UK votes out: après nous, le déluge
On 24 June 2016, the EU referendum result was announced, with a majority of voters deciding that the UK should leave the EU. Once the government notifies the European Council that the UK has decided to leave the EU, the two-year period for the negotiation for exit under Article 50 of the Treaty of the European Union can start.
We spoke to practitioners in a range of areas to gauge their reactions on the shorter and longer term implications of this decision.
For more detailed coverage of the legal implications, see the collection of articles at our EU Referendum landing page. For coverage of the business implications as they unfold, see the Thomson Reuters blog: Everything you need to know about Brexit.
Process and procedure
The current plan is for the government to trigger the formal exit process under Article 50 of the Treaty of the European Union in early 2017. If this timescale remains unchallenged by the EU, the UK will then have two years in which to negotiate the terms of its exit from the EU (see The opt-out options, at the end of this post). In the absence of a deal, the time limit can be extended, but only with the unanimous agreement of the 27 remaining member states. At the same time, the UK will be seeking to negotiate its trading relationships, both with member states and with the rest of the international community.
In terms of legislation, the status quo should apply until the UK has formally left the EU. During the Article 50 process, and in accordance with the European Communities Act 1972 (ECA 1972), EU regulations with direct effect will have to be followed, new EU directives will need to be transposed into UK law (provided the time limit fits with the exit timetable), and the UK courts will continue to have regard to the decisions of the EU courts and European Commission practice until the formal exit has taken place.
Behind the scenes, civil servants and their advisers will have their work cut out as they begin the process of assessing how to manage the unpicking of the statute book. This will not be a straightforward process, since not all EU Directives have been implemented under section 2(2) of the ECA 1972; many have been implemented by a patchwork of primary and secondary legislation and other rules.
So there will need to be a wholesale review of UK legislation and, on top of that, there will be a steep learning curve on how to develop policy for new legislation that has traditionally been made in Brussels. Experts think that this process is likely to take a considerable time and may result in practice in a significant amount of "lifting and shifting" of the existing rules into domestic legislation for expediency's sake, particularly as the exercise to repeal the least popular elements of EU-derived provisions will be a painstaking process.
According to Claire Darwin, a barrister at Matrix Chambers, Brexit is likely to keep lawyers and judges busy for decades. "A key issue for lawyers will be the status of judgments of the Court of Justice of the European Union (CJEU) in a post-Brexit UK legal system. Even if the UK government does manage to agree a trade deal with the remaining members of the EU that does not require the UK to continue to comply with EU law, since a significant percentage of our law is derived from EU law and those laws cannot be rewritten overnight, this issue will arise even if the UK no longer has to comply with any EU law after the date in 2018 or 2019 when the UK leaves the EU."
"The CJEU will continue to hand down judgments that are relevant to the interpretation and meaning of domestic law derived from EU law for decades. Whilst those judgments will no longer be binding (assuming the UK does not have to comply with EU law as part of any trade deal), new legislation is likely to provide that CJEU judgments should be accorded a similar status to judgments of the European Court of Human Rights. However, arguments about the correct status of CJEU decisions and the weight to be accorded to them by the domestic courts, and appeals relating to any differences in view between the CJEU and the domestic courts, are likely to keep our higher courts busy for decades."
There will be implications for a range of legal areas. Very broadly, those areas most heavily subject to EU regulation include financial services, capital markets, employment, data protection, energy regulation, construction and environmental law. Less affected will be private client and family law (other than in the case of cross-border disputes), property, tax (with the obvious exception of VAT), pensions (other than cross-border schemes) and civil litigation and criminal law.
Contract law (except in the area of consumer rights), tort and trust law are legal principles that are developed and maintained by English courts, and so are broadly unaffected by EU law. However, there are potentially complex implications for the conflict of law rules and the conduct of disputes for cross-border contracts. The Companies Act 2006 and the competition legislation both derive at least in part from, and run in parallel with, EU legislation, but, unless there is a political will to "deregulate" certain aspects, they are unlikely to change significantly.
Below are some views from practitioners on the impact on their particular area of expertise:
All relevant EU directives will have been (or are in the process of being) transposed into domestic law/regulations/rules by the time of exit. These provisions will presumably remain in force until such time as the UK government and regulators decide to repeal or replace them.
The position is different for directly applicable EU regulations, which would need to be re-enacted in UK law if considered necessary, either as primary or secondary legislation or in rules made by the Financial Conduct Authority, the Prudential Regulation Authority or the Bank of England, or a combination of all three.
According to Karen Anderson, a partner at Herbert Smith Freehills LLP, "Preserving these rules would be most important where they support financial stability, ensure competitiveness and equivalence, or meet an international commitment. In other areas, they might be preserved on the basis that the rules need to be in place until better rules can be devised: potentially a considerable task for legislative draughtsmen given the volume of recent EU regulation."
