Legal Opinions in Business Transactions (Excluding the Remedies Opinions) -- May 2005, Revised October 2007. The Corporations Committee of The State Bar of California Business Law Section

VI. Special Issues

A. Contracts Not Governed By California Law

Opinion givers normally include a statement that limits coverage of their opinion to the law of a specific state. Opinion letters may also state that they cover federal law. A typical statement of that sort reads as follows:

Our opinions expressed herein are limited to the law of the State of California and to the federal laws of the United States. We express no opinion as to the application or effect of the law of any other jurisdiction.

Even when the qualification stated in the second sentence is not expressly stated in an opinion, the Committee is of the view that, by customary usage, an opinion delivered by a California lawyer should not be read to cover the substance or effect of the law of any jurisdiction other than California unless specifically stated otherwise.270 This is particularly important if a contract is governed by the laws of another jurisdiction.

1. Advising on the Law of Another Jurisdiction

As clients expand the scope of their businesses and transactions, California opinion givers are increasingly called upon to review documents in which the "chosen law" is that of a jurisdiction other than California. While courts occasionally struggle with defining the permissible reach of a lawyer's "authorized" practice,271 a lawyer may properly advise a client on the law of another jurisdiction, as long as the lawyer has adequate familiarity with the relevant law:

... a lawyer conducting activities in a lawyer's home state may advise a client about the law of another state, a proceeding in another state, or a transaction there, including conducting research in the law of the other state, advising the client about the application of that law, and drafting legal documents intended to have legal effect there. There is no per se bar against such a lawyer giving a formal opinion based in whole or in part on the law of another jurisdiction, but a lawyer should do so only if the lawyer has adequate familiarity with the relevant law.272

2. Opinions on Choice-of-Law Provisions

Historically, opinion givers have exercised caution in rendering opinions on the enforceability of choice-of-law provisions, even where the Agreement's choice of law is California.

Developments in customary practice and in the law have led the Opinions Committee of the Business Law Section and this Committee to conclude that, under the circumstances described below, choice-of-law provisions are generally enforceable and that California opinion givers therefore need no longer routinely except the parties' choice of law from their opinions.

Generally a "contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made."273 An exception to this principle is provided by California Civil Code Section 1646.5 (whose re-enactment was pending at the time of the 1989 Report):

Notwithstanding Section 1646, the parties to any contract, agreement, or undertaking, contingent or otherwise, relating to a transaction involving in the aggregate not less than two hundred fifty thousand dollars ($250,000), including a transaction otherwise covered by subdivision (1) of Section 1105 of the Commercial Code, may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not the contract, agreement, or undertaking or transaction bears a reasonable relation to this state. This section does not apply to any contract, agreement, or undertaking (a) for labor or personal services, (b) relating to any transaction primarily for personal, family, or household purposes, or (c) to the extent provided to the contrary in subdivision (2) of Section 1105 of the Commercial Code.274

Moreover, as discussed at length in Appendix 10 of the Remedies Report, California courts have increasingly recognized the "strong policy considerations favoring the enforcement of freely negotiated choice-of-law clauses."275

Given these case law developments and the legislative policy reflected in California Civil Code Section 1646.5, the Remedies Report concludes that opinion givers should generally be able to give opinions that both "outbound" (choice of law other than California) and "inbound" (choice of California law) provisions are enforceable:

Given this standard [permitting choice of the law of a jurisdiction having a reasonable relation to the transaction or to a party], the [Exceptions] Subcommittee concluded that, where the chosen law is the law of the State of California and there is some articulable basis for choosing California law (e.g., domicile/place of incorporation of a party), there should be no need either (1) to disclaim any opinion regarding the enforceability of the choice of law provision, or (2) to address separately the choice of law in the exceptions to the opinion.

. . . .

Where the law chosen to govern an agreement being opined upon is the law of another state, customary practice (which, formerly, often involved engaging separate counsel qualified in the jurisdiction whose law was chosen to give the remedies opinion) now greatly favors permitting the primary opinion giver to render an opinion to the effect that, if the law of the State of California were held to apply to the agreement, notwithstanding the choice of law of another jurisdiction, the agreement would be enforceable.276

The Committee concurs in these observations and recommendations.

