Brexit - Update from Clive Lee, Partner 

October 2018

Brexit FAQs

History to date

In June 2016, 52% of the 30m Britons who chose to vote, elected to leave the EU.

Theresa May - replaced David Cameron (who resigned the day after the leave vote) as UK Prime Minister, and formally triggered Brexit on 29 March 2017 under Article 50 of the Treaty on European Union 2007 (TEU) to start the two year clock to exit: “Brexit” is therefore due to take place on 30 March 2019.

Some 19 months on we are waiting to hear whether or not Theresa May and her team can agree the basis for a Brexit “deal” with the EU (that is, the terms for a Future Relationship Agreement) by the end of this month, November 2018.

Article 50 gives a two year period for the negotiations between the UK Government and the European Council to conclude a Withdrawal Agreement and Political Declaration to provide the blue-print for a detailed agreement setting out the future UK/EU relationship to be ironed out during the post-Brexit transition period (see below) - in effect what those in business and lawyers call “Heads of Terms”.

Article 218 of another EU Treaty (The Treaty on the Functioning of the European Union 2007 (TFEU)) sets out the procedure for the EU to conclude international agreements with non-EU countries. However that cannot be applied until the UK has actually left the EU.

The UK and the EU have provisionally agreed  a transition period which is to provide that most EU law will still apply to the UK until 31 December 2020, enabling the UK to continue to participate fully in the EU Customs Union and Single Market during that period whilst a detailed future relationship agreement is drafted and agreed during that post-Brexit period.

Earlier this year the UK Parliament passed The European Union (Withdrawal) Act 2018 (EU Withdrawal Act) enabling the adoption of European laws that currently apply in the UK to provide legal continuity until specific amendments may be made later to avoid losing all relevant and necessary legislation on repeal of the European Communities Act 1972 when Brexit occurs.

Under section 13 of the EU Withdrawal Act, provision is made for Parliamentary approval of the Brexit negotiations carried out by the UK Government with the European Council and sets out the procedure to be followed in order to obtain that approval including timings (see below).

The UK and the EU are currently trying to get the text of the Political Declaration and Withdrawal Agreement agreed by the end of November 2018; the detailed Future Relationship Agreement will be drafted (based upon the terms of the Withdrawal Agreement and Political Declaration) between 30 March 2019 and 31 December 2020 – the end of the proposed transition period.

What is the current status of negotiations between the EU and the UK?

There is much talk of the concepts of “hard” and “soft” Brexit, and where various UK political factions and EU countries or politicians sit on that spectrum. There is no strict definition of either concept but they really refer to the closeness of the UK’s relationship with the EU post-Brexit.

At one extreme, a hard Brexit could involve the UK refusing to compromise on free movement of people/labour even if that meant the UK having to leave the Single Market and/or giving up hopes of agreeing aspects of free trade arrangements with the EU.

At the other extreme, a soft Brexit might follow a similar path to Norway which, through its European Economic Area (EEA) membership, is a member of the Single Market and therefore has to accept the free movement of people.

The Single Market allows the free movement of goods, services, money and people within the EU (and EEA member states) as a single country. It requires common law making to ensure products meet the same standards and to create a level playing field.

Critics say the Single Market generates petty regulations, robs members of control of their own affairs and causes mass migration from poorer to richer countries.

Theresa May has ruled out the UK staying in the Single Market; a position which is also backed by Jeremy Corbyn, the leader of the opposition Labour Party. This also implies that the UK will leave the EU Customs Union.

Withdrawal from both the Customs Union and Single Market leaves UK business with this question: how can it still effectively access what was recently about 43% of its overall export market without being obstructed by enormous customs bureaucracy and/or tariffs upon entry?

This in circumstances where the European Council has made it clear that it will not wish to allow the UK the advantages of unfettered access to the Single Market unless it is prepared to abide by EU rules as to free movement of people (as does Norway) leaving aside also complying with its uniform standards and regulations on products such as the UK producing/exporting into the EU only non-chlorinated chicken (!).

A key issue to overcome in any trade deal is whether goods passing from the UK to the EU can do so without requiring a hard customs border at which formal checks can take place.