However, one of the key issues raised during the referendum debate was the fact that many financial firms authorised in the UK (both UK firms and non-EEA firms who use London as their springboard into Europe) are able to carry on business in other EEA countries with minor formalities using the EU Treaty "passport". Unless the UK rejoins the EEA via EFTA, this will no longer be available on exit, so firms will need to apply for full authorisation for a local branch or for a subsidiary in an EEA state, which is an expensive process.
"To overcome these and other barriers arising from EU law," says Anderson, "the UK may apply to have its regulatory regime recognised as 'equivalent'. For example, UK supervision of a European financial group might have to be duplicated within the EU, if the UK's regulation were not recognised as equivalent.
"Equivalence assessments take time and the outcome may depend on the extent to which the UK chooses to amend existing domestic law derived from Europe or decides not to replicate new EU regulations. The closer the UK stays to EU regulation, the more likely it is to be assessed as equivalent. These problems would not arise if the UK were to rejoin the EEA through EFTA."
Contractual relationships and dispute resolution
As English contract law has broadly continued to develop outside the EU influence, the likely implications for Brexit will be on cross-border contracts and disputes, rather than on domestic matters.
"English law remains the same as it did yesterday: there will be no immediate change," says Sarah Parkes, a partner at Freshfields Bruckhaus Deringer LLP. "Parties will need to think very carefully about how the referendum result impacts their existing contractual relationships and plan accordingly. The result itself may not affect parties' existing contractual relationships now, but it may do once the response to the result becomes clearer. Any new contractual arrangements must be considered, to the extent relevant, against the background that the UK will be leaving the EU at some stage in the coming years. Whatever happens, the English courts are still likely to recognise parties' choice of English law."
The impact on dispute resolution will, to a large part, depend on the terms of the UK's exit. "For now, the Brussels Regulation remains in place," says Parkes. "If the UK becomes a signatory to the Lugano Convention, the position is not likely to change very much. If there is no multilateral agreement on disputes, this will make enforcing English judgments in the EU more complicated, and could lead to a resurgence of parallel proceedings."
Paula Hodges QC of Herbert Smith Freehills LLP anticipates a big surge in interest in "Brexit-proof" dispute resolution clauses that allow a degree of flexibility and choice to adapt as the UK's position becomes clearer. However, for parties considering a London-seated arbitration, she notes that nothing has changed or will change as a result of Brexit. "The English courts will continue to respect arbitration and the finality of the arbitral process. The UK will remain a party to the New York Convention and awards made in London will still be enforceable across Europe, just as European awards will be enforceable here."
Restructuring and insolvency
Here, the impact will be less great for UK-based restructurings and insolvencies. As Jamie Leader, a partner at Eversheds LLP, explains:
"The effect of EU law on UK insolvencies is, as a general rule, limited to cross-border issues. Within the EU, the Council Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) governs all the main jurisdictional and choice of law questions that arise in international insolvencies (with the exception of the insolvencies of banks, insurers and certain investment companies). In particular, the Insolvency Regulation provides for the recognition of insolvency proceedings opened in one member state by the courts of the others.
"When the UK leaves the EU, the Insolvency Regulation will cease to apply. Unless some alternative arrangements are put in place (and it seems unlikely that that will be a diplomatic priority in the years ahead), the main result will be that UK insolvency officeholders will no longer be entitled to automatic recognition in EU member states, which will inevitably increase complexity and cost in UK insolvencies with a European cross-border element.
"By contrast, insolvency officeholders from the EU seeking recognition in the UK will be able to rely on the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) so that, in those cases, the disruption should be less significant."
"A CEO waking up to this result won't be saying: let's have a new business strategy," says Tim Gee, an M&A partner at Baker & McKenzie LLP. "So, in that sense, the drivers for big, strategic M&A remain as forceful today as they were yesterday. But the inevitable period of uncertainty that we will now have (and not just in the UK) whilst a market consensus forms around the implications of all this, and currencies and stock markets find their new normals, will have a material impact on sentiment and confidence.
"I don't expect the result to have negative implications for debt funding, but equity markets will be cautious, in contrast to their very supportive mood over the last 18 months.
"The result will be a decline in announced M&A over the next period, before confidence reasserts itself. If the UK talks itself into recession, the negative impact on M&A will be extended."
There will no doubt be pause for thought for companies considering an initial public offer (IPO) in the UK, at least in the short term. "General conditions for an IPO are at their optimum when there are low levels of market volatility and the equity markets are rising," says Adam Wells, a partner at Allen & Overy. "In the (hopefully) shorter term, the main threat to the UK IPO market is general economic uncertainty and market dislocation arising from the uncertain environment of Brexit.
