Appendix 8: Customary Practice for the Remedies Opinion
The Meaning and Scope of the Remedies Opinion
Table of Contents
- The "California View": "Essential Provisions."
- The "New York" View: "Each and Every"
- Background and Evolution of the Disagreement over the Meaning
and Scope of the Remedies Opinion
- What is the solution?
- The Standard of Care
- The Restatement
- Legal Diligence
- Customary Legal Diligence
- A Further Note on California Case Law
- Relevant Law
- Opinion Practice
- Reputation and Cost Effectiveness
- Embarrassment and Reputation
- Cost Effectiveness
- Summary and Conclusion
This appendix addresses an historical disagreement about the remedies opinion. Does this opinion cover "each and every" contractual undertaking of a party to the contract (the "New York view") or only the "essential provisions" (the "California view")? The resolution is that our understanding of opinions practice has evolved to a point where lawyers (and their clients) should cease debating this issue. Opinion givers will be better off focusing their energies on conforming to customary practice, which is generally uniform among those who regularly give remedies opinions, wherever located. Opinion recipients should be satisfied with the professional judgment provided them in remedies opinions prepared in accordance with customary practice.
A difference in practice in the use of stated exceptions to the remedies opinion between some who adhere to the California view and many who adhere to the New York view is addressed at V below.
A. The "California View": "Essential Provisions."
Many California opinion givers contend that the "essential provisions" interpretation should satisfy the due diligence interests of opinion recipients and at the same time provide a reasonable allocation of risk and cost. They feel that the "each and every" interpretation imposes or implies an unreasonable and unnecessary legal diligence requirement for the opinion giver. They believe that it exposes the opinion giver to unreasonable risks of liability, embarrassment and loss of reputation, and unnecessarily increases the time and financial costs of transactions. They worry that this is a more serious problem for California opinion givers than for others, because they believe that California judges have an unusual tendency to "do equity" and to ignore the precise language of contracts, if that appears to them necessary to achieve a "fair" result. 1 By interpreting the remedies opinion as applying only to the "essential provisions" of a contract, these opinion givers believe that they have limited their legal diligence requirement.
Many of these opinion givers also tend both to use a generic exception2 in conjunction with the remedies opinion and to state separately a large number of express exceptions (sometimes referred to as a "laundry list").3 Some feel that these exceptions are necessary in case the "each and every" interpretation prevails, because otherwise they may be required unreasonably to know or research the law relating to every undertaking in the contract covered by the opinion.4
B. The "New York" View: "Each and Every".
Other lawyers, including many who regularly represent opinion recipients, contend that each and every undertaking is covered by the remedies opinion (unless expressly or implicitly excluded from coverage), in fulfillment of the legitimate diligence needs of opinion recipients.5
Many of these lawyers state few exceptions when giving remedies opinions. Many also believe that laundry lists and a generic exception are over-used in "California" remedies opinions, and are sometimes cumulated in a way that seriously undermines the usefulness of the opinions. They contend that the reasons for not enforcing many undertakings in contracts are not covered by a remedies opinion, because by customary usage either the equitable principles limitation or the bankruptcy exception6 is understood to exclude those reasons, or because the reasons are understood to be otherwise beyond the scope of the remedies opinion.7 Some also contend that California courts today do not have an unusual tendency to ignore the express provisions of contracts and, therefore, this worry does not justify the laundry list approach.
Several of these issues are addressed or touched on in the Umbrella Report and other appendices.8
A. Background and Evolution of the Disagreement over the Meaning and Scope of the Remedies Opinion.
The "California" view is found in the 1989 Report of the Corporations Committee of the California Business Law Section, and the "New York" view is articulated in the ABA Accord and various reports of the New York-based TriBar Opinion Committee. The Section accepted the "each and every" approach in its 1992 Report about ABA Accord opinion letters, but only if modified by (1) all of the qualifications, limitations and assumptions found in the Accord, (2) additional exceptions (identified as the "California Qualifications") that are spelled out in the 1992 Report, and (3) an appropriate articulation of the legal diligence responsibility of the opinion giver.9 The approach set forth in this appendix is consistent with that of the 1992 Report, but reflects recent evolution of national opinion practice.
B. What is the solution?
The debate between holders of the California view and those of the New York view should cease, because it focuses on the wrong question. Concerns of California opinion givers about liability and reputation risks of an incorrect remedies opinion and undue costs of legal diligence are better addressed by identifying and exercising customary practice in the preparation of remedies opinions. Following is a discussion of the core concern of liability, including a general description of the customary practice of many opinion givers who regularly give remedies opinions. IV below addresses questions of embarrassment, reputation and cost.
A. The Standard of Care.
A third-party legal opinion is not a guaranty of a particular result. Rather, it is an expression of professional judgment.10 Liability for a wrong opinion is based on breach of a duty owed by the opinion giver. While other theories can result in liability,11 the relevant theory is based on an alleged breach of the duty of care owed by the opinion giver to the opinion recipient.
