20 December 202110 minute read

Legal opinions and when to use them

Solicitors routinely provide opinions on a wide variety of issues, and legal opinions are an essential part of many major transactions. In each instance, the solicitor involved is expected to provide an opinion that is both legally correct and not misleading to the addressee. The purpose of providing the legal opinion is two-fold:

 

  • to inform the addressee of the legal effect of a transaction or matter; and
  • to identify legal risks that the addressee should consider and further evaluate.

In general, solicitors are carefully not to phrase the opinions they provide in such a manner as to attract strict liability even though parties requesting the solicitor's opinion have an expectation that the solicitor will be liable if he or she is negligent. Words implying a standard of care beyond ordinary negligence such as "I certify that . . . " ‎should be avoided in a legal opinion.‎ However, it is important to remember that a solicitor’s opinion is only an opinion — not a guarantee.

 

It is also important to recognize the exposure to liability that a solicitor accepts in giving a legal opinion.  This exposure is not limited to financial issues, but can also impact the solicitor’s reputation. With this in mind, one should follow the “Golden Rule” when requesting a legal opinion from opposing counsel — do not request the inclusion of a specific opinion which you would not be willing to provide yourself under similar circumstances. 

 

In preparing any opinion, the solicitor needs to consider who may be relying on the opinion. ‎Since the case of Hedley Byrne, it is clear that anyone whom the author of the opinion knew or ‎ought to have known would rely upon the opinion may have an action against the solicitor if the ‎opinion was negligently prepared. As a result, it is appropriate for the opining solicitor to ‎insert a qualification to the effect that the opinion is being provided to the ‎addressees for their sole use and may not be provided by them to any other person, and that no ‎other person is entitled to rely on the opinion.‎

 

Sometimes, it is not possible for the person requesting the opinion to sufficiently inform ‎the solicitor of the significance of the issue or to provide complete access to the necessary information due to confidentiality concerns. In those circumstances, the opinion will ‎likely contain language limiting the solicitor’s responsibility. An opinion of this nature is referred to as a ‎qualified opinion.‎ If the qualifications are applicable to all of the opinions expressed, it is acceptable to ‎state the opinions and then list the qualifications‎ in a schedule or in subsequent paragraphs.

 

Generally, there will be a list of assumptions relied on in preparing the opinion. ‎All assumptions and matters relied upon should be stated in the opinion letter.  Of course, ‎assumptions should only be made with respect to facts which the opining solicitor knows ‎or has reasonable grounds to believe are accurate.‎ To some extent, the use of assumptions arise as a result of cost considerations — a client will often have significant knowledge of the facts of the matter in question, but will not ‎want to pay for the service required to verify those facts.‎

 

The degree of due diligence required to form a legal opinion will often be the same ‎irrespective of the size of the transaction. If the transaction sum does not warrant a costly opinion, the solicitor may ‎contact opposing counsel to discuss whether certain matters such as the due authorization, execution ‎and delivery of the documentation can be assumed in order to reduce the cost to the client.

 

While use of the legal opinion has waned in recent years with respect to many major transactions, especially those involving public companies, there are still instances where a legal opinion is required — such as under Section 13.4(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”).

 

Opinions required under the BIA, s 13.4(1)

 

Section 13.4(1) of the Bankruptcy and Insolvency Act (“BIA”) affects a trustee acting in a dual ‎capacity as trustee in bankruptcy and as the receiver or agent for a secured creditor. Prior to ‎acting for the secured creditor, the trustee must obtain a written opinion from a solicitor (who ‎does not act for the secured creditor) that the security is valid and enforceable against the bankrupt’s estate. ‎The purpose of a section 13.4(1) BIA legal opinion is to provide comfort to the trustee as to the ‎validity of the security interests being enforced. The opinion given to a trustee pursuant to section 13.4(1) BIA will focus on the date the specific ‎security was (or was not) perfected, as the crucial issue is usually whether or not the security was‎ perfected at the date of bankruptcy.  ‎

 

A section 13.4(1) BIA opinion should be addressed to the trustee. Pursuant to section 13.4(2) of ‎the BIA, the trustee must provide a copy to the Superintendent and to any creditor requesting a copy of the opinion. The section 13.4(1) BIA opinion should contain details of the documents reviewed and any actions taken by the opining solicitor. Investigations will generally include an examination of corporate documents (such as those ‎contained in the corporate minute book and those filed with the corporate registry), the ‎documents prepared for the specific transaction, as well as all relevant filings in all ‎appropriate registries covering searches of titles, encumbrances, and similar matters.‎