California opinion givers are often called upon to give opinions on agreements whose chosen law is that of another jurisdiction. For example, many New York and international banks and financial institutions routinely include New York choice-of-law provisions in their loan documentation with California borrowers. Often this documentation has been prepared by New York lawyers who are acting as the institution's counsel, and yet California counsel for the borrower is asked for an opinion on the enforceability of the loan documentation. Historically, the borrower was requested to retain special counsel to render a remedies opinion under the chosen law (in this instance, New York). Borrowers have understandably objected to the additional cost of this procedure. An alternative approach, now increasingly accepted, as noted by the Remedies Report, is for borrower's counsel to give the remedies opinion as if the law of the borrower's jurisdiction (in this instance, California) applied to the Agreement. When this alternative is followed, the responsibility for rendering advice to the lender, including rendering any remedies opinion, under the law of the chosen jurisdiction (in this instance, New York) rests with lender's counsel.277

The Remedies Report suggests two forms of opinion for California counsel who are asked for a choice-of-law opinion on an Agreement whose chosen law is a jurisdiction other than California. The first form addresses the situation in which California counsel is providing a remedies opinion on the entire agreement as if the Agreement were governed by California law and the other party requests a separate, specific opinion on the enforceability of the choice-of-law provision. The Remedies Report explanation of this opinion is as follows:

It is not uncommon for an opinion recipient who has agreed to accept a remedies opinion rendered under California law with respect to an agreement governed by other law to request in addition a separately stated opinion to the effect that the choice of law set forth in the agreement will be respected by the courts of the State of California. California lawyers have historically declined to give that opinion. In light of the considerable development in the case law over the last decade and a half, however, the Subcommittee believes it is appropriate for this practice to change. If the chosen law is the law of another state, and there is either a substantial relationship to that other state or another reasonable basis for choosing the law of that state, a California court should give effect to that choice of law, unless it is determines both that (i) the application of the chosen law would be contrary to a fundamental policy of the jurisdiction whose law would apply in the absence of a choice-of-law clause and (ii) the other jurisdiction had a materially greater interest in the application of its law than does the chosen-law state.278

An illustrative form of such an opinion follows:

Assuming a court of the State of California has jurisdiction, in a proceeding in a court of the State of California for the enforcement of the Agreement, and based on [describe contact or basis for choosing law of chosen state], the court should, assuming that [the clause whereby the parties expressly agree that the Agreement will be governed by the law of the chosen-law state] is enforceable under the law of [the chosen-law state], give effect to that clause of the Agreement.279

Where the California opinion giver is not rendering an "as if" remedies opinion but is only addressing the enforceability of the Agreement's specific choice-of-law provision, the choice-of-law opinion may be specifically qualified as follows:

Assuming a court of the State of California has jurisdiction, in a proceeding in a court of the State of California for the enforcement of the Agreement, and based on [describe contact or basis for choosing law of chosen state], the court should, assuming that [the clause whereby the parties expressly agree that the Agreement will be governed by the law of the chosen-law state] is enforceable under the law of [the chosen-law state], give effect to that clause of the Agreement, except to the extent that any provision of the Agreement (i) is determined by the court to be contrary to a fundamental policy of the state whose law would apply in the absence of a choice-of-law clause, and (ii) that state has a materially greater interest in the determination of the particular issue than does the state whose law is chosen.280

As noted in the Remedies Report, "California opinion givers do not customarily opine as to what constitutes a fundamental policy of the State of California."281

3. Limits on the Parties' Freedom to Adopt Choice-of-Law Provisions

Although choice-of-law provisions are generally enforceable, the parties' freedom to select a law that will govern all aspects of the Agreement is not unlimited. The most notable examples are the UCC provisions establishing mandatory choice-of-law rules for the perfection, the effect of perfection or nonperfection, and priority, of a UCC security interest.282 Where these provisions apply, they cannot be altered by agreement.283

Accordingly, when rendering an opinion on the enforceability of an Agreement containing a choice-of-law provision, or separately opining on a choice-of-law provision, an opinion giver should review the substantive law governing the Agreement to ensure that that law does not establish a mandatory choice of law or should except from the opinion the effect of mandatory choice-of-law provisions.