According to California case law, a lawyer is expected, in his or her practice, to be well informed and to exercise "such skill, prudence and diligence as lawyers of ordinary skill and capacity commonly possess and exercise in the performance of the tasks which they undertake."12 The Restatement (Third) of the Law Governing Lawyers describes this general duty largely in the same way, expressing a requirement for lawyers to exercise "competence and diligence normally exercised by lawyers in similar circumstances."13 Both articulations stress the requirements of competence and diligence, and use the practice of other lawyers as the primary point of reference.
The authors of the California 1989 Report did not find any case law or Bar canon that clearly articulated the standard of care imposed on opinion givers under California law.14 That report recites general standards of care owed to a lawyer's own client, and then appears to suggest that they likely also apply to the duty owed to a third-party opinion recipient.15 In preparing this report, the Opinions Committee likewise discovered no relevant reported California cases clearly articulating the scope of the duty of care applicable to these opinions.16 Most other literature on third-party closing opinions does not deal extensively with the standard of care.17
(2) The Restatement.
In the absence of defining California case law, reference is appropriate to other authorities that address principles applicable to the liability of opinion givers. The Restatement does so and deserves great weight, because it seeks to restate authoritatively existing law.18 According to the Restatement, an opinion giver owes a duty of care to the opinion recipient, as well as to its own client.19 As noted above, the components of the duty of care are diligence and competence.20
Satisfaction of the diligence and competence standards requires the competence and diligence normally exercised by lawyers in similar circumstances.21 This in turn requires reference to customary practice.22 In general, the giver of a remedies opinion should satisfy its duty of care if it exercises the diligence and meets the competence standards of lawyers who regularly give opinions of the kind involved in similar transactions.23 The opinion recipient should be satisfied if the opinion giver meets these standards.
The following discusses customary practice for legal diligence and competence in rendering remedies opinions.
B. Legal Diligence.
A closing opinion requires factual24 and legal diligence.25 In the case of the remedies opinion, legal diligence means the process of considering how the law covered by the opinion applies to the contract in question.
(1) Customary Legal Diligence.
According to the Restatement, customary practice is a primary determinant of the nature and extent of the legal diligence required to be employed by the opinion giver in preparing and giving an opinion letter.26 Opinion givers are prudent to assume that customary practice for remedies opinions is the practice of lawyers who regularly give opinions of the kind involved in similar transactions.27 Many experienced opinion givers take the same or similar legal diligence steps in giving remedies opinions, regardless of the geographical location and regardless of the applicable law.28 These steps are as follows:29
- One or more competent30 opinion preparers,31 who are reasonably current in developments in applicable law and practice, read the entire relevant contract carefully; that reading necessarily includes each and every undertaking in the contract.32
- If the opinion preparers recognize in the process of that review that a particular undertaking is not enforceable, or that an issue gives rise to a significant degree of uncertainty as to the enforceability of an undertaking, they then determine whether the remedies opinion, after considering the exclusionary effect of general exceptions, customary usage and other factors, would cover the issue giving rise to that unenforceability or uncertainty.33
- If the opinion would cover the issue, the opinion preparers do what is reasonably necessary to resolve any significant uncertainty. This may include reliance on their knowledge of the law (including general principles of contract law), consultation with lawyers with relevant experience or expertise, or in appropriate cases legal research.34 Typically, the opinion preparers already are aware of the current state of law relating to many of the undertakings in the contract.35
- If the opinion preparers still are not satisfied that the undertaking is enforceable, they then include in the opinion letter an exception that expressly excludes or limits coverage of the provision.36
In this entire process, the opinion preparers use reasonable professional judgment.37 It is this professional judgment that the opinion recipient seeks.
(2) A Further Note on California Case Law.
In the context of malpractice actions by clients against their lawyers, a line of California cases includes the following in its articulation of the legal diligence duty. Lawyers are expected ". . . to possess knowledge of those plain and elementary principles of law which are commonly known by well-informed attorneys, and to discover those additional rules of law which, although not commonly known, may readily be found by standard research techniques."38 Some fear that these cases could be read to impose on a California opinion giver a duty to the opinion recipient to know or research the law applicable to the enforceability of every contractual undertaking of the opinion giver's client.39 The concern is that these cases if read that way would impose an inordinately high level of legal diligence and knowledge, with attendant time and monetary costs, and would expose opinion givers to a high risk of liability.
