Brexit | Spring 2017
‘There are known knowns… There are known unknowns… but there are also unknown unknowns.’
Former US Secretary of State for Defence, Donald Rumsfeld, took a lot of flak when he famously uttered these words in 2002, used with regard to weapons of mass destruction in Iraq. Today, they would not sound out of place coming from a lawyer speculating on the impact of Brexit.
Just over nine months after the UK’s June referendum to leave the EU, there are only a few known knowns that lawyers can cling to, and even these are not set in stone. Prime Minister Theresa May followed through on her pledge to invoke article 50 on 29 March, thereby starting the two-year negotiations governing the UK’s exit from the EU. Following May’s speech to Lancaster House in January – and the subsequent government white paper – there is a slightly better sense of what the government’s negotiating objectives are, but since they will require agreement with 27 other EU states, whether they will be met is another matter entirely. What is clear is that Brexit could be a lot harder than many initially thought.
‘You can’t say how it will pan out at all, but you can say that a hard Brexit is one of the things you have to plan for,’ says Dorothy Livingston, a Herbert Smith Freehills (HSF) consultant who heads the firm’s Brexit focus group. ‘There can be no doubt about that now. That in itself means you’ve got a baseline to examine your business against, which is, for most, the worst possible case scenario. Then you would also look at a scenario of phased change to a new EU trade treaty.’
The only other concrete outcome from Brexit that lawyers can be sure of is the Great Repeal Bill. This will, upon the UK’s exit from the EU, immediately annul the 1972 European Communities Act, and transfer (at least temporarily) all existing EU law to UK statute. Everything else, including the UK’s access to the single market, and the timing and nature of the exit negotiations, can be firmly filed in the known unknowns category.
You can’t say how it will pan out at all, but you can say that a hard Brexit is one of the things you have to plan for. There can be no doubt about that now.
Herbert Smith Freehills
‘There is something of a phoney war going on at present,’ says Tom de la Mare QC, a public and EU law barrister at Blackstone Chambers. ‘The reason is pretty simple: no-one has the foggiest what the government is considering doing and there is a void of policy in all the hardest areas. There is nothing of legal substance in the white paper or, as far as I can see, in the Lancaster House speech. Like the output of the Department for Exiting the European Union, they’re fundamentally devoid of content to date. The upshot is that there are huge areas where the government does not know what it is going to do, like financial services, telecoms, broadcasting, data protection or medical regulation, or if they do have an idea what is coming, they are not letting on. And until the government does, the process of advising on the changes to come, and their legality, cannot begin.’
The uncertainty surrounding Brexit raises numerous challenges for law firms and in-house lawyers. Among them is the question of what to advise upon when the negotiation timetable has not been agreed, let alone the terms of the UK’s exit and its future relationship with the EU.
Most firms and clients have formal Brexit groups in place to co-ordinate a message internally and externally. For law firms, this typically involves a handful of lawyers working almost full time on Brexit-related issues, with others dipping in and out as required.
‘Since the referendum was announced back in November 2015 we’ve kept on top of developments to help our clients understand what the possible outcomes and associated issues might be,’ says David Wittmann, practice partner at Slaughter and May. ‘There has been a lot of internal work. We have a Brexit working group, which is responsible for getting together the know-how, thinking about the issues and solutions and making sure that our whole workforce is on top of them.’
While some practice areas and industries are less affected than others, for most senior lawyers the long shadow of Brexit cannot be escaped completely.
‘It’s not just about a small Brexit team doing it,’ says Susan Bright, Hogan Lovells’ regional managing partner for the UK and Africa. ‘The truth is for all of us everything is done in a Brexit context from now on.’
‘It’s a tough job,’ concedes Andrew Wilkinson, a restructuring partner at Weil, Gotshal & Manges, and one of the firm’s go-to Brexit lawyers. ‘Basically it’s about modelling scenarios.’
On one level, this might include the analysis of existing contracts and supply chain arrangements and ensuring they are robust enough to cope with Brexit. Assuming lawyers are identifying the pitfalls now, related contractual disputes can be minimised once Brexit actually happens. One common concern is the dispute clauses in existing contracts.
