Legal Opinions in Banking Transactions

A legal opinion is an opinion expressing legal conclusions about and/or legal analysis of a transaction or matter. The main purposes of a legal opinion are:

•  to state conclusions of law as to the ability of a party to enter into and perform its obligations under an agreement; 
• to inform the addressee of the legal opinion of the legal effect of an agreement; and 
• to identify legal risks that the addressee should consider further and evaluate. 

However, a legal opinion is not a substitute for legal advice which, in a transactional context, is likely to be more extensive.

Legal opinions can be given in a variety of circumstances. In a banking transaction, delivery of a legal opinion will often be a condition precedent to, for example, the advance of a loan.

Typical scope 

Although legal opinions will vary in scope they are, in many respects, fairly standard. Typically, they will address issues such as: 

• capacity and authority (for example, that a company is validly existing and has the necessary corporate power to execute and perform the relevant transaction documents to which the opinion relates); 
• legal effect (for example, that the relevant transaction document creates valid, binding and (subject to all necessary qualifications) enforceable obligations); and 
• governing law and jurisdiction (for example, that the law chosen to govern the documents has validly been chosen). 

Typical focus 

Legal opinions are generally required by banks, to reassure them that the legal effect of a lending transaction is as they suppose. Consequently, they will focus on whether the transaction documents: 

• bind the borrower, any third party providers of security and any guarantors (the obligors); and 
• will be enforceable against the obligors. 

Legal opinions will not focus on whether the transaction documents bind and are enforceable against the non-obligor finance parties, such as the banks, any facility agent or any security trustee. This applies regardless of the jurisdiction of incorporation of a finance party. 

In transactions or matters involving only one jurisdiction, the bank may require only one legal opinion, typically an opinion from the lender's lawyers. In some cases, an opinion may be obtained from in-house counsel of the borrower. The advantage of an opinion from in-house counsel is that they may be prepared to cover issues not usually opined on by external lawyers (for example, litigation or non-conflict with obligor's contracts). 

If the transaction involves several jurisdictions, there will usually be a legal opinion from each jurisdiction, for example, the jurisdiction of incorporation of each of the obligors from the obligors’ lawyers and the jurisdiction of the governing law of the transaction documents from the lender’s lawyers.