All of these California cases involve the duty of a lawyer to the lawyer's own client in a variety of factual contexts; they do not address the duty of an opinion giver to a third party. While statements in opinion literature suggest that a duty of care is owed to an opinion recipient,40 those references are to the existence of a duty and its general meaning (i.e., the requirements of competence and diligence). However, application of the duty differs between client and non-client situations.41 For example, absent a misleading opinion, an opinion giver is not obligated to provide advice beyond the opinion's scope, as it might be for a client.42
As discussed under Customary Legal Diligence above, customary practice for remedies opinions is to exercise reasonable professional judgment in identifying enforceability issues with every undertaking in the contract. It does not call for knowledge or research of the law relating to every undertaking (except to the extent required by that professional judgment). This line of cases concerning a lawyer's duty to its own client should not be interpreted as defining the duty of care to opinion recipients differently from customary practice.
A contrary view could hold opinion givers accountable for addressing not only enforceability issues that would be recognized by a competent lawyer in a careful review of the contract, but also for almost any enforceability issue (no matter how obscure) that could be recognized by an omniscient lawyer. This view is incorrect for reasons discussed earlier in this segment III:
- A legal opinion is an expression of professional judgment, not a guaranty or absolute assurance.43
- The proper scope of legal diligence in the context of third-party closing opinions is governed largely by customary practice, likely as exercised by opinion givers experienced in rendering such opinions in transactions of the same type.44
- Customary practice and the applicable standard of care call for legal diligence by competent opinion preparers using reasonable professional judgment, not absolute perfection by an omniscient attorney.
Moreover, more extensive legal diligence would in many cases be prohibitively expensive.45
As with diligence, the competence component of the duty of care is defined by the competence normally exercised by lawyers in similar circumstances, requiring reference to "normal professional practice," i.e., customary practice. 46 The professional community whose practice is relevant is lawyers undertaking similar matters in the relevant jurisdiction.47 It is prudent for opinion givers to assume that competence for remedies opinions is measured by the competence of lawyers who regularly give opinions of the kind involved in similar transactions.48 While the "relevant jurisdiction" could be a state, the Restatement favors a national standard for competence.49 Moreover, where a national practice exists there may be national standards,50 and it appears that many aspects of opinion practice are now national in scope.51
(1) Relevant Law.
In meeting the requirement of competence, experienced opinion givers expect opinion preparers working on remedies opinions to be reasonably current in developments in the relevant law of the opining jurisdiction.52 This expectation may be met by some combination of regular reading of current publications, attendance at or preparation of educational programs, consultation with experienced lawyers, personal experience in the practice, legal research and other techniques. Many opinion givers strongly prefer that one or more opinion preparers have experience working in transactions and with documentation of the same type. Knowledge gained using the foregoing techniques helps opinion preparers to recognize legal issues raised by transactional documentation.
Where the contract in question includes undertakings requiring knowledge in a recognized area of legal specialty, experienced opinion givers typically assure that at least one of the opinion preparers is knowledgeable in that specialty. If the opinion giver does not have a lawyer with that specialty, it will usually refer responsibility for those undertakings to a specialist.53
(2) Opinion Practice.
Many opinion givers who regularly render remedies opinions also seek to assure that some or all of the opinion preparers maintain currency in their understanding of the relevant customary opinion practice. 54 As is the case with competence in the relevant law, this currency may be achieved by, for example, reading literature on the topic (including Bar Association reports on legal opinions), attending educational programs, personal experience in the practice, and consulting with experienced lawyers. Many also strongly prefer that one or more opinion preparers have significant experience in preparing and giving closing opinions. The foregoing techniques are designed to assure that opinion preparers have an appropriate understanding of customary opinion usage and diligence.
Experienced opinion givers also often use other techniques to help assure that they are bringing the full weight of their competence to bear on closing opinions.55
IV. Reputation and Cost Effectiveness
A. Embarrassment and Reputation.
While liability for a wrong opinion is an important concern for opinion givers, for many loss of reputation is at least as important. A reputation for rendering wrong or poorly thought out opinions is not only embarrassing, but could cause opinion recipients to refuse to accept the opinion giver's closing opinions, and clients to cease relying on the opinion giver's work.
Just as with efforts to satisfy the standard of care, conformity with customary practice by an opinion giver should provide major protection for its reputation. However, if customary practice is followed and an undertaking covered by the opinion letter proves to be unenforceable, embarrassment and reputation issues may still result.56 The risk, however, does not depend on whether an "each and every" or an "essential provisions" interpretation of the remedies opinion is used.
B. Cost Effectiveness.
As noted in the Threshold Subcommittee Report,57 lawyers and clients generally are interested in reducing time and costs in transactions. Exercise by the opinion giver of customary diligence and competence in preparing and giving a remedies opinion usually will result in a reasonable scope of work for the opinion giver, while meeting the reasonable due diligence needs of the opinion recipient. Debating whether the remedies opinion covers each and every undertaking or essential provisions is not productive, because customary practice is the same either way. Accordingly, there should be little difference in cost. If disproportionate cost will be incurred in a particular transaction for any reason, lawyers and clients should discuss that issue and seek to find ways to reduce the cost by limiting the scope of work.
