Brexit: planning for "What if?"

“At present, clients just want to understand what Brexit will mean for them and how it will affect their business.” The observation, from Paul Pignatelli, DWF’s executive partner in Glasgow, sets the tone of responses to a survey by the Journal of some leading Scottish legal firms.

Wait and see?

Most firms surveyed have set up a dedicated Brexit team – and Brodies had one even before the June 2016 referendum. This may be a core team supplemented by practice sector specialists, as with Pinsent Masons and Maclay Murray & Spens (MMS) – now working with global firm Dentons ahead of their pending merger.

An exception is Harper Macleod, whose head of Corporate, Donald Munro, says the firm deals with Brexit-related concerns from clients as and when they arise, but “To be perfectly honest, in some ways Brexit has been more talked about by lawyers and law firms than by clients... Many clients have expressed concerns as to how it will affect their business, but have not at present asked for specific advice in relation to any particular aspect of their business or industry.” 

For Morton Fraser, which set up a dedicated Brexit team immediately following the vote, it varies from client to client. “Some clients have clearly been addressing how Brexit issues might affect them, their markets and their staff while others have been taking a ‘wait and see’ approach,” chief executive Chris Harte reports.

Jennifer Young, chairman of Ledingham Chalmers, puts it slightly differently: “Anecdotally, some businesses are being particularly proactive: larger firms are generally likely to have several iterations of their ‘Brexit’ plan; while, in our experience, the SME market is taking a predominantly ‘watch and see’ approach.”

For operations with a truly global outlook, however, it may be less of an issue: “The oil and gas sector still has a predominantly global view, so in many respects, Brexit is seen as just a relatively small part of a much bigger picture,” she notes.

Pressure points 

But the overall picture that emerges is that some sectors have real concerns. Farming, food and drink, and the hospitality sector are most regularly cited. Each has “particularly acute” issues around free movement of people and mobility of workers, according to Brodies chairman Christine O’Neill, as they rely heavily on incoming workers. 

Paul Brown, head of the Food & Drink sector group at Anderson Strathern, agrees. “Employers are already feeling the adverse effect of Brexit, not just in unsettled staff but in attracting people to come to the UK to do what is often seasonal work.” Devaluation of the pound has made coming to the UK each year less lucrative, and they can now earn more elsewhere. “This is putting strain on what are currently two of our best-performing sectors of industry in Scotland.”

The issue is particularly relevant in the north, Young points out, “where high numbers of workers from other parts of the EU are working in sectors including rural, food, drink, and construction”. 

Pignatelli also offers a geographical slant: “Ireland and Northern Ireland are of particular concern, and businesses want the certainty of what could happen so they can prepare for the worst-case scenario... Clever clients are already looking for any gaps in the market.”

Higher education is another sector facing pressing issues. Brodies and Anderson Strathern agree that Brexit is causing problems both for the institutions and their employees, the latter having worries about their status and right to remain in the UK post-Brexit, Brown confirms. “The Government’s soundbites about the UK needing and protecting those with high skills does not seem to have reassured those individuals. For universities this has had an impact on attracting the best academic talent, as well as on the volume of non-UK students applying for positions.”

Employment issues feature across the board, and with them immigration matters, as Harte confirms: “Not surprisingly immigration advice relating to EU nationals has been much in demand from employers and individuals. Our advice to both has been to take steps now if at all possible, rather than wait for more certainty, which may be late in coming.”

Munro comments: “In reality, political solutions rather than legal ones will be required for some of the biggest areas of concern such as shortages of workers.”

Regulatory issues

Anxieties are also shared among the regulated industries, says Michael Dean, partner and head of EU, Competition & Regulatory practice with MMS. He instances financial services, energy and chemicals. While opinions vary on the relative benefits of the EU regimes, “There is a feeling that, even though the UK Government may wish to remain part of certain EU regulatory frameworks, this will actually be quite difficult to achieve. Most of these depend on the European Court of Justice to resolve legal disputes and many areas of law require a principle of mutuality for enforcement, something the EU Withdrawal Bill, which aims to retain all EU law on the statute book, cannot achieve without agreement with the EU.

“It is not clear that Britain will be able to negotiate suitable mutual arrangements within the Brexit timetable, and remaining subject to EU courts beyond a transition or implementation period appears to be politically unpalatable.”

He continues: “Some financial services firms are already looking at moving some operations to Europe in order to have a foothold within the EU regulatory regime, with others taking a defensive position to ensure they have sufficient resource outside the UK.”

Some, such as Guy Lougher, partner and head of the Brexit advisory team at Pinsent Masons, see a pattern of advice across the sectors. “Typical questions revolve around the impact of Brexit on contracts, and that ranges from short-term manufacturing contracts to large multi-million-pound infrastructure projects. Often concerns such as employment, tax, carrying risk, the imposition of non-tariff barriers, are common to each sector, but in other cases questions are quite different. In financial services, there are some very specific regulatory issues, while in manufacturing it could be about taking a long-term view on whether to build a new facility and where that should be located.”

Contracts first 

What can clients do, then, to Brexit-proof commercial or other arrangements affected? Here a review of commercial contracts comes high on the list for most advisers.

“All contracts should be reviewed and the rights and obligations under the agreements assessed in light of Brexit taking place,” Munro states. “It’s likely that the cost of trading in Europe will increase and so the extent to which prices should include/exclude new taxes, duties, or levies that may be introduced should be considered. And you may have to consider how to allocate the risk of future changes in the pound’s value.”

