Corporate Trust: How Far Can a Bond Trustee or a Security Trustee Rely on a Legal Opinion? The English Courts Have Given Helpful Guidance

A Bond Trustee or Security Trustee in a finance transaction will typically be a beneficiary of a legal opinion. A Trustee may be expressly named as one of the addressees on the face of an opinion letter. Alternatively, a Trustee may receive a reliance letter given by the opinion provider stating that the Trustee may rely on the opinion letter as if it was named as an addressee. A Bond Trustee or Security Trustee will be aware that the terms on which it is appointed as Trustee usually expressly state that it is entitled to rely and act on the advice of a lawyer or other appropriate professional adviser. In some circumstances, a Bond Trustee or Security Trustee might even be in breach of its duties as trustee if it does not require a legal opinion. To what extent can a Bond Trustee or a Security Trustee take at face value a legal opinion provided to it in a finance transaction?

In Haugesund Kommune and Narvik Kommune v Depfa ACS Bank (2009) the English High Court held, amongst other matters, that Depfa Bank (the Bank) was entitled to rely on a legal opinion provided to it by a reputable Norwegian law firm without having to scrutinise the reasons behind the legal opinion. For a Bond Trustee or a Security Trustee this is an important principle.

The Bank was the lender under loan transactions which had been drafted as swaps and made under an ISDA Master Agreement expressed to be governed by English law and subject to the jurisdiction of the English courts. The Bank had obtained an unqualified written opinion from the Norwegian law firm that the two Norwegian municipalities which were the counterparties to these “swaps," Haugesund and Narvik, had full power and authority to enter into these transactions. The judge described the law firm as a “well-known and highly respected firm of lawyers in Norway”. In the event, the Court held that the Norwegian law firm’s legal opinion was wrong (the municipalities in fact lacked the capacity to enter into these transactions which were therefore void) and negligently given.

Did the Bank have to look behind the legal opinion?

The judge said, “[The Bank] was not consciously taking any risks on the legality of the transaction. [It] was relying on the advice of reputable and highly regarded Norwegian lawyers and [it] had no reason to question their opinion, which was unqualified. [The Bank] was entitled to accept it at face value. Had [the Bank] been conscious of any risk as to the capacity of the municipalities to enter into the transactions [the Bank] would not have proceeded.”

The judge also commented, “…it is a most unlikely conclusion that a bank which has doubts of a proposed loan…and takes legal advice in order to resolve those doubts can properly be regarded as thereafter taking the risk that it is mistaken as to the validity of the transaction…” The Court held that seeking legal advice on a point of law was not the same as taking a risk on a legal issue. The Bank did not have to go behind the legal opinions expressed in the opinion letter.

In short, the judge was satisfied that if the Bank had been advised that the transactions were prohibited, the Bank would not have entered into them. Accordingly, the Bank had not taken the risk that the transactions might be void but had relied on the advice of the Norwegian law firm, which in the circumstances it was entitled to do. The judge did not doubt that the particular Norwegian law firm, which provided the legal opinion, was an appropriate law firm for that purpose.

Reassurance for Bond Trustees and Security Trustees

The case was the subject of an appeal to the English Court of Appeal on other points. The High Court judgment remains reassurance to Bond Trustees and Security Trustees that generally under English law they can rely on unqualified legal opinions given by someone appropriately qualified to provide such opinions, without having to investigate the reasons behind those opinions.

In determining who is appropriate to provide the relevant legal opinion, clearly in the case of a capacity and authorisation opinion, it should be a lawyer qualified in the jurisdiction of incorporation of the party to which the opinion relates (in the Haugesund case, Norwegian lawyers). Experience in the areas of law concerned is also important.

This does not mean that possible defects revealed on the face of a legal opinion need not be probed.