Appendix 7: Customary Opinion Practice
Table Of Contents
- Dual Aspects of Customary Practice
- Opinion Literature and The Meaning of Customary Practice
- Some Uncertainties Arising from the use of Customary Practice
- Customary Practice Where?
- Customary Practice by Whom?
- Customary Practice and Reasonableness in the Circumstances
- Who Determines Customary Practice
- Experience and Agreement by Lawyers in the Transaction
- Bar Association Reports and Other Literature
- Committee Surveys
- Other Resources
- Summary and Conclusion
Customary practice has become a unifying tenet of recent literature discussing third-party legal opinions.1 Since no other alternative general standard or approach to third-party opinion practice has attained general acceptance or wide use,2 opinion givers and lawyers representing opinion recipients should seek to come to a common understanding of applicable customary opinion practice.
The California Business Law Section of the California State Bar recognizes and supports the movement toward a uniform national customary practice for remedies opinions in light of the volume of interstate business and financing transactions in which opinions are rendered.3 California lawyers can find guidance on customary opinion practice in Bar Association reports and other literature published in California and elsewhere.4
II. Dual Aspects of Customary Practice
Customary practice provides a general guide for conduct among lawyers and clients giving, receiving and interpreting opinions. It also provides a standard for determining whether the legal duty of care owed by the opinion giver to the recipient has been met.5
According to the Restatement, an opinion giver owes a duty of care to the opinion recipient, just as it does to its own client.6 The components of the duty of care are competence and diligence.7 The duty is measured by the competence and diligence normally exercised by lawyers in similar circumstances,8 which is primarily customary practice.
III. Opinion Literature and The Meaning of Customary Practice
In the last several years, Bar Association reports and other opinion literature published outside California have identified and emphasized the central role played by customary practice (sometimes "custom and practice"9) in giving, receiving and interpreting opinion letters.10 Customary practice is in fact the "starting point" for what an opinion giver should consider when giving a legal opinion. Absent an agreement to the contrary or other mitigating circumstances, an opinion recipient is entitled to assume that the opinion giver has followed customary practice in giving an opinion, and an opinion giver is entitled to assume that the opinion recipient understands customary practice.11 In this context, customary practice includes both "customary diligence" (the factual and legal investigation an opinion giver undertakes to support a particular opinion) and "customary usage" (how words are used in opinion letters).12
The use of customary practice by lawyers similarly situated as a key standard for diligence in preparing legal opinions seems relatively free of controversy.13 It may be less self-evident that customary practice is a key standard for the interpretation of opinions.14 Nonetheless, it is clear that certain words and phrases are, by custom, understood to have special meanings in the context of specific legal opinions.15 For example, most would agree that various formulations of "legal, valid, binding and enforceable" in remedies opinions are by custom understood to be equivalent to the single concept "enforceable."16 Discussion about whether the remedies opinion covers "each and every undertaking" or only "essential provisions" centers on the meaning of words that are generally the same in all remedies opinions and what lawyers and their clients understand the words to mean.17
Customary practice has additional application to closing opinions beyond customary usage and customary diligence, most notably in determining "customary competence". In the context of a remedies opinion, competence connotes a level of knowledge, understanding and skill of the opinion giver in applying (i) substantive law to recognize legal issues raised by the documentation opined on and (ii) principles and practices relating to the process of preparing the remedies opinion.18
In its 2001 Statement, the California Business Law Section, after citing prior opinion reports published by the Section and drawing practitioners' attention to other sources (including the Restatement, the ABA Guidelines, the ABA Principles, and the 1998 TriBar Report), concurred that "customary practice is and should be a very important guiding consideration for both opinion givers and opinion recipients," in giving, receiving and interpreting third-party legal opinions.19 The 2001 Statement declares that, although local practices have differed in the past in certain respects and may continue to differ, certain opinion reports published outside California provide a helpful description of customary practice as understood and followed by a large segment of U.S. practitioners.20
IV. Some Uncertainties Arising from the Use of Customary Practice
Customary practice is of course based on what lawyers actually mean in using certain words and do in third-party opinions practice. Not surprisingly, customary practice can in certain instances be difficult to ascertain. For this and other reasons, application of customary practice has its uncertainties.