As noted in I above, some California opinion givers, including many who support the "California" "essential provisions" interpretation, state separately a large number of express exceptions to the remedies opinion. Ironically, many of those who support the "each and every" interpretation use few exceptions. Yet, as described above under III, experienced opinion givers in general exercise the same customary practice (competence and legal diligence) in preparing and giving remedies opinions.
Why the difference in practice?
Some contractual provisions raise special problems under California law.58
Stated exceptions appropriately arising for this reason should be acceptable to opinion recipients. Appendix 10 (Exceptions Subcommittee Report) analyzes and categorizes a list of "survey provisions," providing guidance on whether separately stated exceptions are appropriate and customary as to those provisions. That appendix demonstrates that many of the exclusions from coverage of the remedies opinion found in the General Qualifications of the Accord or the California Qualifications of the 1992 Report need not be separately stated.59
Some California opinion givers believe that the possible application of the "each and every" interpretation of the remedies opinion compels more stated exceptions to reduce the risk of liability.
Stated exceptions are unnecessary for this reason, because liability for a breach of the duty of care is based primarily on the exercise of customary practice and not on whether the remedies opinion covers "each and every" provision. 60
Some California opinion givers are less willing than their "New York" counterparts to leave out stated exceptions in reliance on customary usage.61
Customary practice, and particularly customary usage62, assist in explaining the meaning of remedies opinions and related exceptions, and lead to the conclusion that certain issues are not covered by these opinions. In summary, an issue is not covered by the remedies opinion where, by customary practice, it is generally understood that the issue giving rise to the concern about enforceability (a) arises under a body of law that is not covered by the opinion,63 (b) is covered by the equitable principles limitation or bankruptcy exception,64 or (c) is of a nature that opinion givers do not address, for example where the relevant undertaking is an economic remedy.65 Many California opinion givers and others have moved substantially toward a consistent understanding of this customary usage.
The reader is encouraged to turn to Appendix 10 for more specific guidance on exceptions.
VI. Summary and Conclusion
With the benefit of more than a decade of experience since the Business Law Section's 1992 Report, it is now clear that national opinion practice has evolved to a point where the argument over "each and every" vs. "essential provisions" should no longer consume time and energy. Recovery from an opinion giver for breach of the duty of care to the opinion recipient in giving a remedies opinion will be based principally on whether the opinion giver has followed customary practice in preparing the opinion, not on a resolution of that argument. Customary competence and legal diligence do not vary significantly among opinion givers that regularly give remedies opinions and adopt one or the other of these interpretations.
Since experienced opinion givers holding the different views tend to have the same competence and exercise the same legal diligence in preparing remedies opinions, the cost of giving opinions should not vary significantly. While reputation issues for an opinion giver may flow from rendering a flawed remedies opinion, this result has little to do with this dispute over the meaning and scope of the remedies opinion. Opinion recipients are and should be comfortable relying on remedies opinions rendered by competent lawyers using reasonable professional judgment while conducting customary diligence.
Some California opinion givers tend to state more exceptions to the remedies opinion than is generally found in the practice. While California remedies opinion practice will always vary to some extent from others,66 some of the separately stated exceptions now found in some California opinions are superfluous.67 It appears that California and other lawyers are increasingly willing to rely on generally understood unstated limitations on the scope of the remedies opinion, and thereby to streamline opinions.
The Business Law Section continues its support of the trend toward a uniform national opinion practice and streamlined remedies opinions with fewer separately stated exceptions, where that is supported by customary practice.68
1 See Bus. Law Section of the State Bar of Cal., Report on the Third-Party Legal Opinion Report of the ABA Section of Business Law § III G 2 (1992) [hereinafter 1992 Report], republished in Bus. Law Section & Real Prop. Section of the State of California, California Opinion Reports at IV (2002) [hereinafter 2002 Compendium]. Back
2 For a discussion of the generic exception, including its text, see the Report of the Generic Exception Subcommittee, infra App. 11. Back
3 See generally infra § V a; infra App. 10. Back
4 Some of these opinion givers may feel that some or many of the nonessential provisions, in context, are either unenforceable or at least of questionable validity. For example, sometimes heavily negotiated documents contain undertakings that are very broad or vague, or are otherwise not clearly drafted, resulting in uncertain enforceability. See also supra App. 4 § II C (questionable provisions that have been drafted or retained by lawyers for the benefit of their clients). These issues have received little attention in opinion literature.
Some seek to use the generic exception and laundry lists even when they believe that the essential provisions interpretation applies. Back
5 See The TriBar Opinion Committee, Third-Party Closing Opinions, 53 Bus. Law 591, 621, n. 69 and accompanying text (1998) [hereinafter 1998 TriBar Report].