B. Selected Matters Governed By the Laws of Other States

1. Delaware Corporate Law

As noted above in the citation to the Restatement's discussion of the competence of a lawyer to advise a client about the law of another state,284 there is no inherent restriction on opinion givers rendering opinions on the law of a foreign jurisdiction, assuming the lawyer has "adequate familiarity with the relevant law."285 Given the preeminence of Delaware corporate law, and the widespread adoption of that law by companies electing to incorporate in Delaware, many California lawyers are increasingly comfortable rendering opinions on the incorporation and good standing of Delaware corporate clients and on certain other "routine" corporate matters, such as the due authorization of an agreement by the corporate client.286 The TriBar Report is in accord.287 The Committee joins with Glazer & FitzGibbon in noting the limits on this practice:

Lawyers not admitted to practice in Delaware customarily render opinions on routine questions, such as a company's due incorporation under the Delaware corporation law when they represent Delaware corporations on a regular basis and follow developments in that law. Non-Delaware lawyers, however, normally do not render opinions on more difficult questions of Delaware corporation law or on questions arising under Delaware commercial law. In those circumstances, they usually rely on an opinion of Delaware counsel or deal with the issue in some other way, for example by relying on an express assumption.288

The Committee further notes that references to the term "Delaware General Corporation Law" are generally understood to refer to the Delaware corporation statute, applicable requirements of the Delaware constitution and reported decisions interpreting these provisions.

2. Other State Laws

In a securities financing, Company counsel customarily renders an opinion to the purchasers with respect to the securities that they are acquiring from the Company.289 It is universally recognized and accepted that an opinion on due authorization and valid issuance of those securities does not cover compliance with federal or state securities laws.290

Blue Sky Memoranda. California lawyers for the lead underwriter in an underwritten public offering, and occasionally the lawyers for the issuer in a private placement of securities, regularly prepare a "Blue Sky Memorandum" addressing the qualification of the offering in selected (often all) states or the availability of exemptions from registration or qualification in selected states. These memoranda are intended as guidance for the underwriters and brokerdealers participating in the offering. They are not intended as legal opinions, but rather as advice based upon counsel's examination of standard unofficial compilations of the examined states' "blue sky" or securities laws, and communications, in certain instances, with the authorities administering such laws. The memorandum typically states that the advice it provides is necessarily subject to the exercise of broad discretionary powers vested in the states' securities administrators (subject to the preemptive provisions of Section 18 of the 1933 Act). The memorandum typically recites that no special rulings of the state administrators or opinions of local counsel have been obtained (except as otherwise indicated), and reiterates that the authors are members of the State Bar of California and do not purport to be experts as to the laws of any jurisdiction other than California.

Blue Sky Opinions. As noted above with respect to opinions on Delaware corporate law, there is no inherent restriction on counsel's rendering opinions on the law of a foreign jurisdiction if counsel has adequate familiarity with the relevant law. Experienced blue sky lawyers may render opinions about the securities laws of states in which they are not admitted; however, these opinions are infrequently given. In a transaction in which a question of state securities law is both significant and subject to interpretation, an opinion of local counsel typically is obtained.

Endnotes

270 See TriBar Report §§ 1.2(e), 1.9(o), 4.1. As stated by TriBar:

If in identifying the law covered [in] an opinion letter [the opinion] does not state that it covers federal law (or the law of a particular state), that law is understood, as a matter of customary usage, not to be covered except to the extent that it is expressly addressed by specific opinions in the letter.

Id. § 4.1.

