It doesn’t take a crystal ball to tell us that the UK’s exit from the European Union is going to dominate the political and commercial landscape next year and possibly for many years after 2017. Predicting just what will happen next is not quite so easy.
December 2016
Looking back at our predictions for 2016, there is something of an omission. Brexit warranted only a paragraph in the context of our predictions for data protection and cyber security. Given that Nigel Farage conceded defeat just before the EU Referendum results started to come in, not to mention the frozen looks on the faces of Johnson and Gove the morning after (“you were only supposed to blow the bloody doors off”), and the fact that we still don’t know what Brexit means (other than that it means Brexit), we don’t feel too bad about this and we are turning to look ahead to the legal issues likely to dominate the Brexit conversation in 2017.
Triggering Article 50
It’s safe to say that on 23 June 2016, the vast majority of people who voted in the EU Referendum did not know much, if anything, about Article 50 of the Lisbon Treaty – the legal mechanism under which an EU Member State may leave the Union. Lord Kerr, who drafted Article 50, recently said that he never imagined it would be used by the UK: “I thought the circumstances in which it would be used, if ever, would be when there was a coup in a member state and the EU suspended that country’s membership. I thought that at that point the dictator in question might be so cross that he’d say ‘right, I’m off’ and it would be good to have a procedure under which he could leave.” Whatever the original intention behind the provision though, the UK must now notify the Council of the European Union of its wish to leave the EU under the Article 50 procedure.
At the time of writing, the High Court decision that the government requires an Act of Parliament to trigger Article 50, is in the process of going to appeal in the Supreme Court with hearings due to start on 5 December 2016. Most (although by no means all) legal commentators are of the view that an appeal is unlikely to reverse the High Court’s ruling and it is rumoured the government is already working on a Bill to put to Parliament early next year if not before. The government’s grounds for appeal have been published and it looks as though it will not, as was previously reported, seek to argue that, once triggered, Article 50 notification could be withdrawn. At first instance, it was taken as read that once triggered, there was no going back. This led to the conclusion that there would be an inevitable loss of rights in the UK which would impact on domestic law and that, consequently, royal prerogative could not be used to invoke Article 50. If the government had argued before the Supreme Court that Article 50 notification could be withdrawn and the Supreme Court had been unable to decide the issue, (the Lisbon Treaty is silent on the question), a reference to the CJEU would have been a real prospect, delaying matters further. While a CJEU reference is still not out of the question, both the government and the Supreme Court are likely to be keen to resolve matters in the UK.
The waters have been further muddied by the recent vote in the House of Commons on a non-binding motion brought by Labour requiring the government to publish its Brexit plan before triggering Article 50. The motion was amended so as to effectively endorse triggering Article 50 by 31 March 2016, potentially taking the wind out of the Supreme Court’s sails.
The prevailing view (reinforced by the recent vote) is that if the Supreme Court does agree with the High Court, Parliament will not act to prevent notification under Article 50. However, around 80 MPs have said they will only vote to pass a Bill to trigger Article 50 which includes an amendment guaranteeing a second referendum on the exit terms. Unless numbers grow substantially, that is not enough to force an amendment. The House of Lords would almost certainly state its view, particularly as the Lords are not worried about having to represent their constituents or having to be re-selected and re-elected. They cannot, however, delay a Bill indefinitely and the vote on the recent motion suggests that as long as the government publishes a satisfactory plan, there may be less and less appetite for Parliament to intervene and cause delays.
Negotiation process
Let’s assume the government triggers Article 50 by the end of March 2017 as it is currently proposing. The two year negotiation period will begin. The Council will then negotiate and conclude an agreement with the UK for its withdrawal in accordance with certain guidelines it agrees on and subject to certain approvals. If the negotiations are not concluded within two years of the exit notification, the EU Treaties will cease to apply unless that two year period is extended by unanimous agreement of the Council and the UK.
The exit agreement will need to be approved by the European Parliament and agreed both by the Council (by an enhanced qualified majority or 20 out of 27 Member States) as well as by the UK and it seems unlikely that the initial two year period will be sufficient.
What about Scotland and the other devolved nations?
Lawyers for the governments of Scotland and Wales have been given leave to intervene in the Article 50 appeal before the Supreme Court. They will seek to argue that their devolved Parliaments should have their own votes about whether or not to trigger Article 50 which should be respected by the UK Parliament. The UK government has said it will argue that foreign affairs and legal treaties are matters which fall solely within its scope. The High Court of Northern Ireland has also given leave for a legal challenge aimed at preventing Northern Ireland from leaving the EU, to be heard in London.
Triggering Article 127, EEA Agreement?
A further legal challenge is pending in relation to the UK’s membership of the EEA. A pro-Single Market think tank has written to David Davis saying that it will be seeking a judicial review as to whether the UK is a member of the EEA in its own right or by virtue of its EU membership. It has been widely assumed that leaving the EU would also entail leaving the EEA but some lawyers argue that the UK could only leave the EEA (and the Single Market) by notifying under Article 127 of the EEA agreement. If a judicial review leads to the conclusion that Article 127 needs to be triggered, this could lead to a similar debate around whether an Act of Parliament would be needed to begin the process. The outcome of such a vote would be far less certain than one on Article 50 because the question of whether or not the UK would stay in the Single Market was not addressed in the EU Referendum in June and MPs might feel they have more discretion in terms of a vote.
