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Brexit – A Legal Perspective

The following article has been produced by Huw Bowden.  Huw is one of our founding Directors and has over 20 years experience across a broad range of disciplines.

Introduction

The 2015 Conservative Party General Election Manifesto contained a commitment that any future Conservative Government would renegotiate Britain’s membership of the European Union (EU) and then hold a referendum to ask the British people whether they wish to remain in the EU on a reformed basis, or leave (Brexit). Britain eventually joined the Union following a referendum in 1973, and a further referendum in 1975 which voted in favour of continued membership. A condition of access to the EU single market (Britain opted not to join the currency union) was, amongst other things, accepting free movement of people, goods, services and capital and adoption of EU regulations. The legal landscape today in England and Wales is dominated by legislation emanating from Brussels, such as TUPE, the Working Time Directive, Data Protection Regulation, competition law and much of consumer law.

The EU is a vastly different animal today to the one Britain joined in 1973, growing from 9 members to 28, with the implications for decision making which that entails. British trade with other EU members has risen dramatically although regulation has also grown exponentially as have the costs of compliance. In recent years the EU has had several crisis’s to deal with including the near bankruptcy of Greece, calling into question the existence of monetary union, and most recently the Syrian refugee crisis.

The Case for Re-negotiation

The Prime Minister, David Cameron, set out the Government’s negotiation objectives in a statement to the House of Commons on 29th June 2015, stating that these revolved around four themes (House of Lords, European Union Committee, and 3rd report of Session 2015-16, 28th July 2015):

  1. Sovereignty: Britain will not support EU Treaty aims of an “ever-closer union” and wants national Parliaments to have more power not less;
  2. Fairness: as membership of the currency union (Eurozone) integrates further, it is important that the EU is flexible enough to make sure that the interests of those states inside and outside the Eurozone are fairly balanced;
  3. Immigration: welfare incentives attracting people from across the EU to seek work in Britain must be tackled. Mr Cameron further elaborated on this at the EU summit, December 2015, by demanding a four year ban on benefits being claimed by EU migrants arriving in the UK; and
  4. Growth: The EU must be a source of growth, meaning trade deals must be signed completing the single market in areas such as digital.

Alternative Structures

What are the options if Britain decided to fundamentally restructure its relationship with the EU? Even if the outcome of the referendum was to leave the EU, the EU remains a hugely important trading partner of Britain (the EU takes over 51% of British exports of goods, and approximately 45% if services are added) and some form of trading and institutional relationship will have to be established.

According to the Economist, (October 19th 2015) there are broadly speaking, 5 models to choose from:

  1. European Economic Area (EEA). The EEA now consists of three relatively small members, Iceland, Norway and Liechtenstein. Members are part of the single market, but are outside of the customs union, and are free to negotiate free trade agreements with other countries e.g. India, US and China. However, remaining fully bound by single market rules, but with minimal influence in making them is unlikely to be attractive;
  2. European Free Trade Area (EFTA). This option would involve membership of EFTA, supplemented by a series of bilateral agreements (In the case of Switzerland, around 129 such agreements are in place. The complexity of this model has been criticised by the EU. This option however was favoured by pro Leave campaigner Michael Gove in a speech given yesterday in London.
  3. The “Turkish” Option. This involves membership of the EU customs union, but not part of the single market and has little formal power in shaping EU trade policy or market rules;
  4. The “South Korean” Option. This option is based on a comprehensive free trade agreement outside of the EU customs union. In theory this is a very flexible option, although would be complex and would take a long time to negotiate; and
  5. The WTO option. This relationship would be based on and governed by the respective obligations of the UK and EU as members of the World Trade Organisation (WTO). This would be on a similar footing as the current relationship between the US and the EU. Trade in goods would be governed by the General Agreement on Tariffs and Trade (GATT) and trade in services by the General Agreement on Trade and Services (GATS). Lack of market access may make this an unattractive option.

Legal Implications

All of the above leads to an uncertain time for the legal and regulatory environment and whether a dramatic “uncoupling” of English and EU law will be required. It is beyond the scope of this article to consider the whole of the legal landscape but a few key areas are considered below.

  1. Contracting. Under the Rome I and Rome II Regulations, contracts are governed by the law chosen by the parties. However, choice of law can be displaced in a number of situations including where choice of law is incompatible with public policy (e.g. where performance of a contract would be illegal). Brexit would give rise to a number of considerations in this respect, for example, will a choice of English law in an agreement still incorporate EU law following Brexit. If EU law is still required, will it be necessary to adopt governing law of another EU member state?
  2. Sales and tender processes. EU companies are guaranteed access to EU’s public procurement market without discrimination. Following Brexit the question of whether UK businesses that tender for significant contracts in the public sector in the EU still have access to the market without discrimination following an exit will be increasingly relevant;
  3. Competition compliance. EU competition law provides a unified legal framework and common processes across the 28 member states of the EU. The European Commission and national competition authorities can investigate anti-competitive behaviour and impose fines of up to 10% of worldwide turnover. The EU Merger Regulation provides a “one-stop shop” for regulation of proposed mergers, acquisitions or joint ventures involving companies operating in Europe. Given that the UK has adopted national legislation that broadly runs parallel to the EU provisions, the fundamental aspects of competition compliance in the event of a Brexit is unlikely to change, although substantive and procedural issues are likely to arise as a result of the decoupling of English and EU regulation in this area;
  4. Intellectual Property. EU member states benefit from a range of pan-European intellectual property rights such as Community Trade Marks and Registered Community Designs and central administrative schemes such as the European Patent Office. A new EU unitary patent system is due to be introduced in the next couple of years. Businesses, post Brexit, would be forced to consider their portfolio management and whether any changes to filing strategy would be required. The question of enforcement and whether e.g. a business would be able to rely on existing injunctions to protect rights in the UK or the rest of the EU. Which courts would offer the most effective remedies for IP breaches, will also be a relevant consideration.
  5. Data. A significant degree of harmonisation in the regulation of data exists currently in the shape of the Data Protection Directive. This is due to be enhanced by the entering into force of the General Data Protection Regulation (GDPR), which will be directly applicable in all member states and introduce fines similar to those in competition actions in the EU. In the event of Brexit, an important question is whether the UK would be considered as a “safe third party” by the European Commission, so as to permit EU personal data to be transferred to it. The applicability of the GDPR will be brought into question and to what extent its provisions would be adopted by the UK. The treatment of data is such a concern to CFOs that it seems likely that the UK would wish to adopt best practices in this areas, whether or not that is in the shape of the GDPR.

Conclusion

Brexit will likely mean a significant amount of change in the legal landscape, and it is important that businesses undertake scenario planning and monitor the ongoing situation until an outcome is reached, however long that may be.

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