If the opinion letter does not state that it covers the law of a particular jurisdiction, then the opinion recipient may reasonably believe that the opinion letter covers the law chosen in the Agreement. Back

271 See Birbrower, Montalbano, Condon & Frank v. Superior Court, 17 Cal. 4th 119, 70 Cal. Rptr. 2d 304 (1998). Back

272 RESTATEMENT § 3, cmt.e. See also Condon v. McHenry, 65 Cal. App. 4th 1138, 76 Cal. Rptr. 2d 922 (1998), (holding that Colorado attorney providing estate planning and probate advice to California co-executor not practicing law in California in violation of Section 6125 of the Business and Professions Code). The Restatement's emphasis (quoted in the text above) on "adequate familiarity with the relevant law" bears emphasis; lawyers should be cautioned that in advising on the law of a jurisdiction in which the lawyer is not authorized to practice law, he or she will likely be held to the standard of competence that governs in-state lawyers.

On April 8, 2004, the California Supreme Court adopted the recommendations of its Multijurisdictional Practice Implementation Committee, and added Rules 964-966 to the California Rules of Court (Rules Relating to Attorney Admission and Disciplinary Proceedings and Review of State Bar Proceedings). The new rules permit four categories of out-of-state lawyers to provide legal services in California without being deemed engaged in the unauthorized practice of law in this state. The new rules require that those taking advantage of them agree to be subject to the jurisdiction of the State Bar of California. The new rules were effective November 10, 2004. For background, see the Report of the California Supreme Court Multijurisdictional Practice Implementation Committee, Final Report and Proposed Rules (March 10, 2004) available as of the date of this Report at http://www.courtinfo.ca.gov/reference/documents/mjpfinalrept.pdf.

See also Report of the Commission on Multijurisdictional Practice, Client Representation in the 21st Century (American Bar Association 2002) (adopted by the ABA's House of Delegates on August 12, 2002) available as of the date of this Report at http://www.abanet.org/cpr/mjp/final_mjp_rpt_121702.pdf. Back

273 CAL. CIV. CODE § 1646. Back

274 CAL. CIV. CODE § 1646.5. Section 1646.5 is modeled virtually word-for-word after New York General Obligations Law § 5-1401(1). See N.Y. GEN. OBLIG. § 5-1401(1). Back

275 See Appendix 10 ("Exceptions Subcommittee Report") to the Remedies Report, Annex B, Discussion, no. 1, "Choice of Law," quoting from the Supreme Court's decision in Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459 (1992). Back

276 Appendix 10 ("Exceptions Subcommittee Report") to the Remedies Report, Annex B, Discussion at B-1 & B-2. Back

277 See Appendix 4 ("Report of the Threshold Committee") to the Remedies Report at 10-11. Back

278 Appendix 10 ("Exceptions Subcommittee Report") to the Remedies Report, Annex B, Discussion at B-2. Back

279 Id. Back

280 Id. Back

281 Id. at B-3. For examples of fundamental policies of California, see discussion at B-3 through B-5. Back

282 See U.C.C. §§ 9-301 to 9-307 and U.C.C. § 1-105(2). The U.C.C. Committee of the Business Law Section, in its 2005 opinions report takes the position that a "Security Interest Opinion" does not include a choice of law opinion. U.C.C. Committee, State Bar of California, Legal Opinions in Personal Property Secured Transactions § 2.4 (2005). Back

283 See TriBar Opinion Committee, U.C.C. Security Interest Opinions -- Revised Article 9, Appendix B ("Perfection Opinions Under the Law of Another State"), 58 BUS. LAW. 1450 (2003). Back

284 See Part VI, Section A.1 of this Report. Back

285 RESTATEMENT § 3 cmt.e. Back

286 In rendering opinions for Delaware and other foreign corporate clients having their headquarters in California or other substantial contacts with California, opinion givers should be aware of the potential application of Section 2115 of the Corporations Code to the opinion. See Part V, Section B.2.d of this Report. Back

287 See TriBar Report §§ 4.1 n.85, 6.1. Back

288 GLAZER & FITZGIBBON § 2.7.3 at 64-65 (footnotes omitted). Back

289 See Part IV, Sections D.1, D.2 and D.3 of this Report. Back

290 See 1989 Report at 40-41; Accord § 19(a); TriBar Report § 6.2.2 n.129; GLAZER & FITZGIBBON § 10.2.1. Back

VII. Opinions Not Normally Requested or Given / Table of Contents