Scottish independence: what commercial lawyers need to know

For 112,180 days the kingdoms of England and Scotland have been joined in one political union: the United Kingdom.

On 18 September—in 78 days—the Scottish people will vote on whether to dissolve that union and become an independent state.

Like the agitated bubbles in a Champagne bottle which is being teased open, the debate is now reaching its crescendo. At an Evening Standard event in London's Guildhall last night, leading public figures—from Danny Alexander (Chief Secretary to the Treasury) to Hardeep Singh Kohli (comedian and self-styled trouble-maker)—discussed the pros and cons of Scotland going it alone. The arguments were erudite, witty and bad-tempered as, in fairness, all impassioned politic discourse ought to be.

'Yes' voter Stewart Hosie, SNP MP for Dundee East, gave an animated speech bemoaning the 'negativity' of the 'no' campaign. He mocked, to much laughter from those gathered in the Great Hall, those who think Scotland can't be independent 'because there would be too many forms to fill in'. Bureaucracy 1, Independence 0?

On the other hand, Helena Kennedy QC, 'no' voter, Labour peer and a 'proud Scot', believed that romantic nationalism 'is a retreat from the future'. She espoused a federal structure for the UK, believing that economic division would be the wrong path to take in a future of rapid globalisation and increasingly powerful corporations.

With odds of 1/6 for 'no' and 7/2 for 'yes', it is clear nobody quite knows who will be opening the bottles of chilled Champagne in the wee small hours of 19 September.

So what does the prospect of independence mean for commercial lawyers?

Lawyers like certainty.

At the moment, however, commercial lawyers are on a hiding to nothing if they think that they can find overall legal certainty in this area, certainly before the referendum takes place.

Nobody knows, for example, what currency would be circulating on Independence Day or even what it might be called.

That said, there seems to be a wee bit more confidence in how the legal system itself would deal with independence.

The Scottish Independence Bill, recently published by the Scottish Government provides, at clause 34, that the laws which are in effect in Scotland immediately before independence would continue to apply post-independence until modified or repealed.

Therefore, if this bill were ever to be enacted, any UK wide law that applies to Scotland, such as the Companies Act 2006, would continue to apply until changed or repealed.

Mark Ellis, Partner at Scottish law firm Burness Paull LLP, confirms this stance:

We would anticipate that the status quo for commercial law would continue to apply for at least an interim period.  The timescale for any change would depend on the legislative priorities of the new independent Scottish government

UK-wide statute law, even though it is somewhat limited in quantity for commercial lawyers, could have an impact for years or even decades to come north of the border. As the Scottish government acknowledges:

There are Westminster statutes which were carried over to an independent Ireland and which remain in force in Ireland still, and which the Dail Eireann, even after 90 years of independence, has never felt the need to entirely rewrite

Moreover, EU law will continue to apply: this would probably be the case even in the worst case scenario of there being a hiatus in Scotland's membership of the EU. After all, if Scotland wants to join the EU it would doubtless look to apply all relevant EU laws, even if it doesn't technically need to do so, in order to show itself to be a model European state.

What have businesses done so far?

Some businesses have already started to tread gingerly into this legal and regulatory quagmire.

In February this year, Standard Life announced that it had 'started work to establish additional registered companies to operate outside Scotland' into which it could transfer parts of its operations if it was necessary to do so. It added that this was a 'precautionary measure' to ensure the 'continuity of [its] businesses’ competitive position' and to 'protect the interests of [its] stakeholders'.

Other companies have started to do the same.

So does this mean that lawyers have started cancelling holidays en masse to deal with the massive inflow of independence-related work?

No.

But there are definitely things that lawyers can start thinking about now.

Top ten things for lawyers south of the border to muse over:

  • Territory definitions: Many contracts (eg distributorship or franchise agreements) contain territorial restrictions and therefore they define the relevant territory. A new definition for the UK might need to be, 'Territory means the United Kingdom, including Scotland (whether or not Scotland becomes independent) but excluding the Channel Islands and the Isle of Man'
  • Currency: Pound? Euro? Scottish Pound? What would a future Scottish currency be? A change in currency means that a foreign exchange risk could be introduced into many contracts. Weir & Oxford Economics estimate that moving to a new currency and redenominating contracts could cost £800 million (although it is unclear how they arrived at this figure). Government contracts have dealt with the possibility of the UK changing its currency to the euro for years (see the latest model services agreement from the Crown Commercial Service). Practitioners should consider whether similar clauses should be introduced in any future contracts
  • Change control clauses: many agreements, particularly those of a long-term nature, contain 'change control' clauses which are designed to deal with matters that arise during the course of the agreement but which are impossible to fine-tune when the contract is first signed (see, for example, clause 13 of the model services agreement). If the parties agree to change certain terms, these clauses set out how to do so. Should they deal with the consequences of Scottish independence?
  • References to statutes: terms that state 'a reference to a statute or a statutory provision is a reference to it as amended, extended, re-enacted or consolidated from time to time' might also need to be revisited in order to carve out carve out the jurisdiction of the newly independent and fully sovereign Scottish Parliament
  • Delay: how would a contract deal with any delays that may inevitably occur between a vote for independence and independence itself? The House of Lords Select Committee on the Constitution believes, for example, that there may be delays in entering into certain contracts, particularly those that affect Scotland in a material way: 'In domestic affairs it may be appropriate for the UK Government to adopt a practice broadly similar to that in the pre-election 'purdah' period. Under the 'purdah' convention ministers observe discretion in initiating any new action of a continuing or long-term character (such as ... entering into large contracts)'.
  • Cross-border tax issues: Now the fun really starts. Or possibly not. My vote goes for the latter (I'm a lawyer: I don't like maths). In any event, businesses ought to be thinking about tax issues regardless as to what happens in the September vote. The Scotland Act 2012 introduced the Scottish Rate of Income Tax (SRIT) which, under current constitutional arrangements, is due to take effect from 1 April 2016. As always, differences in tax rates may have a major impact on the underlying commercial deal
  • Bureaucracy: UK-wide companies may suddenly find themselves having to deal with increasing amounts of bureaucracy. There would be a new financial regulator if Scotland votes 'yes'. Ditto Companies House. Ditto many other government bodies. How are these potential extra costs going to be factored into any contract?
  • Governing law: Some Scottish companies currently make their contracts subject to English and Welsh law given that this jurisdiction is well recognised and used internationally. Given that Scotland, on independence, would be a foreign jurisdiction, choosing English and Welsh law might no longer be appropriate
  • Force majeure clauses: It might be sensible to consider force majeure clauses carefully in some contracts. A contract entered into a decade ago could be affected by Scotland becoming a sovereign state (such as a defence contract). Is independence outside of the reasonable control of the parties? In certain circumstances, could a party rely on a force majeure clause? Then again, certain contracts might be set aside under the common law doctrine of frustration
  • Termination clauses: If it turns out to be a messy divorce, the English and the Scottish may not want to engage with each other as much (let's hope not!). According to research by the not-for-profit think tank nfpSynergy, nearly half of people in England and Wales (48%) would be less likely to give to a charity working in an independent Scotland. Therefore, practitioners should perhaps pay more attention on how contracts can be terminated and in what circumstances. They might want to, in particular, consider shorter minimum terms or no-fault termination clauses.

So what do you think lawyers should be doing? Should they wait until the referendum? Is it 'too early to say'?

Let us have your thoughts below.

scottishdebate

London Evening Standard debate last night

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