An early General Election?
There is also renewed talk of an early General Election following the High Court decision on Article 50. Under the Fixed-Term Parliament Act 2011, a General Election can only be called before the expiry of the five year term where:
- a motion for an early general election is agreed either by at least two-thirds of the whole House or without division; or
- if a motion of no confidence is passed and no alternative government is confirmed by the Commons within 14 days.
As it seems likely that the government would increase its relatively small majority were an early election to take place, particularly if other parties run on a pro-EU agenda, a two-thirds majority to call an early election could be difficult to achieve. While an increased majority in Parliament could help the government to push through notification and also prove crucial during the negotiations leading up to Brexit, the government has enough on its plate without having to deal with the diversion of a General Election. Unless there is fierce resistance to an Act to trigger Article 50, it seems most unlikely that the government will go through the difficult process of trying to call and fight an early General Election.
The ‘Great Repeal Bill’
One of the few concrete announcements made on Brexit by the government is the proposed introduction of the ‘Great Repeal Bill’ which will repeal the European Communities Act 1972 (ECA) which gives effect to EU Treaties, provides the legislative basis for transposing EU law into domestic law and gives precedence to binding provisions of EU law over inconsistent UK legislation. The Bill is also intended to incorporate all EU law into UK law on the UK’s departure from the EU. In the run up to the EU Referendum, it was unclear what would happen to the ECA and the exact timing of its repeal. Some Brexiters, including Suzanne Evans, an erstwhile candidate for the UKIP leadership, called for the ECA to be repealed immediately after the vote and continue to call for it to be scrapped as a priority.
In fact, the Great Repeal Bill is not so much “great” as inevitable and pragmatic. We are, at least, spared some of the uncertainty of conflict of laws which could have arisen had the ECA been repealed before exit. Clearly, the ECA has to be repealed on our exit from the EU and equally clear (at least to the lawyers among us) is that there is no way the UK will be ready to take a decision on which EU legislation should survive our exit or what (if anything) should replace any legislation which goes at the time of exit. There is also a question of amending the legislation and any cross references to ensure it continues to work in a post-EU UK. The House of Commons Library estimates that 13% of legislation enacted between 1993 and 2004 is EU-related. It suggests the review which will be required to decide which legislation to keep, which to repeal and which to amend, will constitute one of the largest legislative projects ever undertaken in the UK.
The Great Repeal Bill is to be announced in the next Queen’s speech and is likely to pass into law during 2017, but only leaving the EU will trigger its provisions.
Taking back control?
Even if we incorporate all existing EU law into UK law on exit, and even if we remain in the Single Market, that doesn’t necessarily mean we can just carry on as we are now.
By way of example, the government has already confirmed that the UK will apply the General Data Protection Regulation as required, from 25 May 2018. While this is unsurprising given that we will still be an EU Member State on this date, it does not guarantee that the UK will continue to be deemed to be providing adequate protection to EU personal data once we exit the EU. The UK’s Investigatory Powers Act is already attracting the scrutiny of data protection regulators and there is a real risk that the EU will take a similar approach to the UK as it did to the USA in relation to Safe Harbor, and hold that national security agencies are insufficiently accountable for the level of access to EU data. In addition, unless there is an adequacy decision on exit, it will take time to put one in place so, at the very least, there could be an adequacy gap.
We can decide to keep or implement any EU laws we like once we leave but that does not mean the EU will regard us as being compliant for their purposes and this could act as a barrier to trade whatever the ultimate post-Brexit trading arrangements are.
To implement or not to implement?
One of the broader issues is what happens as EU law develops. EU laws will be passed between now and Brexit. Will those be implemented by the UK? Regulations (which are directly applicable and do not have to be implemented into local law) which come into force before we leave should, in theory come into effect and be within the scope of the Great Repeal Bill but does this also hold for a Regulation which is passed before we leave but which doesn’t apply until after we leave?
The situation with Directives is still more complicated. Directives usually come into effect with a date by which Member States must pass implementing legislation. Typically, this period is eighteen months to two years depending on the complexity of the legislation although it can be as little as six months. So what happens when the EU passes a Directive during the exit negotiation period? Do we draft legislation to implement it or not? It is possible that the Great Repeal Bill will answer some of these questions when it is published but equally likely that it will not deal with the full complexities.
Going beyond Brexit, even if we do pull EU law which currently applies to us onto the UK’s statute books on exit, what happens when those laws are developed at an EU level? We will have to decide whether to progress with the EU (remembering that we will have no say in EU legislation) or to diverge, at which point, the law is no longer the same and this could, again, impact on any Single Market trading arrangements.
These issues are in addition to the questions of drafting minutiae such as cross-references to EU law or institutions which are no longer relevant.
Hard or soft Brexit?