There are two substantial reasons why this is crucial: 

Firstly because, as an island, the congestion and delays that could build up at key ports such as Dover could be difficult to manage and render it impossible for UK plc to provide a reliable supply of manufactured component products on the “just in time” basis required by most customers.

Secondly, because the creation of a hard border between Northern Ireland and the Republic of Ireland (which remains an EU country) is politically unacceptable, including to the Northern Irish DUP, whose support to the Government is essential to ratify any proposed UK/EU deal.

What are the current options proposed for a Brexit deal?

Theresa May held an “away day” at the Prime Minister’s country residence at Chequers in July 2018 to agree with the Cabinet a favoured UK position for Brexit talks, resulting in the Chequers Plan.

This included proposals for the UK to mirror EU rules on goods and for the UK and EU to be treated as a “combined customs territory”, meaning that the UK would apply domestic tariffs and trade policies for goods intended for the UK, but would charge and account across for EU tariffs and their equivalents for goods which will end up heading into the EU. The idea is that this would then avoid the need for a visible border with the Republic of Ireland.

The Plan suggests that the UK would also be free to strike its own trade deals with non-EU countries  and says it will end free movement of people, "giving the UK back control over how many people enter the country". But a "mobility framework" will be set up to allow UK and EU citizens to travel to each other's territories, and to apply for study and work.

A "joint institutional framework" will be established to interpret UK-EU agreements. This would be done in the UK by UK courts, and in the EU by EU courts. But decisions by UK courts would involve "due regard being paid to EU case law in areas where the UK continued to apply a common rulebook".

Cases will still be referred to the European Court of Justice (ECJ) as the interpreter of EU rules, but it "cannot resolve disputes between the two".

Importantly - services, which constitute over 80% of Britain’s economy, were largely skirted over. The Cabinet simply agreed to retain “regulatory flexibility” and to accept less EU market access as a result.

The UK stance arouses suspicion in Brussels, with EU negotiators arguing it is hard to detach services from goods trade. They also note that in areas such as financial services Britain still seems to want to replicate Single Market access from outside.

There may indeed be an assumption in the UK (credible/realistic or otherwise) that access to the UK financial services market is simply too great an asset to the EU for it to be able to afford to try to overly restrict its availability to and within the Single Market.

In her foreword to the Chequers Plan, Theresa May insists that the UK will leave the Single Market, Customs Union, Common Agricultural Policy and the Common Fisheries Policy, “take back control of our money, laws, and borders, and begin a new exciting chapter in our nation’s history”. The European Court of Justice will no longer have jurisdiction in Britain, she says.

However, she acknowledges that the withdrawal “requires pragmatism and compromise from both sides”.

The reaction from hard-line Brexiteers to the Chequers Plan was negative; within two days, Foreign Secretary, Boris Johnson, resigned as did Brexit Secretary, David Davis (swiftly replaced by Jeremy Hunt and Dominic Raab, respectively) who see the Plan as not providing a clean break with the EU.

The Chequers Plan has not gained much support from the UK Parliament generally since then, and the EU has also said that the trade parts of the proposals are unacceptable (including EU Council President Donald Tusk rejecting the Plan at the EU’s September 2018 gathering).

Theresa May is, however, currently sticking to her guns claiming that the Plan is workable and takes on board both the EU’s and UK’s red lines and claiming that it avoids the need for a hard border in Ireland.

There has however been mounting speculation that the UK could well leave the EU without a deal if opposing positions do not soften, and Mrs May’s repeated phrase has been “no deal is better than a bad deal”.

The main alternatives proposed by hard Brexiteers in the UK are either “Canada Plus” or no trade deal at all.

What is Canada Plus?

In October 2016 Canada entered into the Comprehensive Economic and Trade Agreement (CETA) with the EU after seven years of negotiation. Under CETA, 99% of customs duties are removed on exports between Canada and the EU immediately. CETA also allows EU companies to bid for public contracts in Canada.

Canada is not required to pay into the EU budget, sign up to free movement of labour, or abide by ECJ rulings.

There are, however, hundreds of exceptions to the trade deal and Canadian firms are not guaranteed any EU financial security.