A. Customary Practice Where?
One area of uncertainty arises out of the possibility that customary opinion practice may differ in various geographical locations, as recognized by both the 2001 Statement21 and the Restatement.22 As a result, lawyers from different jurisdictions in a transaction may not understand in the same way, for example, the meaning of or diligence or competence required for an opinion letter. This is a problem in a world of increasing numbers of interstate transactions, but it is a problem that as a practical matter is being ameliorated by the evolution toward national uniformity of business law and opinions practice.
B. Customary Practice by Whom?
Moreover, it is often difficult to apply descriptions in opinion literature of the lawyers whose practices are referred to in determining customary practice. Those descriptions are general and are not entirely consistent. The Restatement states that a lawyer who owes a duty of care "must exercise the competence and diligence normally exercised by lawyers in similar circumstances."23 The professional community whose practices and standards are relevant is ordinarily that of lawyers undertaking similar matters in the relevant jurisdiction.24
Importantly, in the context of giving opinions and advising opinion recipients, the ABA Principles state that matters addressed in closing opinions, the meaning of the language normally used, and the scope and nature of the work counsel is expected to perform are based on the customary practice of lawyers who regularly give, and lawyers who regularly advise opinion recipients regarding, opinions of the kind involved.25 Other sources use different formulations.26
While there is little in opinion literature that provides further help in identifying these lawyers in the context of remedies opinions, it would be prudent for opinion givers to assume that courts will apply a standard of customary practice as exercised by lawyers who regularly give opinion letters of the same type in similar types of transactions.27
C. Customary Practice and Reasonableness in the Circumstances.
Finally, notwithstanding its prevalence in recent opinion literature, there remains a lingering question as to the extent to which customary practice is a standard at all. Without specific reference to opinion practice, slavish and exclusive adherence to a customary practice standard bears the inherent risk of endorsing and entrenching practices of lawyers that should be changed. In some instances, the Restatement reverts to a general description of the duty of care that seems to supplement the general standard of "competence and diligence normally exercised by lawyers in similar circumstances" (customary practice) with the idea of "reasonable in the circumstances."28 For example, the duty of diligence requires that a lawyer perform "tasks reasonably appropriate to the representation, including where appropriate, inquiry into facts, analysis of law, exercise of professional judgment, communication with the client, rendering of practical and ethical advice, and drafting of documents."29 At base, the problem is one of trying to apply abstract word descriptions to concrete, practical professional life. It is clear that the duty of care in general ties to customary practice, that which other lawyers exercise in a similar situation. However, lawyers should become uneasy when customary practice seems to lead to an unreasonable result.
V. Who Determines Customary Practice?
In general, the utility of customary practice as a standard in a particular transaction is determined by whether the opinion giver, on the one hand, and the opinion recipient and its counsel, on the other, understand customary practice the same way.30 When in doubt, where can lawyers go to find out what customary practice is?
A. Experience and Agreement by Lawyers in the Transaction.
The best source is the practice experience of the lawyers in the transaction or in the firms in which they practice.31 If they recognize that they may not understand customary opinion practice in the same way, the lawyers should seek to reach agreement about what customary practice is, or otherwise agree about the diligence for and meaning of the closing opinion in the transaction. However, discussing broad aspects of customary practice is not practical in many transactions and the discussions may be even more complicated where others have an interest.32 In any event, if the lawyers do not agree, they should consider consulting other resources.33
B. Bar Association Reports and Other Literature.
A primary source for external information on customary opinion practice is Bar Association reports and other opinion literature.34
Although many Bar reports state that they describe customary practice, often they also are prescriptive as to what customary practice should be. These reports tend to say that customary practice is what the sponsoring committee members and drafters say it is or should be.35 Since those preparing these reports are experienced practitioners well known in the fields of business law and opinion practice, their pronouncements are influential on customary practice, whether or not they are entirely reportorial.