Those who adhere to the "essential provisions" interpretation may believe that it limits their exposure to liability in cases where the opinion giver has failed to warn that a nonessential provision is unenforceable. However, holders of the New York view contend that this belief is ill-placed. Distinguishing between essential and nonessential provisions is inherently difficult. Moreover, in litigation seeking damages from an opinion giver for a wrong remedies opinion, the plaintiff will need to allege and prove damages resulting from its reliance on the incorrect opinion. If the plaintiff does so, the opinion giver could have difficulty convincing the trier of fact that the relevant unenforceable provision is nonessential. Back
6 See infra App. 10, § I.B. Back
7 See infra § V. Back
The "New York" broad application of customary usage may have evolved to the point that it is little different in practice from the "essential provisions" approach. For example, the 1998 TriBar Report states that the equitable principles limitation ". . . covers those situations in which a court may decline to give effect to a contractual provision because the enforcing party has not been significantly harmed as where an alleged breach is not material and has not resulted in any meaningful damage to the party seeking enforcement." 1998 TriBar Report at 625. Query how different the use of concepts of significant harm, material breach and meaningful damage is from a determination that, in context, the provision is "nonessential." See infra App. 10, § I.B.2 (touching on the concept of materiality as part of the equitable principles limitation). Cf. Assoc. of the Bar of the City of N.Y. and the N.Y. State Bar Association, 1998 Mortgage Loan Opinion Report, 26 N.Y. REAL PROP. J. 2, 18--19 (1998) (commenting (in support of a form of generic exception that expressly assumes a material default) that the existence of a material default depends on future facts and circumstances that are unknown at the time the opinion is issued). Back
8 See Report on Third-Party Remedies Opinions to which this appendix is attached §§ VI, VII & VIII (2007) [hereinafter Umbrella Report]; infra App. 9 (comparison of enforcement of contracts by courts under New York and California law); infra App. 10 (analysis of the need for separately stated exceptions); infra App. 11 (analysis of the generic exception). Back
9 In part, this was an attempt to bridge the gap between the two competing views.
The 1992 Report included in its articulation of the legal diligence responsibility the following: "The Opinion Giver need not conduct legal research as to any such [undertaking] unless the Opinion Giver, in applying reasonable professional judgment to that [undertaking], should recognize, without conducting legal research, that there is a not insignificant degree of uncertainty as to the enforceability based on the existence of California Law (or federal Law, if the Opinion is also given under federal Law) directly applicable to the Client, the Transaction, or both." 1992 Report § III.C.(b)(ii).
Many believe that the statement of this portion of the standard for legal diligence is not felicitously worded. Nevertheless, when provided with this articulation, 83% of the firms that responded to the 2001 Survey stated that it substantially describes their practice in deciding whether and to what extent to conduct legal research in support of a remedies opinion. See supra App. 5 § 7.
See also infra § III.B.(1) Back
10 The Am. Bar Ass'n. Comm. on Legal Opinions, Legal Opinion Principles, 53 BUS. LAW. 831, § I.D (1998) [hereinafter ABA Principles]; The Am. Bar Ass'n. Comm. on Legal Opinions, Third-Party Legal Opinion Report, Including the Legal Opinion Accord of the Section of Business Law, American Bar Association, 47 BUS. LAW. 167, Foreword at p. (iii) (1991) [hereinafter Accord Report]; 1998 TriBar Report §1.2(a); Corps. Comm. of the Bus. Law Section of the State Bar of Cal., Legal Opinions in Business Transactions (Excluding the Remedies Opinion), (2007 printing) [hereinafter 2007 Report] § II. See also RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 95 cmt. c (2000) [hereinafter RESTATEMENT]. Back
11 E.g., aiding and abetting wrongs of another person, violation of securities laws, fraud and misrepresentation. As with the duty of care, the extent of the risk of liability under these theories does not seem to expand or contract based on whether the remedies opinion is interpreted as covering "essential provisions" or "each and every" undertaking. Cf. Vega v. Jones, Day, Reavis & Pogue, LA Super Ct. #BC295541 (2004) (refusal by trial court to dismiss an action for fraud (not based on a legal opinion) on demurrer, where the law firm allegedly failed to disclose to an adverse party in a merger transaction facts the court felt were material). Back
12 Lucas v. Hamm, 56 Cal.2d 583, 591, cert. denied, 368 U.S. 987 (1961) (finding a lawyer not liable for preparing a will that violated the rule against perpetuities because a lawyer of ordinary skill in similar circumstances might have made a similar error); Betts v. Allstate Ins. Co., 154 Cal.App.3d 688, 715, (1984). See also RESTATEMENT (SECOND) OF THE LAW OF TORTS § 299A (1965) [hereinafter Restatement of Torts] ("Unless he represents that he has greater or less skill or knowledge, one who undertakes to render services in the practice of a profession or trade is required to exercise the skill and knowledge normally possessed by members of that profession or trade in good standing in similar communities."). In a malpractice action against a lawyer by his own client arising out of his representation of the client in a divorce proceeding, the California Supreme Court supplemented the Lucas v. Hamm articulation by stating that a lawyer is expected "to discover rules of law which, although not commonly known, may readily be found by standard research techniques." Smith v. Lewis, 13 Cal.3d 349, 358 (1975). In that case, the Court noted that the lawyer would have been aware of an error in analysis with "minimal research into hornbook or case law," and the quoted language therefore may be dictum. However, the language has been used in some subsequent cases. See 2007 Report at § III A 1, and discussion infra at § III.B.(2). Back