 

In addition to a section 13.4(1) BIA opinion, there may be any number of other scenarios where a legal opinion may be required, whether formal or otherwise.‎

 

Opinions confirming corporate status

 

Opinions confirming corporate status are often necessary for (a) the acquisition of corporations, especially of private corporations, and (b) when acting for the borrower on a lending transaction. Generally, such opinions require the following elements:

 

  • Proof that the corporation exists, including the fact that it ‎has been incorporated and is validly subsisting, and, if applicable, that it has been ‎duly registered as an extra-provincial corporation;
  • That it has the corporate capacity to do what it wishes to do, as set forth in its articles, legislation, and the common law;
  • That it is in good standing as a valid and subsisting corporation with respect to the filing of ‎annual returns and perhaps other filings which may be required in order to assure that the ‎company is not in danger of losing its corporate existence or capacity; and
  • That all‎ required corporate actions have been taken, including confirmation that all corporate resolutions authorizing the corporation to enter into the transaction have been executed and that the appropriate ‎resolutions appointing persons to execute and deliver the documents have been passed.‎
Fixed charges against land

 

Opinions relating to land generally deal with both title to the land and registration of a particular encumbrance (such as a mortgage) on title. With respect to title, opinions can be safely based upon an appropriate search.

 

All ‎opinions with respect to title are subject to extensive qualifications including the following:‎

 

  • all statutory limitations or provisions regarding the ownership of, and title to, land;
  • any defects disclosed by survey;‎
  • any statutory liens or charges having priority; and
  • all applicable taxation, bankruptcy and insolvency legislation, and laws affecting ‎the rights of creditors generally.‎
Personal Property Security Act (“PPSA”)

 

PPSA legislation has been enacted in all common law jurisdictions in Canada to replace almost ‎all other legislation with respect to taking security over personal property. The PPSA has broad ‎application and permits the creation of many types of security interests. ‎There are three essential components that must be reviewed for the purpose of providing a personal property ‎security opinion, which are as follows:

 

  • the parties entered into a valid security agreement;‎
  • the security interest is attached to the collateral; and
  • the security interest is perfected.‎

Accordingly, the opining solicitor will review the security agreement between the debtor and the secured party, confirm that the security agreement is executed by the debtor, consider the description of collateral contained in the security agreement, determine whether the secured party has a security interest in the collateral, ensure that the collateral is not excluded by a specific provision of the PPSA, and confirm that the security interest has been perfected by either possession or registration.‎

Since a security interest in investment property which has been perfected by registration is subordinate to ‎a security interest which has been perfected by control, a secured party typically looks for an opinion ‎from legal counsel to the debtor that the security interest has been perfected by control as well as ‎registration and it is “standard practice to request and give an opinion that, having control, the ‎secured party has priority over any other PPSA security interest in the same investment property, despite ‎the rarity of priority opinions for other forms of collateral”.

Mergers & acquisitions

A somewhat recent ABA Business Law Section study on Canadian private mergers and acquisitions shows ‎a steep decline in the delivery of legal opinions on such closings. The study, which reviewed 64 ‎transactions ranging in size from $5 million to $100 million from January 2010 to December 2011, ‎showed that the percentage of deals having a requirement that the solicitors of the target deliver a legal ‎opinion at closing has dropped from 72% in 2008 to 55% in 2011. The drop in the comparable study for ‎transactions in the United States was even greater — 58% in 2009 to 27% in 2011.

The cause of this decline is ‎that the items commonly opined on, such as the existence and status of the target at closing, the ‎due authorization and delivery of the transaction documents, and the like, are matters that can often be ‎satisfied through due diligence. As due diligence becomes more robust ‎and electronic searching increases its effectiveness, the need to rely on a legal opinion is ‎decreasing.

Despite the increasing effectiveness of due diligence, the fact remains that some transactions will require the ‎delivery of a legal opinion on account of that transaction’s particular circumstances. However, the old habit of requiring a solicitor’s opinion as a closing condition, and then leaving the lawyers to negotiate the terms of the transaction at a later date, could soon become redundant.

 

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.

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