‘Clients are looking at their agreements often with respect to the jurisdiction clauses and whether or not they remain fit for purpose,’ says Sarah Parkes, a disputes partner at Freshfields Bruckhaus Deringer. ‘One of the impacts of Brexit is that the UK won’t be party to the mutual recognition and enforcement of judgments across the EU. There are people looking at the choice of forum clauses and whether to have arbitration clauses in there.’
And Sean Ryan, partner and head of the Brexit group at the Dublin arm of Eversheds Sutherland, notes an increase in Brexit clauses in Irish contracts: ‘Outside the financial services area, we are now seeing the potential impact of Brexit arise in commercial negotiations and Brexit clauses being inserted in commercial contracts where there is a UK element. These clauses, to the extent possible, aim to mitigate against possible adverse effects of Brexit.’
It is this sort of contingency planning that is dominating the agenda for law firms and their clients, future-proofing themselves against all of the known unknowns. Law firms and clients are hedging themselves against a worst-case scenario that might never happen. With regard to the recognition of judgments, there is an expectation that some form of reciprocal arrangement will emerge.
‘Assuming our own system becomes legally separate, I would still expect the UK courts to find European Court of Justice decisions persuasive, in a rather similar way to the way the UK courts often find the US Supreme Court decisions persuasive in any area of overlap,’ says Andrew Henshaw QC, a commercial, EU and public law barrister at Brick Court Chambers.
Further down the line, another area where litigation might arise is in public law disputes against the government.
‘The Great Repeal Bill onwards will be about making lots of policy choices that affect businesses,’ says Charles Brasted, who co-heads Hogan Lovells’ global policy advocacy practice. ‘It seems pretty clear that we’re not going to go through a process of very substantial changes in policy over a sustained period without a substantial uptick in judicial review litigation.’
Banking on trouble
One sector where the time pressure is more acute, and where people are already taking matters into their own hands, is financial services, because institutions without EU-licensed operations outside of London could lose their passporting rights post-Brexit. Getting the necessary regulatory approval, personnel and infrastructure in place for a new EU operation could take up to two years. This is why most banks and institutions, if they have not already done so, need to assume the worst and make a decision by mid-2017. Lloyd’s of London recently announced it will open a subsidiary on the continent for its EU business.
HSBC also confirmed that it will move at least 1,000 staff to Paris, while other centres are also vying to become passporting hubs, including Frankfurt, Luxembourg and Dublin.
‘Passporting is a challenge,’ says Wim Dejonghe, senior partner at Allen & Overy. ‘At this stage it’s not clear whether the passporting system will disappear, be changed or remain as is. We’ve been advising on that. Some clients are obviously hedging their risks to make sure they have dual passports, so they can carry on both in the UK and Europe with the minimal disruption possible.’
The ability of law firms to employ non-UK citizens and train them here might disappear. That will have an impact on the relevance of English law.
Wim Dejonghe, Allen & Overy
However, Juan Carlos Machuca, resident partner in Uría Menéndez’s London branch, is sceptical of any immediate benefits from Brexit for European jurisdictions like Spain: ‘I doubt that an alternative hub will be created or that all businesses will move to another leading city in Europe. London will keep a great part of its economic and financial activity, even if there is some movement to other cities. In the long run, Brexit will probably lead to a more diversified Europe, with Frankfurt as headquarters of the European Central Bank perhaps leading the transition. We are also confident that Spain may benefit as an alternative legal and business jurisdiction to London, at least in some sectors where we have strong corporations, such as in the infrastructure, energy and banking sectors, or as a result of our strong ties to Latin America.’
For clients, tackling Brexit is as much about handling the personal concerns of staff as about broader regulatory issues.
‘In the UK pharma affiliate, we have over 35 different nationalities,’ says Funke Abimbola, UK and Ireland general counsel and UK head of financial compliance at the healthcare giant, Roche. ‘Immigration is the biggest staff priority right now. We’re supporting our staff in very practical ways, for example, by offering an immigration consultation service.’
At Roche, Abimbola is part of a Brexit team that includes senior colleagues from departments such as regulatory, communications and human resources. One of Roche’s primary concerns revolves around the central licensing of medicines for the EU. Presently this is handled by the European Medicines Agency (EMA), which is headquartered in London. Medicines approved by the EMA can subsequently be marketed across the EU. There remains a big question over how this will be managed after Brexit.
