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Brexit: What’s in store?

The vote of the British electorate on 23 June 2016 to leave the European Union will have far-reaching economic, political and legal consequences for both the UK and Europe as a whole.

 

Already we have seen market turmoil, not only in the UK, but also in other markets, not least Italy, where a banking crisis may be imminent.  And we have also seen extra-ordinary political turmoil with a number of seemingly stellar political careers brought to an abrupt end.

 

Against this backdrop, the legal consequences of Brexit can seem somewhat mundane but they are vitally important and businesses need to begin to consider how they can adapt to the new world they will find themselves in.

 

The extent of the legal changes will depend largely upon the outcome of the negotiations to be undertaken between the UK and the continuing EU Member States (“C-EU”) and so cannot be predicted in detail at this stage.

What we can be foresee however is the broad outline which the Brexit process will take under Article 50 of the Treaty on European Union (“TEU”) and the areas of law most likely to be affected by Brexit.

 

In this briefing, we set out: (i) the likely shape of the Article 50 process; and (ii) a high level summary of the areas of law most likely to be affected and what these effects might be.

 

The withdrawal process under Article 50 TEU

 

Article 50(1) provides simply that:

 

“Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.”

 

All that is required to begin the withdrawal process under Article 50 is that a “Member State which decides to withdraw shall notify the European Council of its intention”.  In effect, the Prime Minister must write a letter to the President of the Council, currently Mr Donald Tusk of Poland, stating the UK’s intent to withdraw from the EU.
At the time of writing no such “resignation letter” has been sent and it does not appear that one will be sent until the appointment of a new leader of the Conservative Party (and hence Prime Minister) later this year.  Accordingly, the Brexit process has not yet formally begun.

 

Article 50 itself does not set out any detailed procedure for withdrawal.  Article 50(2) simply states that, on receipt of the resignation letter:

 

“… the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament. (emphasis added)

 

A close reading of Article 50 shows that there are actually (at least) two agreements to be negotiated between the UK and the C-EU.

 

The first is the agreement for withdrawal itself and the second is that dealing with the UK’s future relationship with the C-EU.

 

It should be noted, however, Article 50 itself places no obligation on the C-EU to negotiate any deal at all with respect to its future relations with the UK.

 

All that Article 50 requires is that the C-EU negotiate an agreement setting out the arrangements for the Member State’s withdrawal from the EU.  That withdrawal agreement should “take into account” the likely nature of the withdrawing Member State’s future relations with the EU, but does not say what these should be and it could in theory be that no ongoing relations are contemplated (other than those governed by the World Trade Organisation (“WTO”) and similar trans-national bodies).  This would however seem unlikely.

 

The lack of any requirement for an agreement on any ongoing relationship is made clear by Article 50(3) which states that the EU Treaties shall cease to apply to the withdrawing State on the entry into force of the withdrawal agreement or, failing that, within 2 years of the resignation of the State concerned, unless the Council decides unanimously to extend the period.

 

By Article 50(4), from the date of its resignation, the withdrawing Member State shall not participate in any discussions of the Council or in any decisions concerning it.

 

In addition, Article 50 does not contain any mechanism for withdrawing the resignation letter.  Once the process begins, it seems to be unstoppable.

 

It is not, therefore, a foregone conclusion that the UK will obtain any “deal” in relation to its ongoing relations with the C-EU other than one covering the practicalities of withdrawal itself – e.g. budgetary matters and the removal of UK nationals from any posts within EU institutions.

 

In such a scenario, the UK’s position vis à vis the C-EU would be little different to that of any other member of the WTO with all the restrictions on residency rights and trade that this would entail.

 

On the other hand, the degree inter-dependence between the UK and the EU, not least in relation to the number of EU nationals living in the UK and of UK nationals living in other EU countries, suggests a strong mutual interest in negotiating a partnership between the UK and the C-EU that preserves as many as possible of the mutual benefits enjoyed by each side.

 

One option would therefore be for the UK to join the European Economic Area (“EEA”) – this is sometimes referred to as the “Norway Model”.  Membership of the EEA gives access to the EU single market but requires compliance with EU rules (including those on free movement of workers), with only very limited ability to shape those rules.  EEA States must also contribute to the EU budget as their “entry fee” to the EU single market.  The EEA model may therefore be politically unpalatable to those who voted for the “leave” side in the referendum.

 

Another option would be to seek a bi-lateral relationship with the EU which offers partial access to the single market along the lines of that concluded between the EU and Switzerland.  However, such agreements are complex and time-consuming to negotiate and, again, in practice involve substantial adherence to many aspects of EU law by the non-EU party.

 

A still further option would be for the UK to join the EU customs area (as Turkey has done) which offers partial access to the single market but without free movement rights for individuals.  However, it seems unlikely that such a deal would be capable of protecting the range and extent of the UK’s existing links with the EU.
Whatever option is pursued, EU law will remain applicable in the at least until the Article 50 process has concluded, which will be a minimum of two years from the date of the UK’s formal resignation, which as stated above, has not yet taken place.

 

Even thereafter, it is likely that much EU law will remain applicable in the UK.  This is because, although Article 50(3) states that the EU Treaties shall cease to apply to an EU Member State following its withdrawal, that does not mean that EU law will cease to apply within that country.

 

Many aspects of EU law have been incorporated into domestic law by the European Communities Act 1972 and subsequent legislation so that, for example, the rules on public procurement now exist in UK law independently of their genesis as EU legislative instruments.  Specific UK legislation would be required to reverse that position.
We set out below some of the principal areas of law that will be affected by Brexit.