While the government and other Brexiters want to move away from the concepts of hard and soft Brexit, a key issue for business is whether we will exit the EU with an agreement on access to the Single Market. The Great Repeal Bill does at least allow for this possibility, but however much the government tries to avoid the dichotomy, access to the Single Market is seen as being in direct conflict with the key issue for many of those who voted for Brexit; controls on EU immigration.
The EU has been widely reported as being currently insistent that we cannot cherry pick – if we want freedom of movement of goods and services, we have to accept freedom of movement of people, just as the EEA countries do.
The approach taken by the government in relation to Nissan offers an indication that the government may aim to take a sector by sector, or even a business by business, view rather than seeking to exit with a single trade policy in place. This begs a number of questions, not least of which are what happens to the industries left behind, and what happens with the industries yet to be invented? Very few people know exactly what Nissan was promised to give it sufficient comfort to invest in the UK and that means we don’t know how widely this approach can be replicated. While EU State Aid rules may no longer apply after exit (depending on the agreement reached), it is worth noting that if we trade on WTO terms, we will still be bound by rules on deployment of subsidies under the Agreement on Subsidies and Countervailing Measures and we may also, in the long term, introduce our own State Aid law.
Business hates uncertainty and the law doesn’t like it much either
The most obvious outcome of the Brexit vote so far for businesses is the plummeting of the pound which has pushed up import prices but helped exports and been largely responsible for the apparent robustness of the FTSE. While economic predictions are beyond the scope of this article and complete future proofing is impossible, there are steps which can be taken over the coming months to prevent contractual complications down the line, including:
Termination clauses – There are options which may enable you to terminate an existing contract further down the line, such as a Material Adverse Change (MAC) clause which can provide for the contract to be terminated where there is a materially adverse change caused by circumstances not known at the time of entering into the contract. Whether or not a MAC clause will work will depend on how it is drafted and there is a great deal of variation in the way they can be expressed as they can be either broad or narrowly limited to particular circumstances. Relying on a force majeure clause will not necessarily achieve the desired outcome as Brexit and its economic consequences are unlikely to constitute a force majeure event. You may, also, under limited circumstances, be able to rely on the remedy of frustration but again, this is not a straightforward route.
For new contracts, including well drafted Force Majeure and MAC clauses to deal with unanticipated events is still advisable, even if they may be harder to rely on but it will usually better to be precise, where possible, without drafting yourself into a corner. There is unlikely to be a ‘one size fits all’ solution and careful drafting will be key. If you have a contract which is particularly sensitive to the impact of Brexit (for example where you outsource to the EU, rely on incoming EU personal data, are dependent on EU labour, or on EU imports and exports) ensure that you have specific termination clauses in place which will allow you to exit the contract if it becomes untenable (considering carefully how precise you can or want to be about trigger events).
Allow for currency fluctuations in cross border contracts – ensure that contracts reflect any commercial agreement to absorb currency shocks.
Define what you mean by the EU – if you refer to the EU in a contract, consider whether that should be read as including the UK at all times even after Brexit. It may be preferable to refer to the UK separately. The same issue is relevant to references to EU law. What is meant by that and do you want to include any UK laws derived from EU law?
Define what you mean by Brexit – with the range of exit options available and the uncertainties around timing of exit, make sure that you are precise about what Brexit means for the purposes of the contract and when any provisions triggered by Brexit come into effect. This is particularly important given the Prime Minister is already talking about a transition period.
Intellectual property – don’t rely solely on EU level protections (where relevant).
Variation clauses – if you want to be able to vary the contract in the event of certain outcomes during the Brexit process and/or on Brexit, make sure this is dealt with explicitly.
Governing law and jurisdiction – Brexit is unlikely to affect governing law (except where agreements are subject to mandatory law provisions of other EU Member States). The situation with jurisdiction is a little more complicated. Where a contract clearly provides for English jurisdiction there is unlikely to be an issue but in cases where there is a disagreement over jurisdiction and there are no reciprocal arrangements in place with a country after we leave the EU, this could cause problems. This means it is particularly important to include a clear jurisdiction clause, especially if you want the contract to be subject to the jurisdiction of England. In addition, judgments may be harder to enforce after we leave the EU. You may want to consider whether arbitration is suitable as an alternative to going through the courts and a non-UK party should nominate and maintain an agent for service in England in the contract.
Review existing contracts – review existing contracts to identify potential issues caused by Brexit. You may not be able to change contractual arrangements but identifying exposure will help protect against it.
What next?
So, our predictions for the impact of Brexit in 2017? Notification under Article 50 will be given even if it is delayed but we’ll still be in the EU by this time next year. This means the law in the UK will not change in 2017 as a result of Brexit but the commercial environment will as we get more information about what Brexit will entail (leaving aside the impact of the US election). Anything which suggests a deal involving continuing access to the Single Market will shore up business confidence, while drawn out negotiations could have the opposite effect. Businesses will undoubtedly be looking to future proof legal and commercial interests as far as possible.
That may be a pretty uncontroversial conclusion but it’s about as far as we’re willing to go. If 2016 showed us anything, it’s that anything can happen. And sometimes it does.
Source: lexology.com
Original title edited
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