In Pignatelli’s view, “Businesses can adjust their contracts and look to see how existing contracts are interpreted as well as considering Brexit clauses for future contracts closely. Clients need to take all of these into account and understand the risks to their business. At a granular level, it’s looking at the worst case scenarios and having a plan to cover the risk against them.”

For O’Neill, an important practical exercise to undertake now is the “mapping exercise” of assessing to what extent contracts rely on EU law or the UK’s EU membership: it enables clients to consider where Brexit presents a risk to ongoing effectiveness or commerciality, and their options.

Dean suggests in addition that potential tax issues associated with leaving the EU be considered as early as possible: “If you are going to reorganise your European arrangements, it may be better to do so now while British companies still benefit from certain protections under EU laws.” 

Scenario painting

Lougher flags up the fact that some contracts, such as supply and distribution agreements, contain territorial definitions, “and it will need to be established if those definitions are still going to work in a post-Brexit world”. 

His firm has found “scenario planning” helpful for clients. “We consider the potential destinations the UK might end up at, and work out the implications for their business in a hard Brexit or a disorderly Brexit with no transitional agreement at one end of the spectrum, and a satisfactory negotiated settlement at the other. We don’t know where we are going to end up on that continuum, but nevertheless they can take the two extremes and the points in between and identify the commercial implications for their businesses, and what they can be doing now to protect or enhance their position.”

This is a fruitful exercise: “There is almost invariably something which comes out of the discussion which had not been thought of before, and sometimes commercial opportunities evolve from this discussion which had not been apparent beforehand.”

In terms of employment, Munro adds, “it’s worth assessing the worst-case scenario to establish how many of your employees could be affected, including auditing the workforce in terms of immigration status”.

For a private client-based firm like Turcan Connell, substantive areas of interest include charities (funding and mutual recognition), the environment and renewables, along with mutual recognition of civil judgments, for example in the family law context. “Given the current state of negotiations, our approach at present is to give clients background material to help in long-term planning, our view being that we can identify themes and possible problem areas while we wait for greater clarity as the negotiations develop and the Withdrawal Bill makes its progress through Parliament,” firm chairman Simon Mackintosh explains. 

Hard to take

How serious would a “hard” Brexit be for our respondents’ clients, and how likely is it to happen?

“Of course, it wouldn’t be good news,” Pignatelli responds. “However, people are already taking steps to cover their risks. Given the damaging effects it would have on both sides, we of course hope that both sides will take a pragmatic view. We suspect however that whatever deal is done will only get done at the eleventh hour, after a lot of politics and posturing first.”

Munro suggests that clients are not panicking. “Many of them have expressed scepticism that a ‘hard’ Brexit will happen, and while they would prefer not to have the disruption caused by uncertainty, their own customers will continue to need their services and products whatever happens. There’s an overall feeling that there will be negotiations and compromise before Brexit is concluded, limiting any profound impact.”

Mackintosh, however, believes that a hard Brexit “would be viewed seriously by many clients – for example family businesses in the food industry, and those individuals who have property and family interests and links abroad, quite apart from the overall financial impact on the UK and Scottish economy”.

Taking his cue from the politicians, Lougher sees a “tremendous appetite to avoid a disorderly Brexit”; but if we arrived at the point of exit with no agreement or transitional arrangement, “things could get very disruptive very quickly”.

Dean observes that European businesses that rely on the UK as part of their supply chain or for access to capital would also suffer. “The closer that comes to a potential reality, the more likely organisations will opt to avoid cross-border UK-EU solutions in their business structures.”

While Dean notes that there are different definitions of what a hard Brexit would look like, O’Neill says Brodies aims to avoid the language of “hard” and “soft”. “Clients invariably favour arrangements that maintain the greatest possible access to European markets and workforce mobility. It remains very difficult for us and our clients to predict the eventual outcome of the UK’s negotiations with the EU, but the UK Government’s acknowledgment that a transition period is essential is welcome.” 

Harte points out that legal and political questions become mixed up here. “The impact will depend on how much time clients have to think about it, how much forward planning they have done and how quickly trade, in the widest sense, could be made to work under different and possibly unfamiliar rules.” 

Benefit or cost?

What impact do our firms predict on the legal sector, in the shorter and longer term?

While some take the position that Brexit creates uncertainty and therefore a need for advice, O’Neill considers that both short and longer term, Brexit represents a major cost: “We are having to make significant investment across the board in understanding how substantive law will be affected by Brexit and its implementation through the EU (Withdrawal) Bill and other legislation.”

More broadly, much will depend on the health of the wider economy, and therefore on the outcome of the negotiations. “Anything that erodes confidence in the UK’s commitment to the rule of law – whether on human rights or legal certainty and clarity of regulation – is going to be bad for the economy,” she adds. “That includes the ability of Scots lawyers to support their clients’ objectives across the EU, which we wish to see preserved.”

Longer term, Lougher predicts that a negotiated outcome including mutual recognition of qualifications and allowing professionals to operate cross-border, would have “potentially much less adverse impact on the legal profession than if it was an alternative scenario where there had been nothing agreed” in this respect.

Pignatelli sees threats to the prominence of the UK legal sector in Europe, but believes that with UK lawyers having been “at the forefront of the internationalisation of law” since long before Brexit, leading firms will adapt.

“One thing’s for certain,” Young concludes. “Those wishing to ‘futureproof’ their businesses will need to follow the latest developments carefully, and seek specialist advice, as the UK divorces itself from the EU.”

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Harte sums up simply: “It is up to us lawyers to make sure we are as prepared as possible.”