Use of Legal Opinions to Manage Legal Risks in International Banking Transactions - Coursework Example

Use of Legal Opinions to Manage Legal Risks in International Banking Transactions Name: Instructor: Course: Institution: Date: Table of Contents Introduction Businesses require financing from time to time. As part of their growth, it is inevitable that there will be new purchase and disposal of some property. Mergers and acquisitions also are common practices in today’s business operations. Some of these transactions involve international transactions and the difference in business customs, law, and practices necessitates legal consultancy to address, interpret, and advise on the way forward depending on whether the transaction in questions meets the legal requirements. To ensure effective financial systems and minimize risks, banks seek a legal opinion from a reputable law firm after which a deal is closed or set aside depending on the legal counsel given. This is easily determined since different countries have developed comprehensive civil and commercial laws that make it easy to verify transactions prior to incorporation or the legal standing concerning the power to contractually bind the interested corporation. In other words, legal opinions in international transactions determine issues in the transactions at hand, that are governed by foreign law and which are governed by the law of the home country of the corporation. The opinion of the counsel precedes the closing of the transaction. The written opinion is therefore, referred to as a ‘Legal Opinion Letter.’ The recipient of this legal opinion is expected to rely on the accuracy of the opinion to evaluate the legal risks inherent in the transaction. This paper details different ways in which legal opinions are used to manage legal risks in international banking transactions with emphasis on the loans and contract governing laws, the scope, and limitations of legal opinions. Reasons why banks require legal opinions before closing transactions and the contents therein are of great interest to this paper. History of Legal Opinions The history of legal opinions and their use in businesses is scanty and hardly well documented. However, there has been widespread use of legal opinions especially in the United States, which implies the high likelihood of being the origin, and until recently, it is argued that their use was not prevalent outside North America1. In addition, He argues that while the legal opinion letters have enjoyed a common use, they have only been used in certain areas and for certain types of practice. However, the Silverado conference, 1989 is said to have laid down framework for use of opinion legal letters sometimes alternately referred to as third-party legal opinions2. The law practitioners, lenders and borrowers, and academe representatives from different regions laid down guidelines for negations, format, and coverage and perhaps the precise meaning and interpretation of the document. The 1989 report has been use for many years now though collisions on interpretations and scope have led to revisions and significant new developments, which have had impact on its use and practice in different geographic regions. Loan Contract Businesses and other investment opportunities may open up when least expected or when a corporation is not in a position to finance the project. As such, borrowing provides the only feasible option to have the transaction done. Loaning on the hand requires commitment from the borrower and this forms the basis of a Loan Agreement or also known as loan contract. A loan agreement is a contract which contains the terms under which a loan was given or may contain terms that regulate securities lending. The contract simply details parties involved, the size of the loan, payment period, interest rates, and other conditions such as the changes in base interests and how they may affect the loan given. As such, the lender is concerned about the financial position, legality of the transaction and the legal procedures that can be taken in case of default of payment. If the borrower is required by the bank to represent in the loan agreement that the contract has been duly authorized by the same, the lending party will require a legal opinion from the borrower’s counsel to the same effect3. In essence, the rationale for requiring a legal opinion from the borrower’s counsel is that the counsel is far much more familiar with the issues relevant to the legal opinion and further serves to reinforce his client’s representations. While the bank’s counsel may give the opinion, it may not only take more time but also involve expensive investigations thus the borrower’s counsel is often preferred. Critically speaking, the business people and banks together with their lawyers, lay emphasis on this legal document from the other party’s side in order to be assured that the loan will be paid, that lawyers from both sides have scrutinized and identified same legal issues, that they have critically evaluated the issues spotted and have consequently reached a consensus concerning the same. It’s worth noting that that deal is only authorized and binding when all parties to the transaction and their lawyers share an interest that there are no unresolved legal issues or requirements and that the deal can be recognized as binding in the court of law. Since all parties are required to append their signatures in authorizing the transaction, its common experience and knowledge that they would think more carefully and cautiously about the subject matter. Furthermore, opinion from the borrower’s lawyer makes it difficult for such a party to later raise defense or complains for that matter against the loan contract in a way that contradicts the legal opinion delivered at the time the transaction was closed4. For instance, the borrower cannot claim lack of authorization or argue against the terms of the loan contract since his own lawyer had given the required legal opinion that the contract has been duly authorized, hence a binding legal document to that effect. However, if the agreement contradicts the law or some crucial governmental regulations were not followed to the letter, the borrower or any of the party cannot be prevented by the legal opinion signed from raising their concerns. Interestingly, if an unauthorized person signed the agreement, the lack of