Price, Path & Pride: Third-Party Closing Opinion Practice Among U.S. Lawyers (A Preliminary Investigation)

Published in 3 Berkeley Bus. L.J. 59 (2005).


This article presents the first in-depth exploration of third-party closing opinions, a common but curious – and potentially troubling -- feature of U.S. business law practice. Third-party closing opinions are letters delivered at the closing of most large transactions by the attorney for one party (e.g., the borrower) to the other party (e.g., the lender) offering limited assurance that the transaction will have legal force and effect.

Hundreds, if not thousands, of legal opinions are delivered every week. Yet, lawyers often complain that they create needless risk and cost, and produce little benefit. Closing opinions thus pose a basic question: Why do we have them at all?

The chief explanation to date has been economic: Closing opinions ostensibly reduce information asymmetries by compelling the production and verification of information that enables the parties to price their transactions more accurately. This article reflects the first empirical assessment of this explanation.

The evidence supports a more complex story than that of economics. On the one hand, lawyers indicate that some aspects of opinion practice do produce and verify important information under certain conditions. For example, lawyers are uniquely situated to provide information in an opinion about a client’s corporate power and authority to engage in a transaction.

On the other hand, the economic explanation has at least three serious limitations. First, closing opinions have often been implicated in famous financial frauds, including most recently Enron. To the extent closing opinions abet fraud, they obviously fail to produce valuable information. Second, even in the absence of fraud, lawyers routinely cite certain aspects of opinion practice that make little economic sense, because information is not produced, or is duplicative or produced at needless expense. Third, and more subtly, when opinion practice improves it does so not principally by virtue of the “market” but instead due to the intercession of the bar associations, which dominate this area of practice to an unusual degree.

The article thus argues that the traditional economic explanation (which I characterize as a “price” analysis) must be supplemented with a more nuanced understanding of human behavior, which I characterize loosely as “pride.” Recent advances in behavioral economic theory, for example, suggest that inefficiencies in opinion practice may reflect certain psychological biases and effects. The paper thus argues that we can understand this practice only by seeing the dual roles of price and pride.


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Date of this Version

March 2005