13 RESTATEMENT, supra n. 10, § 52(1). California courts give heavy weight to Restatements. This is true both for the RESTATEMENT and for the RESTATEMENT OF TORTS, supra n. 12, the most relevant Restatements for purposes of this discussion. Through March 1, 2004, California courts had cited those Restatements (in all versions) a total of 4,073 times. Although the RESTATEMENT'S formulation varies somewhat from Lucas v. Hamm and related cases, the Opinions Committee believes that the articulations have substantially the same meaning. See infra n. 18 and related text. Back
14 1989 Report § III. The 2007 Report did not comment on this point. Back
15 See infra n. 19 and accompanying text. Back
16 Roberts v. Ball, Hunt, Hart & Baerwitz, 57 Cal.App.3d 104 (1976), cited in the 1989 and the 2007 Reports, was a reversal by the Court of Appeal of the trial court's grant of a demurrer in an action by a creditor of the opinion giver's client who received an opinion letter originally given to that client. The complaint did not allege that the legal conclusion (that a general partnership was duly organized) reached in the opinion was incorrect. The appellate court reversed on the basis that an allegation in the complaint that the opinion failed to disclose material facts known to the opinion giver (that some partners of the partnership did not believe there was a general partnership) stated a cause of action for negligent misrepresentation. This case is generally believed to stand for the proposition that an opinion giver can have liability for a misleading opinion that is technically correct. See 2007 Report § III.B. n. 45. Back
17 California cases addressing the duty of care owed to a non-client outside of the third-party opinion letter context tend to focus on whether the duty is owed to the non-client, and do not articulate clearly the scope of the duty. See, e.g., B.L.M. vs. Sabo & Deitsch, 55 Cal.App.4th 823 (1997); Mattco Forge, Inc. vs. Arthur Young & Company, 38 Cal.App.4th 1337 (1995); Held vs. Arant, 67 Cal.App.3d 748 (1977); Goodman vs. Kennedy, 18 Cal.3d 335 (1976); Biakanja vs. Irving, 49 Cal.2d 647 (1958). See also the discussion of Smith v. Lewis, 13 Cal.3d 349 (1975), cited in the 1989 Report and the 2007 Report, and related cases, infra § III.B.(2). Back
18 See also RESTATEMENT OF TORTS § 552, supra n. 12; supra n. 13. Back
19 RESTATEMENT § 51(2); see also id. § 95(1). This appendix does not undertake a comprehensive review of all of the elements required to establish liability, e.g., reliance and causation, but rather addresses only the outline of the duty of care. Back
20 Id. § 52(1); see also MODEL RULES OF PROF'L CONDUCT R. 1.1 (Competence), 1.3 (Diligence); CAL. R. OF PROF'L CONDUCT 3--110 (Competence and Diligence). Rules of professional conduct are not usually used to establish liability, but may be used as evidence of the standard of care. See supra App. 7 § II n.7. Back
21 See supra n. 13 and related text. There might be disagreement about the meaning of "lawyers in similar circumstances." See generally supra App. 7 §§ IV & V (uncertainties arising from the use of customary practice); language quoted from the RESTATEMENT OF TORTS, supra n. 12. Regarding closing opinions generally, Appendix 7 cites references, in ABA Principles § I.B, to the customary practice of lawyers who regularly give, and lawyers who regularly advise opinion recipients regarding, opinions of the kind involved. In the context of remedies opinions, Appendix 7 (§ IV.A) concludes that 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 in similar transactions. The discussion in Appendix 7 also touches on such questions as the geographic location of lawyers used to measure customary practice and customary practice for handling specialized matters (n.26). Back
22 See, e.g., RESTATEMENT, supra note 10, § 52(1); id. cmt. b (competence); infra n. 26 (diligence). Sometimes more general reference is made to that which is reasonable or appropriate in the circumstances, but the discussion always returns to competence and diligence that lawyers exercise. See RESTATEMENT § 95 cmt. c & reporter's note; id. § 52 cmt. b. See also 2007 Report § III A 2, which notes that there is currently no case law authority in California that definitively establishes customary practice as the touchstone by which to measure the duty of care, but expresses the expectation that a California court would give weight to the analysis of commentaries regarding customary practice. Back
23 While this conclusion is supported by the text and authorities cited in the footnotes in this appendix and Appendix 7, there are situations where it would not be correct, for example where the parties have agreed to a different standard. Back
24 This appendix does not discuss factual diligence. See 1998 TriBar Report § II (discussing factual diligence). Back
25 See generally 1989 Report § III; 1998 Tribar Report § 1.4 ( c). This appendix addresses only legal diligence for the remedies opinion. Back
