Opinions are common legal documents, although their importance is often overlooked. This post explains what they are and why they can be of critical importance on a cross-border transaction.
What is a legal opinion?
A legal opinion is a formal document of advice relating to a specific point of law, usually whether certain aspects of a proposed transaction are lawful and binding. An opinion is generally in the form of a letter from a law firm to a party to a proposed transaction (recipient). Opinions are most commonly seen on cross-border transactions. For example, where a UK party is entering into an agreement with a US party, US lawyers would be engaged to provide an opinion on the due constitution of the US party and the required mechanics for execution of the transaction documents by that party. If the opinion is incorrect, the firm giving it is likely to be negligent and liable to the recipient for any loss suffered as a result.
What is the purpose of a legal opinion?
A legal opinion has two main purposes. Firstly, it informs the recipient of the legal effect of entering into the proposed transaction. For example, in a cross-border transaction, lawyers in a foreign jurisdiction may give an opinion on whether a transaction document is valid and enforceable in that jurisdiction and complies with local law.
Secondly, an opinion identifies legal risks and issues that the recipient should address as part of the transaction. For example, an opinion may identify certain documents that have not been validly executed and which are therefore unenforceable. The recipient can use the issues identified in the opinion to raise further enquiries and, depending on the outcome of those enquiries, decide whether other forms of protection (for example, warranties and indemnities) are required.
Content of a legal opinion
Generally, you can expect an opinion to contain the following key parts:
- Background – this will provide an explanation of the relevant transaction, together with details of the documents reviewed and the searches conducted in preparing the opinion
- Assumptions – in reviewing documents and giving their opinion, the relevant law firm will make a number of assumptions, principally about factual matters, which will be stated in the opinion – for example, that all signatures on documents reviewed are genuine, that copy documents are complete and authentic and that foreign language documents have been accurately translated
- Qualifications – these are included in order to limit the opinion when absolute assurance cannot be given. They often relate to points of law such as the approach local courts would take to enforcing the transaction documents.
- Opinions – this is the meat of the opinion. They are statements relating to specific points of law (not facts) and will generally cover matters such as the incorporation and existence of a foreign entity, that entity’s ability to enter into the transaction documents and the enforceability of those documents
A cautionary tale…
Whilst parties are often reluctant to incur the additional cost of obtaining a legal opinion from foreign lawyers, their importance should not be underestimated.
Recently, a bank was entering into a facility letter with a company registered in the British Virgin Islands (BVI). As the deadline for completion approached and the bank was preparing to transfer funds, a legal opinion from BVI lawyers revealed that the company had in fact been struck off for failing to pay its annual licence fees. Without the opinion from local BVI lawyers, the bank could have lent money to a company which didn’t actually exist!
So a legal opinion can be a valuable document in protecting a recipient and should always be considered when a matter has a foreign element to it on which UK lawyers will be unable to advise.
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