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Introduction

It is customary in financing transactions for financiers to require the delivery of a legal opinion prior to the advance of a financing. The delivery of the opinion is generally structured as a condition precedent under the finance documents. Opinions serve an important role in assuring financiers as to the legal effect of the transaction, and, while they may vary in scope, they are in many respects consistent across transactions.

Why Legal Opinions Matter

Legal opinions provide comfort to financiers that the transaction parties are properly authorized, and the finance documents are valid and enforceable. In this way, they serve as a risk-management tool, reducing transactional uncertainty.

Typical content of Opinions

Typically, legal opinions address whether the parties to a transaction are duly authorised to enter into it, whether the finance documents have been validly executed, and whether those documents constitute legal, valid, binding, and enforceable obligations under their governing law and jurisdiction. In most cases, the focus is placed on the capacity of borrowers and guarantors (together, the “obligors”) and of the security providers as well as the enforceability of the finance documents.

The proposed content of a legal opinion is often subject to discussion between the external legal counsels involved in the transaction. In cross-border financings, it is customary for financiers to obtain legal opinions from multiple jurisdictions. The governing law of the finance documents, and the extent to which a particular jurisdiction is involved in the transaction, will dictate the scope of the opinion to be obtained.

Capacity and Enforceability

Where the home jurisdiction of the obligors and security providers overlaps with the governing law of the finance documents, counsel may combine capacity and enforceability opinions in a single opinion. Where these differ, it is customary for financiers to request a home-jurisdiction opinion to confirm the capacity and authorisation of the relevant parties, and, in certain cases, to address the recognition of foreign judgments under the laws of that jurisdiction.

In terms of allocation of responsibilities between counsel in a financing transaction, it is market practice for obligor or security provider counsel to opine on capacity matters, while financier’s counsel – who typically holds the pen on the finance documents – provides the enforceability opinion.

UAE Financing Transactions

Where a UAE obligor or guarantor (the “UAE Party”) enters into finance documents governed by UAE law, external counsel is generally expected to opine on both capacity and enforceability. Such an opinion is based on a review of the transaction documents, the corporate records of the UAE Party, and the relevant provisions of UAE law. By way of example, it may address matters such as the UAE Party’s valid corporate existence and authority, and whether the documents are capable of creating binding obligations under UAE law. The precise scope of the opinion will depend on the particular features of the transaction and the issues that are material to the parties.

When foreign law governs

Where a UAE Party is entering into finance documents governed by foreign law, external counsel is typically asked to provide a capacity opinion in respect of the UAE Party.

In certain cases, the opinion may also address whether UAE courts would recognise and give effect to documents governed by foreign law, and whether the chosen law and jurisdiction would be upheld. These issues tend to become more complex in cross-border transactions involving multiple jurisdictions.

Special Considerations for Free Zones

In addition to onshore UAE entities, many obligors and security providers are incorporated in free zones. Certain free zones, most notably the DIFC and ADGM, operate as separate jurisdictions with their own companies laws, courts, and insolvency regimes. Accordingly, even where the finance documents are governed by UAE law, financiers will usually require a separate opinion confirming the capacity and authorisation of a free zone entity under the laws of its free zone of incorporation.

Reliance and Disclosure

Legal opinions are generally addressed to the specific addressees named in the opinion letter. However, financiers typically require the flexibility to disclose opinions in limited circumstances, particularly where a facility is transferable or may be syndicated.

Market practice accommodates this through reliance and disclosure language, which usually provides that opinions may be disclosed:

• as required by law or judicial process;
• on a non-reliance basis to professional advisers, auditors, or financial institutions that may become lenders or sub-participants, and in each case to their professional advisers.

This approach ensures that legal opinions retain their confidential and transaction-specific nature, while enabling financiers to share them where strictly necessary.

Conclusion

Legal opinions form a critical element of financing transactions in the UAE. They provide financiers with assurance as to the capacity and authority of obligors and the enforceability of the finance documents. The precise scope of the opinion will depend on the governing law of the finance documents, the jurisdiction of the obligors and security providers, the transaction structure and prevailing market practice.

Each transaction has its own dynamics and requirements and the opinions must be tailored accordingly. If you would like to know how these requirements apply to your situation, or if you have any question, please reach out to us.