The City of London Law Society has issued a useful Guide to assist practitioners in providing English law opinion letters in financial transactions. The aim of the Guide (available at the website) is to save time and costs spent in discussing which law firm should provide an opinion letter, what it should cover and who may rely on it.

The Guide suggests 12 questions which a law firm practising English law should consider addressing when seeking or providing an opinion letter. It explains the key considerations, including the professional conduct rules which must be observed. It does not lay down rules or a code of conduct. Each firm is free to decide on its own policy for providing opinion letters.

The Guide focuses on opinion letters delivered by a law firm (typically at completion of a transaction) to its client or, at a client’s request, to a third party, where the opinion is to be relied upon by the client or the third party, or reference is to be made to the opinion in a public document or to obtain a debt rating. Written advice to a client for its sole use on points of law or on its legal position falls outside the scope of the Guide.

It is appropriate to consider, before requesting another law firm to provide an opinion letter, whether, if the roles were reversed, the requesting law firm would itself be willing (and permitted by professional conduct rules) to give the opinion requested. This approach - sometimes called the ‘golden rule’ - can avoid many of the difficulties which may otherwise arise.

The normal practice is that an English opinion letter in a financial transaction is given by the lender’s own legal advisers. Exceptions may occur where it is convenient and saves costs, or where market practice has adopted a different approach and, in each case, where giving the opinion is consistent with professional conduct rules. There are differing views about the extent of the exceptions. One exception recognised by some (but not all) law firms is that, if one party requires an opinion letter only on the capacity and authority of the other party to enter into the transaction documents, it may in certain cases be most cost-efficient for the law firm acting for that other party (or its in-house lawyer) to provide the opinion letter.

There is a significant difference between practice in the US and ­practice in England and Wales. The US approach is to expect more from the borrower’s legal advisers. A lender in a US financial transaction will often require the borrower to provide an opinion letter for the lender’s benefit from the borrower’s legal advisers on the enforceability of the documentation. The golden rule may appear difficult to apply in cross-border transactions because of this difference in approach. In practice, a common answer (consistent with professional conduct rules) is that the opinion letter should be given by reference to the practice generally applicable in the jurisdiction whose law is the subject of the opinion. So an opinion letter on English law would take into account the normal approach that applies in England and Wales, and an opinion letter on New York law would take into account the normal approach which applies in New York.

The Guide examines several factors relevant to opinions for third parties. In particular, applicable professional conduct rules must be observed where, for example, a request for a third-party opinion may give rise to a possible conflict between the law firm’s duty to its own client and the responsibilities assumed by it to the recipient of the opinion. Additionally, the giving of the requested opinion letter may have the effect that responsibility for advising the addressee on certain features of the transaction is transferred inappropriately from the addressee’s legal advisers to the opinion provider.

The Guide explains the purpose of an opinion letter and the proper role of the opinion provider. The purpose is to state conclusions of law as to the ability of a party to enter into and perform its obligations under an agreement and/or the legal effect of the agreement. Most opinion letters are subject to at least some qualifications. An ­opinion letter often states conclusions of law without a detailed legal analysis.

Closing opinions do not normally address the legal consequences if, for example, the contracting party were to enter into insolvency proceedings. This possibility would involve complex legal issues. The time and expense involved in the analysis of these issues may be disproportionate in the context of the transaction. So, the opinion letter will normally include a qualification that any opinion is subject to all provisions of insolvency law and other laws affecting creditors’ rights generally, unless a reasoned opinion is necessary to satisfy the requirements of rating agencies or regulators.

It is often regarded as inappropriate for a law firm to give an opinion as to the effect of security, unless it has been or is responsible for preparing and registering the security documents. Even if a law firm has prepared the security documents, it may be unwilling to opine on priority, unless the legal position is capable of being established conclusively by priority searches at the relevant registry (for example, in the case of a mortgage of land).

The views contained in an opinion letter are expressions of professional judgement on the legal issues addressed and not guarantees that a court will necessarily reach a particular decision. The provider of an opinion letter may be liable to the addressee if the opinion is negligently given, but is not necessarily negligent merely because an opinion proves to be at variance with a decision ultimately reached by a court at a later date. The provider of an opinion letter is not an insurer against risks which may affect the parties.

The Guide highlights the importance of the distinction between fact and law. An opinion letter will generally be given only on specific questions of law. The provider of an opinion letter is not a warrantor of factual matters. An opinion letter is invariably expressed to be based on relevant factual assumptions, which may in turn be covered by warranties in the transaction documents.

Where an opinion letter is given to a client, it is often helpful not only to the recipient but to the law firm providing it, since it defines the scope (and, at least in a reasoned opinion, records the substance) of the opinion given.

Geoffrey Yeowart is a partner at Hogan Lovells