26 " Unless effectively stated or agreed otherwise, a legal opinion . . . constitutes an assurance that it is based on legal research and analysis customary and reasonably appropriate in the circumstances and that it states the lawyer's professional judgment as to how any legal question addressed in the opinion would be decided by the courts in the applicable jurisdiction on the date of the [opinion]." RESTATEMENT § 95 cmt. c. "Similarly, once 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 the issuance." Id. § 95 cmt. e. A reporter's note on Restatement § 95 states that various bar association reports that purport to be mainly declaratory of custom and practice have been instrumental in furthering understanding of the evaluation process and contributing to uniformity of practice among lawyers issuing legal opinions, citing various TriBar reports and the ABA Principles. Id. § 9. reporter's note. Back
27 See supra n. 21. Back
28 Law firms with offices in California and elsewhere usually give opinions under the law of each jurisdiction where they have an office, and report little difference in their legal diligence approach. See supra App. 6 Back
29 This appendix sets forth the Opinions Committee's consensus view of practices of many lawyers who regularly deliver remedies opinions. Other practices may also meet the "customary practice" standard. Moreover, as illustrated by notes 31 and 36, details of how experienced opinion givers act in rendering opinions vary. Back
30 See discussion § III.C. infra. Back
31 An opinion preparer is a lawyer in a law firm who prepares the opinion letter. The opinion giver is the lawyer or law firm in whose name the opinion is signed. See supra App. 1. Details vary as to how different experienced opinion givers use opinion preparers in this process. In some circumstances, for example in complex transactions where the opinion giver is a large law firm, experienced opinion givers involve more than one opinion preparer. Different parts of the documentation may require different expertise, or the opinion may cover many different documents or even several related transactions. Some opinion givers delegate review of relatively straight-forward undertakings to less experienced lawyers under the supervision of a senior lawyer. See notes 29 & 36. Back
32 This provides assurance that the opinion preparers have considered each and every undertaking.
The purpose of this review is to determine whether the opinion preparers, using their knowledge, background and skill, and reasonable professional judgment, recognize unenforceability, or a significant degree of uncertainty as to the enforceability, of one or more of the undertakings of the contract. While the steps in the diligence process may in some cases merge, the opinion preparers do not typically undertake legal research in making that determination. Back
33 For a discussion of generally understood limitations on the scope of a remedies opinion, see infra § V. Back
34 The law covered by the opinion is discussed infra, n. 52. Back
35 See infra § III.C.(1).
See also The TriBar Opinion Committee, The Remedies Opinion -- Deciding When To Include Exceptions And Assumptions, 59 Bus. Law. 1483, 1487 (2004):
The opinion preparers normally will not have to conduct legal research on every contractual provision each time they render an opinion. For many common provisions, the opinion preparers' existing knowledge and experience typically will be sufficient without further research to permit them to address the legal issues presented. Back
36 See infra App. 10 Ann. A (examples of exceptions).
Details of how legal diligence is carried out vary from firm to firm. For example, some firms require review of third-party opinions by an opinion committee or a second partner to help assure the quality of their opinions practice. Others do not. See supra n. 29; see generally The Am. Bar Ass'n .Comm. on Legal Opinions, Law Office Business Practices, 60 Bus. Law. 317 (2004). Back
37 1992 Report § III.D.1. The combination of competence, infra § III.C, and customary diligence conducted with reasonable professional judgment is at the heart of this process. See supra § III.A. Back
38 Smith v. Lewis, 13 Cal.3d 349 (1975); Camarillo v. Vaage, 105 Cal. App. 4th 552, 561 (2003); Stanley v. Richmond, 35 Cal. App. 4th 1070, 1092 (1995). Emphasis added. Back
39 Some California opinion givers have concern that 1989 Report § III might be read to support an extension of the legal diligence standard articulated in Smith v. Lewis to givers of third-party remedies opinions, by stating that "the same or similar standards no doubt apply" to "rendering legal opinions." As is evident in the following text, the Section believes that such an extension is inappropriate. See also 2007 Report § III A 2. Back
40 See RESTATEMENT § 51; 1989 Report § III. Back
41 In non-client matters, the duty of care "must be applied in light of the scope and rationale of the duty in question." RESTATEMENT § 52 cmt. e. Back
42 "In rendering an evaluation, a lawyer does not undertake to advise the third person except with respect to the questions actually covered by the evaluation." Id. § 95 cmt. c. See Accord Report, Accord § 18; A. N. Field, Legal Opinions in Business Transactions §3.5 (Practicing Law Institute 2003) (discussing the "Four Corners" approach). Back
43 See supra note 10. Back
44 See supra § III.B.(1), n. 21, App. 5 § IV B. Back
45 For a discussion of the cost/benefit analysis applicable to remedies opinions, see supra App. 4. Back
46 RESTATEMENT § 52; id. § 52 cmt. b. While the Restatement does not use the term "customary practice" in its discussion of competence, there does not appear to be a difference between "normal professional practice" and "customary practice." See also Lucas v. Hamm, supra n. 12, at 591. Back
47 Id.§52 cmt. B. See supra App. 7 § IV.B. Back
48 See supra note 21; supra App. 7 § IV.B. "Normal professional practice" does not mean "average" performance; the duty is one of reasonableness in the circumstances. RESTATEMENT § 52 cmt. b. See supra note 22.
