The Practice of Law

The Golden Rule

There are two rules which young lawyers have to learn to be successful. Strangely enough they do not learn either of these rules in law school.

Luckily, they have me to fill in this gap in their education.

The first rule is ‘The Golden Rule.’  It has absolutely nothing to do with saying please and thank you or doing unto others as they do unto you. No, simply put, The Golden Rule is, “he who has the gold, makes the rules.”

The Golden Rule explains a great many things, especially when dealing with Banks.

For example, it explains why borrowers always pay the Bank’s legal fees, and why Borrowers provide non-refundable deposits to Banks for the privilege of finding out whether or not the Bank wants to lend them money. (Try that with your clients some time. Say to them, “give me $3,000 and I will get back to you in three weeks and tell you to whether I want to incorporate a company for you.”)

As powerful as the Golden Rule is, one cannot really appreciate its beauty until you couple it with a slightly lesser-known rule, called “The Because Rule.” 

In its long form, The Because Rule is stated as follows: “We do it that way because we have always done it that way.”

The Because Rule explains things like why lender’s counsel insists on seeing an authorizing resolution when a client enters into a general security agreement, but a landlord’s lawyer does not when a tenant enters into a commercial lease. “But why would you treat these two differently,” you might scream, only to be answered with, “Because we have always done it that way.”

Or perhaps the question is why we initial every page of a commercial lease but we don’t bother doing that for a share purchase agreement. And the answer – you guessed it – is, “Because we have always done it that way.”

The best example that I can give of the sheer beauty that comes from combining The Golden Rule with the Because Rule has to do with the practice of requiring Borrower’s counsel to provide opinion letters in lending transactions.

Borrowers have to pay for both their own lawyer and the lender’s lawyer to create and negotiate these letters, ostensibly because the Bank needs to be assured that the Borrower has the legal right to borrow the money. The due diligence that the Bank has done is not sufficient. The common law indoor management rule is not sufficient. The codification of the indoor management rule in the corporate statutes is not sufficient. The Certified Copy of the Authorizing Resolution, the Corporate Certificate with Articles of Incorporation attached, the Certificate of Non-Restriction, and the Certified Copy of an Extract from the Corporate By-law are not enough. Even the Certificate of Incumbency (or Encumbency if you prefer) won’t do it. (You would think that anything with that weird a name would be a powerful document, but apparently it is not powerful enough.)

On top of all that you need an opinion letter to be given by the Borrower’s lawyer. Why? Because we have always done it that way. And because the Bank has the gold.

I once attended a continuing legal education seminar at which a panel of research lawyers at major Toronto law firms gave a presentation on the usefulness of these opinion letters. They all agreed on two things. The first was that in the vast majority of routine loan transactions, these opinion letters do not add anything and are a waste of the borrower’s money. The second was that because of the Golden Rule and the Because Rule, they were not able to convince the financing partners in their firms to change their practice and would be forced to deny having said that these letters were useless if any member of the audience brought it up on a loan transaction with another member of their firm. Seriously. They actually told us that they all agreed that this practice was nonsense, but that nothing was going to change.

There is absolutely nothing that lawyers can do about the Golden Rule except to seek to understand it. As for the Because Rule, that one is on us. Surely, we can do better.

2 replies on “The Golden Rule”

I have a rule for working out why there redundancies in processes exist in what should be an efficient market.

It has two separate but interlinked components:

I) Apply Occam’s Razor; and
II) Consider: Cui Bono?

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