authority is not remedied by the legal opinion rather can be resolved under the theory of apparent authority.5 Governing Law The governing law in the context of loan agreement refers to the law of jurisdiction, agreed by the parties in which the loan will be entered into. In most cases, the parties settle on the jurisdiction where the lender resides. In international bank transactions, the bank’s state law on business loan contracts is in most cases selected as the law governing substantive issues. On the other hand, loan agreements relating to purchase of assets; the Governing Law in the location of the assets is normally selected. In England for example, the decision rests on factors where the transaction will be effected and where the assets are located irrespective of the nationality of parties6. In essence, different states have different governing law and the parties must agree on the governing law that will apply to the underlying loan contract. The laws consequently vary upon the jurisdictions involved. As such, the parties must establish unequivocally the rules of interpretation and legal remedies that can be applied. In addition, the governing law clauses helps in determining aspects of the original agreement such as validity, amendments, interpretation or evaluating uncertainties and establishing whether there has been any breach of the contract by either party and how the damages can be calculated. In most cases, the choice of the governing law is done by the lawyers of both parties who definitely influence and direct the loan agreement. Nonetheless, it’s common knowledge that the interest of the dominant party, often the bank, prevails even when the rationale for such choice appears hazy. However, this does not imply that the state’s legislations of the other party are not considered since factors such as financial services’ regulations of either country cannot be ignored. In addition, while choosing the governing law, the aspect of jurisdiction must be addressed. Why Choose a Single Law As aforementioned, choosing the contract’s governing law can present many challenges. The two parties often find themselves at a deadlock if the two state’s law and regulations differ significantly. However, party autonomy plays a key role and permits them to choose the law that will govern the contract. It is prudent that a single law is selected to the same effect to avoid conflicts that are bound to arise if a plurality of legal systems governs the contract or the subject matter. As such, a single legal system must be chosen between the two conflicting laws and be adopted by the two parties as the binding and governing law. Proponents of single law argue that it eliminates ambiguity, contradictions and depending on the chosen law, other factors such as jurisdiction and venues (in case of disagreements) are determined and documented in the contract. It is also necessary to mention that some situations may require that more than one law regulate the contract7. However, this happens either by the choice of the two parties or by the operation of the law. Scope of Governing Law While the governing law most obviously relates to agreements or contracts, it often permeates our everyday lives albeit unconsciously in most times. It therefore, governs such issues as which agreements the law will enforce, the obligations imposed by the contract and the remedies available if there is breach of the agreement or when the obligations are neglected by either party. In essence, the governing law of a contract or an agreement is based on liability for breach of promise.8 For example, when a counsel argues that based on particular facts a contractual liability will arise, he simply means that liability in this context is predicated upon a promise that has been broken. In an international business transaction, the scope of a legal opinion on English law depends on the extent to which the English law is proved relevant to the transaction9. This means that that specified law determines the validity of the outlined obligation governed by foreign law and that English law cannot therefore address questions of validity. There exists much controversy over the exact scope of contractual liability. While the traditional view holds that it is predicated upon breaking a promise that formed part of the contract (agreed exchange) between the parties, unless there were some exchanges, there cannot be a contractual liability10. On the other hand, contractual liability may arise when one party makes simply a promise to the other even without any exchange so long as the other party relies on the promise in some way. Conclusively, the size, nature, and scope of the business transaction play a significant role in determining the scope of the governing law. Furthermore, the terms of the governing law are limited to only the contract at hand and reference to the same in other case(s) is therefore invalid. However, the scope of governing laws continues to evolve with the new nature of business contracts marked by increased risks. Limitations of the Governing Law The governing law does not effectively address the “obsolescing bargain” that is bound to occur especially with long term projects such as infrastructure. While the customer may offer attractive terms as the project may need urgent private investment, management expertise or even technology; after the customer achieves what the project requires, the terms of the agreement changes unilaterally11. As such, it exposes the weaknesses in the governing law to protect the bank from such occurrences and issues like economic crises, wars, political instabilities, as they are not well addressed. Where government is involved in the contract, changing political circumstances, rejection of the project by the people or at times opposition because of the bureaucracy within, the government may file for changes to the contract. Furthermore, contracts ought to be treated as living frameworks so that ongoing negotiation are permitted yet should equivocally outline solid terms so that parties involved can operate with acceptable certainty levels. Therefore, conflicting needs for both predictability and flexibility are not well taken care of. Again, despite selecting a single law to govern the contract, statutes and financial services’ regulations must also be considered and where the contracts are incomplete or incomprehensive, the