Mayer Brown is helping companies and organizations worldwide understand, and respond to, the emerging legal and business implications of the UK’s decision to leave the EU. The majority vote in the UK referendum on membership of the European Union, announced on 24 June 2016, in favor of departure by the United Kingdom from the European Union, means that businesses operating in the United Kingdom now face a period of uncertainty.
As things stand, following a second extension request, the United Kingdom will leave the European Union on 31 October 2019. The original aim of this extension was to give the UK time to ratify the Withdrawal Agreement. However, following Prime Minister Theresa May's decision to step down, the direction the United Kingdom now takes in relation to Brexit will depend on the strategy adopted by the newly elected Prime Minister, Boris Johnson. It is not yet clear whether Boris Johnson will pursue a No Deal exit on the 31st October if no satisfactory agreement can be reached with the EU, or whether he will request a further extension period in order to either continue negotiations or seek a General Election.
While there is no majority in Parliament for a No Deal outcome, this remains the legal default option until an alternative solution can be found.
Background – The formal legal agreement on the terms of withdrawal (Withdrawal Agreement) and the non-binding Political Declaration on the framework for the future relationship were endorsed at an EU summit on 25 November 2018. However, the deal cannot take effect until it is approved by both UK and EU Parliaments (in that order) and by a majority of Member States at an EU Summit. First, second and third 'meaningful votes' by UK MPs took place in January and March 2019, and the deal was rejected by a significant majority on each occasion.
The key issue continues to be the contentious Irish 'backstop'. The backstop is designed to avoid a hard border between Ireland and Norther Ireland by establishing a temporary UK-EU Customs Territory (with deeper integration for Northern Ireland) in the event that no agreement on the future relationship can be reached by the end of the transition period. The UK would be unable to exit this backstop without the EU's agreement.
Any extension beyond 31 October would still require the unanimous approval of the 27 remaining Member States. The EU may only be prepared to grant a longer one if the UK were to decide to call a General Election or hold a Second Referendum.
While the Labour Party's preference would be to renegotiate a permanent Customs Union and close alignment with the Single Market, it is also indicating support for a Second Referendum if all other options have been exhausted.
The Court of Justice of the European Union has confirmed in a recent judgment that the UK may unilaterally withdraw its notification to leave. It stated that the withdrawal would need to be 'unequivocal and unconditional', putting an end to the withdrawal process and resulting in the UK remaining a Member State on current terms.
If parliamentary approval for the Prime Minister's deal is finally obtained, there will be a transition period from Exit Day until the end of December 2020. The UK would be entitled to request a one-off extension to this transition period of either one or two years, subject to EU approval. This gives the UK an option to avoid the Irish backstop in the event that the negotiations on the future relationship are still ongoing at the end of the transition period, or that the technical measures required for a new customs regime are not yet in place. The UK would need to request this extension by 1 July 2020.
During the transition period, businesses will trade on essentially the same terms as before and EU law will continue to apply, while the detailed legal agreement on the future relationship between the UK and the EU is negotiated. This will occur against a backdrop of political uncertainty, with a new Commission being appointed in Brussels in 2019, as well as continued debate within the UK as to the right approach to the UK's long-term relationship with the EU.
While the Withdrawal Agreement sets out a 'best endeavours' commitment to reach agreement on the terms of the future trading relationship by 31 December 2020, it is possible that a full UK-EU trade deal will not be agreed in this timeframe (or indeed after the end of an extended transition period). Negotiations, and the accompanying uncertainty surrounding the UK's exit from the backstop arrangements, could thus continue for some years to come.
The UK will also need to use this time to seek to 'roll over' existing trade relationships with third countries with which the EU has trade deals, as well as negotiate and ratify new ones.
This period is also likely to see several legal challenges as the new relationship with the EU is tested in the courts.
It will therefore be important for businesses to consider the implications of the likely changes in the legal and regulatory framework for their operations and strategic decision making. In the current uncertain climate it is also highly prudent to be prepared for the possibility of a 'no-deal' outcome – see below.
To this end, we have developed a simple tool to assist our clients in identifying and prioritising potential areas where the changes in the legal regime may have the greatest impact or give rise to significant opportunities for their business. We are keen to work with you to create a framework for analysing these issues, and for devising a set of actions to address them.
