Commercial Awareness Update – W/C 20th March 2023

THE SKY IS THE LIMIT – A BEGINNER’S GUIDE TO THE US DEBT CEILING CRISIS

Every year, April brings a rush to millions of American households as the deadline for submitting individual income tax returns approaches.

Even though the White House estimates a federal tax revenue of $4.71 trillion for FY 2023, the projected deficit sits on an eye-watering $1.4 trillion.

To put it into perspective, the US government can scrap the Departments of Education, Transportation and all services that are not ‘mandatory’ (e.g., defence, social security etc.) entirely and will still not balance the budget.

How does the US government fund itself?

By borrowing until it cannot.

Simply put, the debt ceiling is a cap that automatically prevents government spending until Congress votes to increase the limit. This is a relatively simple and bureaucratic process. However, as the world’s largest economy now has a congress representing its political divide, eyebrows are being raised in the city.

Issues

According to Treasury Secretary Yellen, the US will inevitably hit the limit in summer 2023, despite the ‘extraordinary measures’ taken, such as pausing contributions to federal workers’ retirement funds.

So, what happens if the US congress cannot raise the ceiling until then?

The worst-case scenario is unprecedented: a default on $31.4tn government debt. To quote analysts from JP Morgan, ‘The implication of such an event is hard to quantify’ as the US government has never defaulted on its obligations before.

The main concern is the issue of trust rather than the amount of capital involved. A US-government bond is generally seen as the safest investment asset. Therefore, most financial institutions have US bonds as collateral.

Thus, the worst (but least likely) case is an economic Armageddon or a severe recession for more optimistic outlooks. However, the most vocal scenario is a soft landing similar to the 2011 debt ceiling crisis.

To recall what happened in 2011:

• The political environment was familiar with an ideologically divided Congress.
• Standard & Poor’s downgraded the US sovereign debt rating from AAA to AA+, and S&P 500 fell by 17%.
• According to Goldman Sachs, stocks and corporations with higher exposure to government spending were affected disproportionately – such as defence, healthcare, and aerospace.

However, the contagion was controlled. The markets bounced back a week after the dilemma was resolved, which may explain the markets’ current compound attitude. Some analysts still expect a government shutdown in the following months, yet a default is ruled out by most.

In addition, as the Biden administration is likely to wait until after April to push for an increase in the debt limit, markets are reserving their focus.

How might this issue affect the legal industry?

The answer is once again the most lawyer-like response: It depends.

For the sake of specificity, there are two likely scenarios:

1 – Legality of the Trillion Dollar Coin

The Trillion Dollar Coin (TDC) is conceptualised during every debt limit debate. The idea is that the Treasury can mint a $1 trillion coin, deposit it at the FED to replace vast quantities of US federal debt, and then proceed with its obligations while bypassing the bureaucracy of the DC. Since this is an accounting trick that would not introduce additional money to the economy, inflation would not be a concern.

Academia has a consensus that the US treasury has no legal obstacle to doing so. Nonetheless, the utilisation of the TDC has been avoided because of ethical grounds rather than legal ones. Treasury believes that the law shouldn’t be utilised to bypass the democratic process, and they should not intervene with the political chambers of the government.

Nevertheless, suppose the Treasury finds itself with Congress in a deadlock and an inability to pay federal workers. In that case, law firms operating in the US can see an unprecedented client and a case that will go down in history.

2 – Performance of the US economy through the process

Even though the issue may be resolved without an epic lawsuit involving the US Congress and the Treasury, further market uncertainty can bring new challenges for the main clients of law firms and economic policymakers.

Suppose history is repeated with a similar (maybe slightly trickier) outcome than in 2011. In that case, this can have long-term implications for the trust in the world’s largest economy and legal market.

According to Goldman Sachs, if the issue still needs to be resolved by late summer, Treasury must implement the strictest extraordinary measures. The Biden administration could find themselves unable to provide almost all non-essential services to keep up with their interest payments, a move that could impact the economy by as much as $225 billion.

Even though the fallout may not be as dramatic as this forecast, any trend impacting the world’s largest economy will influence the British legal market, from the Magic Circle to the high street firms.

Article written by Teoman Sevgen

THE ILLEGAL IMMIGRATION BILL

Earlier this year, Prime minister Rishi Sunak made stopping immigrant boats one of his five promises to the British people.

The ‘stop the boats’ campaign, or the Illegal Immigration Bill, was introduced on March 7th 2023, and it aims to stop unlawful migration through unsafe, illegal routes by preventing those who enter the country illegally from claiming asylum, detaining them for 28 days and deporting them to Rwanda or a ‘safe third country’. After deportation, the individual will be blocked from seeking UK citizenship.

What safe, legal routes have the government implemented for people seeking asylum?

Currently, there are limited safe, legal routes available to refugees, with the majority being for people seeking asylum from Hong Kong, Ukraine, and Afghanistan under the nationality-specific bespoke immigration routes.

Programs for resettling refugees include the UK Resettlement Scheme, Community Sponsorship, and the Mandate Scheme. Those who are close relatives of those granted asylum in the UK before they left their place of origin may be eligible for refugee family reunion visas (known as pre-flight relatives).

Issues

According to the government, the Bill is required to address the problem of illegal immigration, which it argues undermines public services, encourages crime, and puts pressure on salaries and working conditions.

Also, the government makes the case that the legislation will aid in safeguarding those who run the risk of being exploited and trafficked by criminal organisations, meaning a severe and viable threat to the continued existence of such organisations.

Nonetheless, critics of the Bill have expressed concern about how it would affect vulnerable immigrant groups.

They argue that the Bill may result in increased exploitation and discrimination of undocumented employees, who would be less likely to report abuse due to worry about being deported.