Some Brexiteers have argued that this model is attractive to the UK due to the lack of obligations in return for EU market access -respecting campaign promises made on the leave side.

However, Theresa May considers that Canada Plus would be worse than no deal, largely because, in her view, it would, not avoid a hard border with the Republic of Ireland.

This is because under the Chequers Plan - as part of the combined customs territory - the UK would distinguish between goods entering the UK which would not then continue into the EU, and those that would, and ensure that any surplus differential in tariffs was accounted for to the EU at that stage. This would avoid the application of any Rules of Origin (ROOs) to determine whether the value of the goods imported into the EU originated in a foreign territory  and attracted additional duty upon entry to the EU.

However, in a Canada Plus deal, ROOs would need to be applied to stop exporters sending goods to the UK at lower tariffs and then transporting them on, tariff free, to the EU. This would cause bureaucracy/delays, and the EU would be more likely to require a hard border between Northern Ireland and the Republic of Ireland to make sure that this did not become an loop hole for avoidance of EU tariffs and/or regulations.

What if there is no Brexit deal?

If there is no trade deal, the two most likely alternatives will likely be as follows:

Either the UK will trade with the EU subject to World Trade Organisation Rules (which are signed up to by many international trading countries under a number of related international treaties) which set out a wide range of agreed tariff parameters and trading rules providing protection from negative trading practices such as by potential imposition of Anti-Dumping Duty upon artificially under priced (“dumped”) exports and restriction of trading in prohibited goods, endangered materials and species.

Alternatively, if the UK Parliament considers that the resulting position is so disadvantageous compared to doing a deal with or even, potentially, remaining in the EU, then it may refuse to ratify the proposed terms upon which the UK leaves the EU.

If this occurs then a variety of outcomes could arise including:-

  • The UK requesting an extension of the period before it is required to leave the EU (under Article 50) in which to seek to negotiate a better or more acceptable deal.
  • The UK requests the EU’s agreement to the UK staying within the EU, possibly with some relaxation of the EU rules that apply to it or other Member States (or in effect “reapplies for EU membership”).
  • There is a General Election in which a Government is formed that has the voting power to ensure ratification of any deal that has been proposed or to impose a different direction be taken.
  • As part or parcel of any of the above the UK might potentially have a second referendum in which the UK electorate either votes upon a proposed deal or even has the opportunity to revisit the question raised in June 2016 as to whether it wishes to leave the EU or to remain.

Interestingly, UK bookies recently gave odds for no deal happening and a second referendum happening as a result, of just 2-1 against and, in that case, of the UK voting to leave at 1-8 against!

As this suggests that the result of a second referendum would be likely for the UK to remain, it is not difficult to see why most Brexiteers take the position that a second referendum should be ruled out as “anti-democratic”.

The suggestion that a second referendum is unconstitutional is swept aside by the Scottish Nationalist Party in its determination to have a further vote on independence once the Brexit negotiations are finalised; they are optimistic that if the UK leaves the EU and potentially with no deal, that the Scottish people would vote to leave the UK in order to stay in the EU.

Unsurprisingly, Theresa May is opposed to Scotland having a second referendum on independence.

There may also still be a hope within the EU that by the European Council driving a hard Brexit bargain, they might still persuade the UK to vote again to remain.

A forthright view on Brexit was recently given by Hillary Clinton in Belfast when she said that she thought it was a bad idea both before and after the UK referendum, and suggested that it may go down as one of the greatest and most unnecessary self-inflicted wounds in modern history.

Her comments were, however, made in the particular context of her concern for the implications for the relations and border between Northern Ireland and the Republic of Ireland when polls suggested that 87% of leavers regarded the potential end of the peace process as a price worth paying for Brexit.

What are businesses based in Britain doing in reaction to Brexit?

This is a difficult one to give a definitive answer on. Many large manufacturers who fear obstruction to their ability to export goods fluently and economically have threatened to leave the UK if there is a hard Brexit. Then some have changed their minds and already reinvested within the UK before the outcome is known. Many businesses including banks, financial institutions and service related companies, have taken steps to ensure that they have a presence on both sides of the UK/EU border to give maximum flexibility.