The tool is not intended to be exhaustive, but may help you identify and address the most important areas. Note in particular that the continuous nature of developments relating to the UK's withdrawal means that changes may have occurred since the last update. Always seek legal advice in relation to specific topics of interest.
A 'no deal' scenario could arise if the terms of the Withdrawal Agreement (and Political Declaration) are not approved by the UK Parliament.
In the event of no deal, there would be no transition period for businesses to adjust to the immediate effects of leaving the EU. This would give rise to a period of unprecedented legal and regulatory uncertainty. Trade between the two economies would be conducted under WTO rules, with tariffs likely on UK exports to the EU (and vice versa). Further, the border between the UK and EU would become a customs border, with significant disruption, including delays and administrative costs for business.
While it may be possible for the EU and UK to agree a 'bare-bones' deal covering key issues of mutual concern such as counter-terrorism cooperation, or put in place a series of unilateral or bilateral (UK-EU27) measures to minimise disruption in certain areas, none of this could be guaranteed.
While neither side wants a no deal outcome, contingency planning is now a central feature of both the UK Government's and the EU 27's Brexit preparations. The UK and EU have both issued a series of technical notices outlining the impact of no deal in a wide range of areas and it is clear that much of the burden of planning for this scenario is falling on businesses themselves.
The prudent course is for businesses to plan for the worst case – an abrupt exit with no new arrangements in place to govern the UK's future trading relationship with the EU.
January 2019 – March 2019: The Withdrawal Agreement and Political Declaration
The formal legal terms of the Withdrawal Agreement relate to separation issues such as citizens' rights, the transition period and the financial settlement, as well as provisions to allow businesses more time to adjust to leaving the EU, e.g. the ongoing recognition of professional qualifications.
If UK Parliament votes to approve the deal, the Bill to put the Withdrawal Agreement onto the UK statute book, the EU (Withdrawal Agreement) Bill, will be introduced. This Bill must be passed before Exit Day in order for the agreement to have domestic legal effect.
The draft Withdrawal Agreement must also be approved by the European Parliament in a plenary vote and then endorsed at an EU Summit by a majority of Member States (representing at least 20 of the other 27 EU countries and 65% of the population). It will have the status of an international treaty.
The accompanying Political Declaration is not legally binding, but will form the basis for the agreement between the EU and UK on their future trading relationship.
The EU (Withdrawal) Act 2018 provides that EU law as it exists on Exit Day (with some limited exceptions) will be transposed into UK law, creating a body of 'retained EU law' which will provide legal continuity regardless of the outcome of negotiations. This means that the UK will still be bound by existing EU legislation on Exit Day, while being in a position to diverge from it after the end of the transition period. However, divergence will be subject to the 'level playing field' provisions of the future relationship in key areas such as employment and environmental standards, as well as competition and State aid.
Exit Day – 31 December 2020 (subject to extension to 31 December 2022): Transition Period
EU law will continue to apply in the UK during the transition period, subject to the terms of the Withdrawal Agreement, e.g. elements of the EU Charter of Fundamental Rights will not be binding on the UK.
New directly applicable EU legislation will also apply automatically within the UK, while other new EU measures will need to be implemented domestically as before.
The UK and EU will use the transition period to negotiate and ratify a legally binding agreement for their future relationship.
Beyond December 2020 (subject to extension to 31 December 2022): The Future Relationship
The Political Declaration establishes agreement in principle on the need for comprehensive arrangements for a free trade area for goods, involving significant regulatory and customs cooperation. These will mean zero tariffs, and no fees, charges or quantitative restrictions across all goods sectors, with arrangements that build on the single UK-EU customs territory provided for in the Irish backstop. They will be underpinned by provisions ensuring a level playing field for open and fair competition, which include state aid, competition, social and employment standards, environmental standards, climate change provisions and relevant tax matters. The UK would not align with EU rules on services, losing current levels of access to the EU Single Market as a result.
However, proponents of a 'hard Brexit' are strongly resistant to the idea that the UK would continue to be subject to a Brussels rulebook going forward. They favour a 'Super Canada' model; a free trade agreement based on Canada's recent trade deal with the EU.
It is important to note that the Political Declaration leaves much room for further negotiation, and it could even be revisited in the event of a significant change to the political landscape in the UK.
Any future trade agreement would require ratification in the national and (some) regional parliaments of the EU – a process which has historically taken some years to complete.