A difficulty arises in the unusual circumstance where inconsistent answers are provided by different opinion reports. One such issue is an historical disagreement between the "California" view that a remedies opinion addresses the enforceability of only the "essential provisions" of a contract and the "New York" view that the opinion addresses "each and every undertaking", as discussed in Section V of the Umbrella Report and in Appendix 8.36 Fortunately, such inconsistencies are rare.
The Umbrella Report and its appendices are largely an effort to report on the customary practice of California lawyers. Nonetheless, readers may occasionally find some of the same tension between reporting and prescribing.
Surveys of lawyers can help to determine what customary practice is, as well as providing other important useful information. As a practical matter, however, contemporaneous surveying is not available to lawyers in the middle of a transaction. Accordingly, published survey results are often useful only as general background. Still, as evidence of actual practice, the results of these surveys merit attention.
Unfortunately, conducting a survey has its notable complications. For example:
- Where should the survey be taken (what jurisdictional or geographic scope)?
- Who should be surveyed (within the identified jurisdictional or geographic scope)?
- How are the survey questions framed?
- How long after completion are surveys useful?
It is difficult to obtain a satisfactory or even meaningful sample, especially as many lawyers are disinclined to respond to surveys, often due to a reluctance to commit the necessary time. Also, questions in surveys are not always clear, even after great effort to make them so, and answers are not always responsive.
B. Committee Surveys.
In an effort to gather information on various questions germane to, or illustrative of, customary practice, and to identify, address and attempt to resolve questions and issues presented in the Umbrella Report and its appendices, the California Opinions Committee conducted numerous informal surveys and inquiries among committee members and their firms and colleagues.
Importantly, in 2001 the Opinions Committee conducted a relatively structured survey of California law firms (both local and regional firms and the California-based offices of national and international firms) about certain aspects of their practices relating to remedies opinions. While subject to all of the complications mentioned above, the 2001 Survey provides very useful information about California customary practice in relation to the remedies opinion. Appendix 5 to the Umbrella Report is the form of the 2001 Survey, and Appendix 6 summarizes the survey results.37
VII. Other Resources
Other external resources, such as legal treatises, law review articles and other publications, as well as continuing legal education and Bar Association conferences, forums and committee work, also provide information on customary practice.
VIII. Summary and Conclusion
The California Business Law Section, in adopting the Umbrella Report, reaffirms the importance of customary practice in giving, receiving and interpreting third-party closing opinions, and the desirability of achieving, where practical, national consensus on customary practice. Bar Association reports and other opinions literature are important sources of information about customary practice. While the Opinion Report and its appendices are based in part on surveys and in general reflect the views of members of the Opinions Committee as to what opinion practitioners actually understand and do, they are occasionally prescriptive in the sense of presenting views as to what customary practice should be.
Lawyers should be realistic in recognizing that uncertainties exist about customary practice. In the real world, lawyers negotiating opinions should talk with each other about what they understand customary practice to be, particularly where there is doubt about whether they have a common understanding. Those who give or represent clients who receive remedies opinions in their practices are encouraged to read Bar Association reports and other relevant.
