpose is to satisfy the recipient that the lawyer has done due diligence and assured him/herself that all is right with the client. . . . A third purpose would be to provide a second look at the legal and factual intricacies of the transaction, backstopping the advice of the lawyer for the recipient. . . . It has generally been agreed that an impermissible purpose of a Third Party Legal Opinion is to seek a deep pocket (the lawyer's) if things don't work out as expected. . . . For example, it is generally considered bad form, if not reprehensible, for a lender to require the borrower's lawyer to render an opinion that a usurious transaction is not usurious on pain of not making the loan. The oft repeated "Your lawyer screwed up another deal" can often have an adverse effect on the relationship between a financially strapped client and its [soon to be erstwhile] lawyer. . . . Another facet of Third Party Legal Opinions that offends many is the idea that the party with economic leverage will use such power to wrest unreasonable or unnecessary opinions from the lawyer for the oppressed. . . . This has led to the theorem that no lawyer should ask for an opinion that the lawyer would not give. Its corollary is also true, although often not as religiously advocated; no lawyer should give an opinion the lawyer would not accept.(fn6)

As attorneys became increasingly required to provide third-party legal opinions in transactions involving their clients, the opinions seemed to grow from simply "the opinion" to the much more convoluted "the opinion subject to a number of limitations, qualifications and exceptions." A good example of this concept is shown by the following excerpt from George W. Bermant:

In its first manifestation in the Third Party Legal Opinions, the Remedies Opinion,(fn7) generally consisted of the simple statement that the "[Agreement] has been duly and validly authorized, executed and delivered, constitutes the binding agreement of the Company enforceable against it in accordance with its terms." . . . As lawyers began to think aboutthat opinion, they concluded that bankruptcy and other insolvency laws prevented the enforcement of the agreement "in accordance with its terms" and possibly, at all. Therefore, such lawyers started to insert in their Third Party Legal Opinions an exclusion for the effect of such laws. The consequence of such exclusion was to remove from all consideration how the agreement being opined on would fare if bankruptcy intervened. . . . Next, careful lawyers started to worry about whether the effect of a Remedies Opinion meant that the provisions of the agreement could be specifically enforced against their clients. Since specific performance is an equitable remedy subject to all sorts of judicial discretion, they started to abjure specific performance as a necessarily available remedy. . . . That started them to consider other equitable remedy problems, such as availability of any remedy at all for an immaterial breach, restrictions on remedies because of inequitable behavior of the party seeking to enforce the agreement, restrictions because the court finds the...