‘We currently benefit from the European centralised procedure for registering our medicinal products but when we leave the EU we don’t know what will replace that. Importantly, how is that going to affect patient access?’
Rather than sitting on their hands, a big part of the Brexit strategy for companies like Roche is to actively engage in the decision-making process, usually through their respective trade associations, to try to influence the outcome.
‘Forward-thinking clients and industries shouldn’t be waiting, because to wait leaves it in the hands of the governments, which is the last thing you want.
Brendan McGivern, White & Case
‘Forward-thinking clients and industries shouldn’t be waiting, because to wait leaves it in the hands of the governments, which is the last thing you want,’ says Brendan McGivern, a Geneva-based international trade partner at White & Case, who also heads the firm’s World Trade Organization (WTO) practice. ‘You want to make sure that your industry is putting forth its views and that the government is taking those on board.’
For law firms, lobbying and advocacy can take various forms. On the softer side it means issuing reports and hosting seminars in association with industry groups, as firms like Clifford Chance and Hogan Lovells have done with leading financial services trade bodies such as TheCityUK. At a more direct level, firms can lobby on behalf of their clients, or at the very least have lawyers accompany the client to meetings with regulators and other government bodies.
Firms with significant trade law teams will also have an advantage, not just for advising clients on how to navigate a new world of post-Brexit tariffs, but also in influencing the actual trade negotiations. Given the likely increase in demand for trade lawyers, who typically work out of Brussels, Washington DC and Geneva, it is unsurprising to see law firms beefing up in this area. In December, HSF recruited Eric White, former head of the European Commission legal service’s trade and WTO group, while in January, White & Case recruited King & Spalding trade law partner Jasper Wauters to its Geneva arm.
‘These negotiations can take a long time, they can be painful exercises, and the UK government hasn’t negotiated free trade agreements since 1973,’ says McGivern. ‘That whole effort is going to be quite difficult. Companies, including our clients, are going to want to have their say on how the new regime is structured. Typically an industry that wants to push a certain agenda will hire counsel to develop its position and then work with governments to push it forward.’
When it comes to public policy and advocacy, the challenge for law firms and their clients will be how to represent their own interests without appearing overly political.
‘Our political stance is neutral at Roche,’ says Abimbola. ‘We, together with other organisations, are offering solutions to what we know are issues for the government. Regulators are also struggling to find a way forward that works for most of the organisations involved.’
Law firms are equally aware that they must retain a neutral political stance. This is despite the fact that when The In-House Lawyer surveyed lawyers prior to the referendum, 57% backed remain (see ‘2016 and all that’, Spring 2016).
‘The lawyers did take a fairly public position for remain, but that has now gone,’ says Wilkinson. ‘People are keeping their heads below the parapet, because of government pressure, client pressure and not wanting to be seen to be out of step with the mood of the times.’
This could prove difficult when it comes to lobbying about the specific challenges that face the post-Brexit legal industry, such as barriers to freedom of movement. Sector issues, such as reciprocity arrangements for the recognition of court judgments and the mutual recognition of professional qualifications, where English law-qualified solicitors can practise in other EU jurisdictions and vice-versa, are unlikely to be too contentious. The same cannot be said for freedom of movement, one of the government’s stated ‘red lines’.
Regulators are struggling to find a way forward that works for most of the organisations involved.
Funke Abimbola, Roche
‘A key concern for the industry is that the ability of law firms to employ non-UK citizens and train them here might disappear,’ says Dejonghe. ‘These concerns have been raised with the government. If restrictions are pushed through, that will have an impact on the relevance of English law across the world. By not allowing people to gain experience in English law, give it ten to 20 years and the risk is that it will lose market share to New York law. That will have a serious impact on the UK legal industry, and it’s an essential part of the soft power of this country.’
Whether the government takes this on board remains to be seen. Arguing that point in the current political climate will not be easy, but representative organisations such as the Law Society will need to find a way to push the legal sector up the government’s order of priority. It is a known known that the success of the UK legal industry goes hand-in-hand with the fortunes of the business sector. However, it is also true that any diminution of the country’s legal standing would be detrimental to the UK’s status as a post-Brexit trading nation. It is impossible to disassociate the two.