1 See The Am. Bar Ass'n. Comm. on Legal Opinions, Legal Opinion Principles, 53 BUS. LAW. 831, § I B (1998) [hereinafter ABA Principles] ; TriBar Opinion Comm., Third Party "Closing" Opinions, 53 Bus. Law 591 §§ 1.1, 1.4 (1998) [hereinafter 1998 TriBar Report]; See also Bus. Law Section of the State Bar of Cal., Report on Third-Party Remedies Opinions § V (2004), to which this appendix is attached [hereinafter Umbrella Report) and infra App.8 (discussion of customary practice as an important basis for resolving perceived historic disagreements between the "California" view and the "New York" view regarding the scope and meaning of remedies opinions). Back
2 The most common alternative approach, incorporating by reference a set of mutually agreed standards, was advocated by the Am. Bar Ass'n Section of Business Law, Third-Party Legal Opinion Report, Including the Legal Opinion Accord, 47 Bus. Law 167 (1991)[hereinafter Accord Report], but the Accord (included in the Accord Report) never achieved general acceptance or wide use. ABA Principles 831. See Bus. Law Section of the State Bar of Cal., Statement of the Business Law Section of the State Bar of California January 2001, supra App. 3 n. 4 [hereinafter 2001 Statement]. See also infra § IV C (discussing "reasonableness in the circumstances" as a standard). Back
3 2001 Statement 2; infra App.8 § VI. See RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 95 cmt. a (2000) [hereinafter RESTATEMENT]. Back
4 See infra §V B; 2001 Statement. See generally Restatement § 95 cmts. b, c; Donald W. Glazer, Scott FitzGibbon & Steven O. Weise, Glazer and FitzGibbon on Legal Opinions: Drafting, Interpreting and Supporting Closing Opinions in Business Transactions § 1.6.1 (2d ed. 200) [hereinafter GLAZER, FITZGIBBON & WEISE]. Back
5 See 1998 TriBar Report § 1.4(a); RESTATEMENT § 95 cmt. c. See also Section V of the Umbrella Report and infra App. 8. Back
6 RESTATEMENT §§ 51(2) & cmt. e ("When a lawyer or that lawyer's client (with the lawyer's acquiescence) invites a nonclient to rely on the lawyer's opinion . . . and the nonclient reasonably does so, the lawyer owes a duty to the nonclient to use care . . ., unless the jurisdiction's general tort law excludes liability on the grounds of remoteness. Accordingly, the nonclient has a claim against the lawyer if the lawyer's negligence with respect to the opinion . . . causes injury to the nonclient."), 95(1), 95(3). See also infra App. 8, § III A 1 (no California cases discovered clearly articulating the duty of care by an opinion giver to an opinion recipient). Back
7 RESTATEMENT § 52(1) & cmts. b (competence), c (diligence); See MODEL RULES OF PROF'L CONDUCT R. 1.1 (competence), 1.3 (diligence); CAL. RULES OF PROF'L CONDUCT R. 3--11 (competence and diligence); infra App. 8 § III A 2. While potentially relevant evidence, the violation of a professional conduct rule in and of itself "should not give rise to a cause of action nor should it create any presumption that a legal duty has been breached." Am. Bar Ass'n, MODEL RULES OF PROF'L CONDUCT, Introductory Scope (1983); See RESTATEMENT § 52 cmt. f & reporter's note Back
8 See infra § IV B; App. 8 § III. Back
9 See RESTATEMENT, supra note 4, § 95 & cmt. a. Back
10 See, e.g., The Am. Bar Ass'n. Comm. on Legal Opinions, Report: Guidelines for the Preparation of Closing Opinions, 57 BUS. LAW. 875 (2002) [hereinafter ABA Guidelines]; ABA Principles at 831; 1998 TriBar Report § 1.4; RESTATEMENT § 95 reporter's notes to cmts. b, c; GLAZER, FITZGIBBON & WEISE § 1.61. Back
11 ABA Guidelines § 1.7; 1998 TriBar Report § 1.4(a). Back
12 1998 TriBar Report § 1.4. See also infra note 15 and accompanying text; App. 8 § III A(2).
An opinion giver may vary customary meaning or customary diligence by including an express statement in the opinion letter to that effect or by reaching an express agreement with the opinion recipient. ABA Principles § I C.