Furthermore, Home Secretary Suella Braverman has said that the Bill would push “the boundaries of international law without breaking it”, which “is already controversial”.

The UK’s commitment to the European Convention on Human Rights and the UN Refugee Convention, which grants rights to asylum seekers entering the UK, is anticipated to be put under strain by the new legislative measures.

Additionally, many have turned to Parliament Square to protest this anti-immigration Bill, with people chanting, “migrants built the NHS”, in solidarity with people seeking safety in the UK. Some Conservative MPs are in opposition, with Teresa May stating that the Bill is unlikely to deal with the issue of illegal immigration.

However, despite the strong opposition, the Bill passed its second reading on March 13th 2023, with no Conservative MPs voting against it.

Impact on the legal sector

The Law Society has expressed concerns over the new Bill as there has not yet been a public consultation, nor do they think the Bill feasible.

Home secretary Suella Braverman has stated that she cannot “address the Bill’s full legal complexities”, and to reassure the public, she said that “some of the finest legal minds have been and continue to be involved in its development”.

If the Bill is passed, Oliver Oldman, a senior lawyer at the British law firm Kingsley Napley, predicts that it will “inevitably” face court challenges that will cost the taxpayer more money.

The existing statutory limitations on the duration of detention of families with children and pregnant women would not apply where they are detained under these new powers.

Anyone detained under these bespoke powers would not be permitted to request immigration bail from the Immigration Tribunal or file a judicial review during the first 28 days of custody.

Also, modern slavery legislation would be amended to exclude those subject to the arrangements for removal duty (suspected or actual victims of modern slavery or trafficking) from certain specific provisions.

Despite the possibility of this Bill not being compatible with the European Convention of Human Rights, the government still wishes to proceed to enactment.

Article written by Efua Okhiria

LAWSUIT FILED AGAINST THE WORLD’S FIRST ROBOT LAWYER:

WHAT DOES THE ENHANCEMENT AND PROLIFERATION OF AI MEAN FOR THE FUTURE OF THE LEGAL INDUSTRY?

The rise of AI, the legal industry’s new hot topic, long heralded as an instrumental advancement in the provision of legal services, is starting to reveal its double-edged nature.

Just one month after Allen & Overy became the first Magic Circle law firm to declare using an AI chatbot in its services, the world’s first AI-powered robot lawyer “DoNotPay” is being sued by US law firm Edelson for “masquerading as a licensed practitioner”.

What is DoNotPay?

DoNotPay is a legal services chatbot released in 2015, which was initially built to contest parking tickets. On its website, it is described as fit to help clients “fight corporations, beat bureaucracy and sue anyone at the press of a button”.

Today, the technology has dramatically evolved, offering 153 services ranging from annulling marriages to navigating the US Freedom of Information Act.

In January 2023, DoNotPay was to mark history and become the first robot lawyer to be brought into a courtroom. However, these plans have been thrown into chaos by Edelson’s filing of a lawsuit against the chatbot on behalf of its customer Jonathan Faridian.

The complaint

The plaintiff, who used the service to draft a job discrimination complaint, “believed he was purchasing legal documents and services that would be fit for use from a lawyer that was competent to provide them” (as per Faridian’s lawyers).

However, Jonathan Faridian reported he received poor quality service. Hence, he is claiming the service is unlawful, with the justification that the robot is practising law in California without a license when it is, in fact, not qualified in any jurisdiction.

This claim is consistent with Legal Cheek’s analysis of DoNotPay in 2016, which noted that the AI failed to answer “basic legal questions” on matters such as securing immigration status.

Joshua Browder, the founder of DoNotPay, alleges no basis for the claim that the service is unlawful.

What does the enhancement and proliferation of AI mean for the future of the legal industry?

This new development will undoubtedly add to the debate surrounding the place of AI in the legal industry, which will only continue to grow in the coming years.

An increasing pressure to keep up with AI-assisted technology within the legal sector is observable worldwide. Its assistance on labour-intensive tasks, such as legal research, due diligence, and contract review and analysis, has proven very time-effective and helped boost law firms’ productivity in the past decade.

The legal sector has familiarised itself with using AI-assisted technologies despite an initial sentiment of disruption of professional norms and culture. As such, technologies such as DoNotPay will likely enhance law firms’ productivity and competitiveness when inexorably adopted.

Nonetheless, some are still reticent when embracing this innovation and incorporating AI into legal work. Indeed, many questions are posed by these developments, such as the likelihood of an ultimate loss of jobs in the legal sector or, at the very least, of a redeployment of skills within law firms. In other words, the enhancement and proliferation of AI will inevitably require a shift in training and skills.

This leads us to wonder whether the law degrees currently dispensed by universities will even be adapted to the skillsets that firms will require in the future. Moreover, some concerns surrounding the trustworthiness of some technologies, especially regarding data protection, should be addressed.

Beyond the question of when clients’ data can legitimately and legally be used to enhance AI’s performance, we can rightfully ask whether “lawtech” is a safe server to house highly sensitive information and whether we can trust these technologies to be accurate. Allen & Overy has specified that licensed legal practitioners would always double-check its AI-Bot Harvey’s work.

Suppose AI becomes more mainstream within law firms, and its purported accuracy is overly relied upon. In that case, this could pose serious issues, including determining liability for the damage caused to the client because of an AI’s mistakes.

Therefore, the predicted result of AI enhancement and proliferation within law firms is mixed. While lawtech will likely be synonymous with productivity and competitiveness in its future development, we must stay wary of its long-term side effects on liability risk and the legal employment sector.

Moreover, the advent of performing and efficient lawtech could go hand in hand with the augmentation of new technologies delivering services outside the structure of established firms.

In the long run, this would lead to more accessible and cheaper legal services and a dip in competitiveness for existing legal structures.

Article written by Mahault Dignet