law relies on default rules to resolve the ‘thorny’ issues that are not explicitly addressed by the contract law. Legal Opinions It refers to an opinion that is delivered by a law firm to its client on request and presented to another party as a condition to the completion of a transaction, advance of funds or simply financing of a project12. The opinion is relied on by the lender and that a reference can be made to the said opinion either to obtain a debt rating or in a public document for that matter. In addition, the legal opinion creates binding obligations that are valid before the governing law and that contractual liability can be imposed on the party breaching the agreement of the transaction. Why are Legal Opinions Required? Legal opinions from reputable law firm or counsel are required as a condition precedent to closing of the transaction13. The nature and the size of today’s international business transactions require an improved approach of assessing and managing risks. As such, parties to a transaction require legal opinions in an effort to evaluate the underlying legal risks that may be involved in the business deal. In other words, the party requesting for the legal opinion seeks to obtain counsel’s legal judgment on whether the legal assumptions taken by the parties to the transaction are correct and hence determine whether to complete the transaction or not. If the legal opinion identifies legal risks in the transaction, the party requesting for the same is advised accordingly that the transaction involve certain risks, which should be keenly addressed or evaluated before closing the transaction. In more general terms, the legal opinion serves mainly as a confirmation that legal relationships to be established has legal backing and do not violate the established law regarding the said transaction either in part or in whole. Decisively, the legal opinion addresses relevant legal risks in a contract and therefore, it is said to be a risk management tool. Again, the legal opinions help unravel any legal problems or uncertainties in respect to the proposed transaction.14 Furthermore, the parties have a choice to either abandon the whole transaction or accept the uncertainties and the identified problems a business matter and just treat it a business risk. Contents of Legal Opinions Both parties and their lawyers usually participate in determining the relevant legal issues to be addressed in the opinions. As such, the scope of the legal opinion varies considerably with different business transactions. A well-written legal opinion identifies explicitly the problem areas and issues that lack any legal assurance or to which cannot be defended by law or adopted as binding. In addition, the opinion also determines issues within the transaction that are governed by foreign law and further identifies the aspects that are governed by the law of the home country. Furthermore, the opinion further outlines the responsibilities of the lawyers involved (from different countries) and in most cases, the counsels give written legal advice to minimize their liability especially with complex international transactions. Additionally, the contents of a legal opinion may not address factual matters such as title to assets, whether a company has engaged in litigation unless in special cases only, but confines itself to the legal basis of the transaction expressing conclusions in a standardized language15. It should focus on law specifics and avoid general opinion as much as possible after all, the primary purpose is to state conclusions about the ability of a firm to enter into and honor obligations under the agreement or the legal effect of the contract.16 Problems Associated With Legal Opinions An obvious problem arising from legal opinions is that they address the specific of law concerning the business transaction and does not identify factual matters about the party in question. Secondly, the provider of the legal opinion will often lack personal knowledge of all information about his client and as such, it is articulated according to pertinent realistic assumptions.17 In addition, the law firm does not posses factual statements; confirmation of certain facts may take long periods, which can be a huge undertaking for the counsels. It is also necessary to note that while the law firm may be liable for obvious negligence, by providing a legal opinion, the counsel is not an insurer against the risks that may affect the parties in future.18 In addition, the views contained in the legal opinion only reflect a professional judgment on the legality of a transaction and do not guarantee that a court’s ruling will definitely favor the same. The law firm may not be automatically liable or take responsibility simply because an opinion is incorrect, as such, parties must engage trusted and reputable counsels. The legal opinion is therefore not conclusive and parties must weigh the risks and assumptions made whether to abandon or complete the transaction. Conclusion This paper expounded on the use of legal opinion as a tool for reducing and managing risks in international transactions. Businesses request for legal opinions before closing transactions to ensure effective financial systems and minimize risks. The legal opinions in international banking and other business transactions determine legal risks inherent in the transaction, issues that are governed by foreign law, and those governed by the law of the home country of the corporation. While the provider of the legal opinion may be sued for negligence, the recipient is expected to rely on the accuracy of the opinion to evaluate the legal risks inherent in the transaction. The main limitation of legal opinion is the fact that they do not give factual matters and it is up to the recipient to research over the same. Bibliography Sterba, MJ, Legal opinion letters: a comprehensive guide to opinion letter practice, Aspen Publishers, New York, 3rd edn, 2003. Gruson, M, S Hutter, & M Kutschera, Legal opinions in international transactions, 4th edn, Kluwer Law International, The Hague, 2003. Yeowart, G, ‘Principles for giving opinion letters on English law in financing transactions’, Journal of International Banking and Financial Law, vol. 18, no. 5, 2003, pp.164-170. Beale, H, W Bishop, & M Furmston, Contract: cases and materials, Oxford University Press, New York, 2008. Read More