Customary practice bears on opinion practice in other important ways, including determining the scope of the opinion requested, e.g., the matters and the law covered by the opinion (See ABA Principles § II B; 1998 TriBar Report § 3.5.1; See generally ABA Guidelines; GLAZER FITZGIBBON & WEISE at 257), and the competence expected of the opinion giver (See infra note 18 and accompanying text; App. 8 §III C). Back
13 See, e.g., RESTATEMENT §§ 95 cmt. e ("[O]nce the form of opinion has been agreed on, customary practice will also determine the nature and extent of the factual and legal diligence to be employed by the opinion giver in connection with its issuance."), 52 cmt. c; 1998 TriBar Report § 1.4(c). Back
14 See 1998 TriBar Report § 1.4(b). Back
15 See 1998 TriBar Report § 3.1. Back
16 See Accord Report, Commentary ¶ 10.1; Comm. on Corporations of the Bus. Law Section of the State Bar of California, 1989 Report of the Committee on Corporations Regarding Legal Opinions in Business Transactions, 45 Bus. Law. 2169, § V C (1990), , reprinted in Bus. Law Section & Real Property Section, State Bar of California, California Opinion Reports (2002) [hereinafter 1989 Report]; 1998 TriBar Report §§ 1.4(b), 3.1. The Corporations Committee of the Section revised and restated the 1989 Report in the 2007 Report; the 2007 Report did not address the remedies opinion or the meaning of the words "legal, valid, binding and enforceable." Back
17 California lawyers do not tend to use wording for the basic remedies opinion that differs significantly from that used elsewhere. Arguments for the "each and every" or "essential provisions" interpretation are not dependent on different wording, but rather are based on different understandings of the same words. The dispute may be thought of as a question of different views of the "customary usage" of those words. Appendix 8 infra concludes that the outcome of that discussion has little practical relevance, since the exercise of customary diligence and customary competence do not vary significantly among opinion givers that regularly give remedies opinions. See Umbrella Report § V; infra App. 8 § VI; infra note 36 and accompanying text; note 37. Back
18 See infra App. 8 § III C. Back
19 2001 Statement at 3. Back
20 Id. See 1998 TriBar Report § 1.4; RESTATEMENT § 52 reporter's notes to cmts. b, c. Back
21 2001 Statement at 3. Back
22 RESTATEMENT § 52 cmt. b (discussing competence). Back
The Accord Seems to assume that the appropriate measuring location is the "Opining Jurisdiction." Accord Report, Accord §§ 10 and 18. The Restatement favors a wider, perhaps national, geographical measure, at least in addressing competence. RESTATEMENT § 52 cmt. b ("The professional community whose practices and standards are relevant in applying this duty of competence is ordinarily that of lawyers undertaking similar matters in the relevant jurisdiction (typically, a state). . . . The locality test is now generally rejected for all professions, because all professionals can normally obtain access to standard information and facilities, [and] because clients no longer limit themselves to local professionals . . . . "). Back
23 RESTATEMENT § 52 (1). Italics are added in the text and footnotes throughout this heading. Back
24 RESTATEMENT § 52 cmt. b (discussing competence). Comment b also describes the duty of competence as the skill and knowledge normally possessed by members of that profession in good standing, citing RESTATEMENT (SECOND) TORTS §299A (1976). See supra § IV A (discussing the relevant jurisdiction). Back
25 ABA Principles § I.B. Back
26 E.g., compare Accord § 10 relating to the law that is covered by a remedies opinion ("the law of contracts . . . and other laws of the Opining Jurisdiction that a lawyer in the Opining Jurisdiction exercising customary professional diligence would reasonably recognize to be directly applicable to the Client, the Transaction, or both.") with Accord § 18 relating to the inclusion of an implied opinion ("if it is both essential to the legal conclusion reached by the express opinion and, based upon prevailing norms and expectations among experienced lawyers in the Opining Jurisdiction, reasonable in the circumstances.").