This does not foreclose a lawyer from giving a remedies opinion where the lawyer has not regularly given remedies opinions before. However, opinion givers should understand the importance of having sufficient legal knowledge to recognize issues with undertakings in the contracts in question at a level that will meet that competence standard. Moreover, opinion preparers are well advised to have sufficient knowledge of customary opinion practice to understand the diligence required and the impact of customary usage on the scope and meaning of the opinion. While it may be possible or even necessary to achieve some of the required level of competence in the course of a particular transaction, it could be difficult to achieve all of it in that time frame. Examples of techniques used by many to achieve and maintain that competence level are set forth below, and the Umbrella Report and its appendices (including this appendix), and other reports referred to therein, are particularly useful in providing background on relevant customary practice. Back
49 RESTATEMENT § 52 cmt. b. Back
50 Id. Back
51 See App. 7 § IV.A n.22. Back
52 The Accord states that "The Remedies Opinion deals only with the law of contracts of the Opining Jurisdiction and other laws 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." Accord Report, Accord § 10. The 1998 TriBar Report concurs that the opinion deals with the relevant contract law, and that: "Customary practice requires the opinion preparers to take account of law that lawyers who render legal opinions of the type involved would reasonably recognize as being applicable (i) to transactions of the type covered by the agreement and (ii) to the role of the Company (but not other parties to the agreement) in the transaction." Cf. Smith v. Lewis and related cases, supra n. 38, which state that lawyers are expected ". . . to possess knowledge of those plain and elementary principles of law which are commonly known by well-informed attorneys . . . ." 1998 TriBar Report § 3.5.1. See also 2007 Report § III.A.1, 2.
Certain areas of law that might meet these standards are nevertheless understood not to be covered unless specifically included, e.g., securities and antitrust laws. See Accord Report, Accord §19; 1998 TriBar Report § 3.5.2; infra App. 10, at 12--15.
In general, lawyers who regularly work on transactions similar to the one at hand have thereby acquired knowledge of applicable law, which assists them in recognizing legal issues with the documentation. Back
53 See 2007 Report § III.A.1; 1989 Report § III; see also supra App. 7 n. 26. Back
54 And many law firms representing opinion recipients that regularly receive opinion letters seek such assurance regarding their lawyers as well. Back
55 Details of this practice vary substantially from firm to firm. See Committee on Legal Opinions, ABA Section of Business Law, Law Office Opinion Practices, 60 Bus.Law. 327 (2004). Back
56 This could be true even though the opinion giver successfully defends a liability claim on the basis that it complied with customary practice. Back
57 Supra App. 4. Back
58 For a discussion of the general similarity between the laws and courts of California and New York in enforcing contracts, see infra App. 9. Back
59 Infra App. 10 Ann. A. Back
60 See supra § III. Back
61 Historically, the extent of the willingness to accept customary usage to obviate the need for separately stated exceptions may have been the most important difference in approach between the TriBar Committee and the Section. Back
62 Certain words used in closing opinions are by customary practice generally understood to have special meanings. See supra App. 7 § III, including the discussion of why the debate over "each and every" vs. "essential provisions" is really a debate about customary usage. See also 1998 TriBar Report § 1.4 (b). Back
63 See supra note 52; infra App. 10, at 12--15. Back
64 See infra App. 10 § I.B.2. Back
65 See infra App. 10 Ann. B § 3.
Of course, if the parties wish to avoid a separately stated exception, they may redraft a questionable contractual provision or restructure the transaction to avoid any uncertainty about enforceability. Back
66 If for no other reason, because California has its own unique substantive legal issues. Back
67 Moreover, the practice by a few opinion givers of including a laundry list of exceptions that do not refer or relate to any undertakings in the contract in question is unfortunate and inappropriate. It may suggest that the opinion preparers have not followed customary diligence by carefully reading the document. See ABA Guidelines § 1.3; Field, One Size Doesn't Fit All, 11 Bus.Law Today 5 (2002). Back
68 See 2001 Statement, App. 3. Back
Appendix 9 / Report on Third-Party Remedies Opinions