Clients have been concerned to consider reviewing their commercial contracts to deal with Brexit contingencies (possibly even to allow variation or termination should Brexit render the contract terms disadvantageous or commercially unviable), but now many are simply waiting to see what outcome arises before doing so.

It might be fair to say that there is still sufficient uncertainty as to the outcome, that many if not most clients, are waiting to see what the end game will be before making any major decisions.

In the meantime, the Pound has weakened against the US Dollar and the Euro (by about 10 to 15%) which has made UK exports cheaper and more competitive; the UK stock market and growth in GDP has remained relatively competitive; and, inflation is still sub 3%, enabling some Brexiteers to ask “crisis, what crisis?”.

What is the background for the End Game in March 2019?

We are waiting to see what the result of the negotiations will be, and the jury is still out.  

In practical terms the UK Government will need to be informed of any proposed deal well before the end of its final Plenary session on 13 December 2018. On that basis, consideration and ratification or rejection of any deal laid before Parliament could be completed by the end of January 2019, which would then (if relevant) enable the EU Parliament to consider any deal approved by the UK Parliament thereafter; theoretically the European Council could sign off an approved deal at its 21-22 March 2019 Summit in advance of Brexit on 31 March 2019.

It is however possible that all of the other 27 EU members could still consent to a short extension of the Article 50 time limit if it were necessary and facilitative to prevent the UK “crashing out” of the EU with no deal.

Under Section 13 (11) of the Withdrawal Agreement, if there is to be no agreement in principle reached on the future relationship with the EU then a Minister of the Crown must, by 26 January 2019, make a statement setting out how the UK government proposes to proceed.

What should businesses do in anticipation of Brexit?

There are no hard and fast answers: as it stands, the form of Brexit is too uncertain. That said, there are practical steps a business can undertake which may assist when certainty comes.

Key is to update / create a “contracts register” which should include a summary of the material terms of all EU/UK contracts such as: term, renewal dates, termination rights, position on liability, and, those contractual provisions which are substantially affected by the result of the Brexit negotiations.

Contractual provisions most likely to be affected on Brexit include:

  • Delivery terms including responsibility for export / clearance and payment of duties. For example, many cross-border contracts provide for these matters using the ICC’s Incoterms (2010). Increased costs may arise for a UK exporter, for example, where the parties have agreed to DDP (Incoterms 2010) – delivered duty paid – and where duty was not payable pre-Brexit but becomes so post-Brexit. Similar matters arise for a UK importer contracted on a DAP (Incoterms 2010) basis.
  • Pricing clauses. Both suppliers and buyers will need to consider the impact of currency volatility, and whether there is any flexibility.
  • Territorial scope. It’s not uncommon for the scope of activities or licensed use to be restricted to the EU. Clearly, if the UK is no longer in the EU then there is a prospect of breach.
  • Compliance with regulatory regimes – for example, the supply of chemicals may be subject to REACH regulations.  It’s possible there will be divergence between EU and UK regimes which may complicate the import and export of products currently subject to EU regulation.
  • Data Protection. Does the contract provide for cross-border data transfers? If we have a hard Brexit, the UK will no longer automatically be considered to be a safe destination for transfers of EU personal data and would need to seek separate approval from the European Commission by way of an 'adequacy' decision – the UK government could only apply for an adequacy decision post-Brexit, and therefore cross-border transfers may necessitate the use of the Standard Contractual Clauses pending an adequacy decision.
  • Jurisdiction. Does the contract provide for exclusive jurisdiction in the courts of one country? If so, which? Clauses which provide for exclusive jurisdiction in the English courts will continue to operate in the post-Brexit world, but there may be uncertainties and inconsistencies. This is due to the current lack of clarity as to whether the UK will: (a) remain in the current Brussels Regulation regime (or subject to the closely related Lugano Convention); (b) fall back to the Brussels Convention (which would probably apply in the absence of any agreement); or (c) opt out of all international agreements so that the UK applies its previous common law rules and other countries apply their existing rules.

With this information to hand, a business should be able to readily identify those contracts it will need to seek to vary when Brexit certainty comes.

Find out more

If you have any questions or want to find out more information about Brexit and the Brexit negotiations, get in contact with Clive Lee, one of our Dispute Resolution partners.

Get in touch