 

FINANCIAL SERVICES

 

This of course, is an area of fundamental importance for the UK economy.  The EU Treaties currently provide for the “passporting” of financial services which means that a financial services institution domiciled in one Member State may supply its services in all other Member States.  Alternative arrangements for access to the market by financial services institutions based in the UK would therefore need to be made if these institutions are to continue to be able to supply services in the C-EU post Brexit.

 

EMPLOYMENT LAW

 

Many aspects of UK employment law derive from EU law and, as stated above, have been incorporated into national law.  Specific UK legislation would be required to undo this.  The position of workers from other EU Member States resident in the UK and vice versa will need to be dealt with in the withdrawal agreement concluded between the UK and the EU.

 

TAX

 

Direct (as opposed to indirect) taxation is not currently harmonised at EU level and therefore remains within the competence of the individual Member States – though the Commission is currently attempting to use the lever of State aid law to attack what it sees as artificial intra-group arrangements by which multi-national (often American) corporations seek to account for revenues in Member States with low rates of corporation tax such as Ireland or Luxembourg and therefore reduce their tax bill.  This will largely be un-affected by Brexit.

 

COMPETITION LAW

 

UK competition law, in the form of the Competition Act 1998, is modelled on EU competition law and this is unlikely to change.  However, the current specific requirement that UK Courts and regulatory bodies follow the relevant judgments of the European Courts may be removed which could lead to a divergence between the legal approaches under UK and EU competition law going forward.

 

In addition, there may be changes in the domain of merger control where currently larger mergers “with a Community dimension” are reviewed by the European Commission under the EU Merger Regulation which provides a one stop shop merger clearance covering all 28 Member States.  The benefit of this “one stop shop” is likely to be lost post-Brexit with the result that parallel merger control proceedings (potentially with divergent results) in the UK and EU will become more common.

 

Whether the UK competition authorities will have the resources to deal with any such expanded case load remains to be seen.

 

If, as is to be hoped, the UK negotiates some form of access to the EU single market, it seems likely that EU State aid law (or a domestic variant closely modelled on it) will continue to apply.  The same may also apply to the rules on public procurement.

 

It should, of course, also be noted that EU competition law applies to anti-competitive conduct that potentially affects trade between EU Member States, irrespective of where the companies concerned are based.  In fact, the criticism has been levelled at the EU in the past, particularly by the US authorities, that it disproportionately penalises non-EU companies.  If true, there seems no reason for this to change post-Brexit.

 

DATA PROTECTION

 

Although the UK Data Protection Acts of 1998 and 2003 derive from EU Directives, they are self-sufficient pieces of UK legislation and will not be affected by Brexit unless they are repealed by the UK Parliament.  Nevertheless, in time one could foresee divergence between data privacy standards in the UK and those in the C-EU which may affect the ability of companies to transfer personal data between the UK and C-EU.

 

INTELLECTUAL PROPERTY

 

There is a significant potential impact in this area as a number of intellectual property rights, such as EU Trade Marks and design rights, are granted across the EU and provide protection in all 28 current EU Member States.
It seems likely that, on Brexit, such protections will no longer apply in the UK hence rights owners who thought that they had protected their position in the UK along with the rest of the EU may well have to make specific arrangements for the UK, unless some form of continued protection in the UK is negotiated with the C-EU.

 

COMMERCIAL CONTRACTS

 

It would seem unlikely that Brexit itself would affect the validity of commercial contracts, except in some unusual situations in which contractual performance depended upon the status of one or other of the parties as an EU national.

 

However, it cannot be excluded that Brexit will trigger contractual provisions that terminate, or at least render more difficult the performance of, contracts but that would depend upon the drafting of the agreement in question.
A related issue is the jurisdiction of Courts and the enforcement by the Courts of one EEA country of judgments given by the Courts of all other EEA countries.  Within the EU, this is covered by the Brussels Convention, to which the UK is a party but will cease to be on Brexit.  The Lugano Convention provides for similar rules as between the EU and European Free Trade Area (“EFTA”) States.  The UK will probably need to accede to this convention on Brexit.
Arrangements will also be required to ensure the recognition of international arbitration awards and decisions of insolvency authorities.

 

Finally, as a Member of the EU, the UK benefits from trade agreements negotiated by the EU on behalf of its Member States with over 50 other countries around the world.  Following Brexit, the UK will no longer benefit automatically from these deals and will have to negotiate replacements (or at least obtain the agreement of the counterparties that the UK will continue to be given the benefit of these deals).

 

ENVIRONMENTAL AND CLIMATE CHANGE LAW

 

As with other areas of law, much UK law on, for example, emissions reduction and water quality, derives from EU Directives.  Without specific regulation repealing these rules, they will remain in place though divergence from EU norms may emerge over time if the UK fails to transpose Directives issued by the EU in future into national law.  Such divergence may put single market access at risk.

 

UTILITY REGULATION

 

Much of the UK legislation governing the organisation and economic regulation of the energy, tele-communications and water sectors is derived from EU legislation (which in turn was in many cases inspired by the UK’s pioneering privatisation of those industries).  As before, Brexit will not automatically dis-apply domestic law derived from EU principles but future divergence is possible, threatening single market access by UK firms.
On a more practical note, with its increasing reliance on electricity generated from intermittently available renewable sources, the UK currently imports significant quantities of (nuclear generated) electricity over the interconnector with France.  Arrangements will need to be put in place with the French authorities to ensure energy security going forward.

 

However, the continued willingness of State-owned Électricité de France to invest the many billions of euros that will be required to develop the planned Hinckley Point C reactor must now be in doubt.