The 2007 Report recites a general standard of care for lawyers, as "such skill, prudence and diligence as lawyers of ordinary skill and capacity possess and exercise in the performance of the tasks which they undertake," quoting Lucas v. Hamm, 56 Cal.2d 583 (1961) and Betts v. Allstate Ins. Co., 154 Cal.App.3d 688 (1984). 2007 Report § III A 1. The 2007 Report notes language in Smith v. Lewis, 13 Cal.3d 349 (1975) (a case not involving a legal opinion, but rather a malpractice claim by a client against the client's own lawyer in a divorce case), which included as part of the lawyer's duty a diligence requirement: "to discover those additional rules of law which, although not commonly known, may readily be found by standard research techniques. 2007 Report § III.A2. The 2007 Report defers to Appendix 8 § III B(2), infra, for its analysis of Smith v. Lewis and to this Appendix and Appendix 8 for their evaluation of the role that customary practice plays in establishing an opinion giver's duty of care in giving an opinion letter. The 2007 Report also notes that where a matter falls within a recognized area of legal specialty a more stringent "prudent expert rule" is generally applied. 2007 Report § III A 1. A lawyer may have a duty to refer the client to a specialist, and the duty of care may be measured by a specialist in similar circumstances. Id. n. 34.. Back
27 Whatever standard is used, it is likely that a finder of fact would rely on expert testimony concerning the duty of care and the opinion giver's success or failure in exercising that care. RESTATEMENT § 52 cmt. g. Back
28 Compare the following two statements in comment b to Restatement § 52 (discussing competence): "As is generally true for professions, the legal duty refers to normal professional practice to define the ordinary standard of care for lawyers, rather than referring to that standard as evidence of reasonableness." "The duty is one of reasonableness in the circumstances." Back
29 RESTATEMENT § 52 cmt. c. Back
30 See RESTATEMENT § 95 reporter's note to comt. c. Back
31 In a particular firm, this practice experience may be shared horizontally among lawyers practicing in the same or different areas of the law, or vertically, passed down by lawyers with broad experience gained over years of practice. Back
32 E.g., in some cases an opinion letter may appropriately be relied on by someone not at the table. See generally Umbrella Report § III; supra App. 4 § III. Back
33 As mentioned supra, note 12, an opinion giver may, absent an express understanding with the opinion recipient or its counsel, vary or disclaim the customary meaning of an opinion or the scope or nature of the diligence customarily required to support an opinion by including an express statement to that effect in the opinion letter. The opinion recipient, of course, may not agree to accept an opinion that contains such an express statement. Back
34 See supra note 1. The Restatement recognizes Bar Association reports as resources for understanding third party legal opinions, particularly citing various Tribar Committee reports and the ABA Principles. RESTATEMENT § 95 reporter's notes to cmts. b, c. It notes that most reports state that they mainly declaratory of existing custom and practice, and contribute to uniformity of practice among lawyers issuing legal opinions.
While previous opinion reports published by the California Business Law Section largely avoided expressly identifying or describing customary practice, they nonetheless provide a useful source of information about what the experienced lawyers who drafted the reports thought (for example, the 1989 Report makes little express reference to customary practice; rather it usually describes normative guidelines for important aspects of opinion practice, including diligence and coverage). By contrast, the 2007 Report was specifically intended to reflect current opinion practice in California as understood by the Section's Corporations Committee. 2007 Report Intro. The 1998 Tribar Report also expressly provides guidance on customary practice in giving closing opinions. 1998 TriBar Report §§ 1.1, 1.4(a). Likewise, the ABA Guidelines directly addresses developments in customary practice, and the ABA Principles are intended to be a ready reference to selected aspects of customary practice. See, e.g., ABA Principles §§ I.B, II.B, II.D, III.A and III.B. Back
35 See, e.g., ABA Guidelines § 4 (setting forth prescriptive standards for specific opinions, including foreign qualification and good standing, legal and contractual compliance and negative assurances). This may be appropriate if it is not clear what customary practice is, or if there is a feeling that customary practice should be changed, so long as the reports are clear about what they are doing. Back
36 See also 2001 Statement at 3. See generally 1998 TriBar Report note 69; GLAZER, FITZGIBBON &WEISE § 9.7. Back
37 The 2001 Survey produced ambiguous information on the issue of "each and every" vs. "essential provisions." 34% of the law firms surveyed accept the "each and every" standard, and another 46% state that, although they have not accepted that standard, they feel they must act as if it applies to avoid undue exposure to liability on their opinions. Infra App. 6 § 7. See supra § V B; note 17. Back
Appendix 8 / Report on Third-Party Remedies Opinions