"In addition, a company considering an IPO should evaluate whether the nature, size and scale of its business is likely to be impacted by Brexit. This may not always be clear until the rulebook between Britain and the rest of Europe is renegotiated over the next few years.
"Over the medium to longer term, however, the London Stock Exchange has been an attractive listing venue with a deep and liquid market and strong corporate governance regime, so we expect these strong fundamentals will continue to attract companies to list here as investors and companies adjust to the new paradigm."
As is the case for other areas, the implications of Brexit for competition law depend largely on the model that would form the basis of the UK's ongoing relationship with the EU, according to Alex Nourry, Head of Clifford Chance's London Antitrust practice.
"A model whereby the UK continues to follow EU legislation (for example, by rejoining the EEA under the same terms as Norway) would mean that broadly the same laws apply, but with powers for the EFTA Surveillance Authority to assert jurisdiction over certain mergers, investigations of anticompetitive conduct and State aid, and rulings of the EFTA court becoming more influential on UK courts, albeit not quite as binding as those of the EU courts are at present.
"Under other models, the UK's position would depend on negotiation, but it is likely that EU competition law would cease to apply in the UK, and that UK courts and competition authorities would cease to be bound by EU case law and decisions, creating scope for divergence over time. UK businesses would become subject to the possibility of parallel antitrust investigations and merger reviews by both EU and UK competition authorities, creating potential for increased compliance costs.
"Some transactions would benefit from fewer merger filings, while others might suffer as a result of the greater freedom of the UK government to block or impose remedies on mergers on public interest grounds, such as the impact on employment, or a desire to limit foreign ownership of UK businesses. Finally, EU rules on State aid and public procurement would also fall away, but current or future treaties would probably impose similar restrictions, albeit possibly less stringent."
Under the terms of the Article 50 process, EU trade marks (EUTMs) and Registered Community designs (RCDs) will still give protection in the UK until at least June 2018, possibly longer.
According to Mark Holah, a partner at Bird & Bird, when the UK does leave the EU, it is almost inevitable that there will be some mechanism for EUTMs and RCDs to be "converted" into UK rights. "It seems inconceivable that all protection currently given by EUTMs and RCDs would be allowed to just disappear overnight when the UK leaves the EU. As a result, the owners of existing EU-wide registered rights should not re-register these rights in the UK at this point: it should be possible for the filing dates of their existing rights to be maintained in some way. However, it is unclear how the conversion mechanism will operate, or whether there will be a fee payable to the UK Intellectual Property Office. Whatever the mechanism involves, it will be a huge administrative task as there are more than a million EUTMs that could potentially be converted into UK rights!
"For trade mark and design owners filing new applications now, there is a choice: apply EU-wide and 'convert' those rights into UK rights later; or file both UK and EU-wide applications now, to avoid having to rely on the conversion mechanism. Whichever option is chosen, EUTMs and RCDs continue to be the best way of protecting trade marks and designs in the EU in most circumstances, so businesses should continue to use these systems, and that won't change even after the UK has left the EU."
The future of patent litigation is also unclear, and unlikely to be top of the list of priorities in the months ahead. As Hilary Pearson, Practical Law patents editor, explains, the Unified Patent Court (UPC) Agreement is not an EU document, it is an international agreement, but the concept behind it is to have somewhere to litigate the EU single (unitary) patent. The unitary patent, although coming out of the European Patent Office and governed by the European Patent Convention (neither of them EU institutions), was set up by EU Regulations.
The UK also managed to negotiate to get one section of the UPC first instance court in London and preparations for that court are well advanced. "I would be surprised if the decision was to withdraw from the whole thing rather than just the unitary patent," says Pearson, "but it is impossible to make a call on how things will develop at this stage".
Whatever form of relationship the UK and the rest of the EU forge over the next few years, for trade reasons the UK is likely to want to maintain parity with the EU on data protection standards post-Brexit, says Kate Brimsted, a partner at Reed Smith LLP.
"What has changed is that there looks set to be some scope over how to achieve that and this could present opportunities. Much is unknown and unknowable but, currently, the new General Data Protection Regulation (which comes into force in the EU from 25 May 2018) looks like the most promising blueprint for businesses which themselves trade internationally or have partners which do so."
The free movement of people was, of course, one of the key areas of the referendum debate, and will be of particular interest to international employers. Other areas of employment law may also be candidates for deregulation or partial repeal, such as the Agency Workers Regulations 2010 (SI 2010/93).
James Davies, a partner at Lewis Silkin LLP, thinks that it is possible, although probably politically unlikely, that the EU and the UK will agree to maintain freedom of movement. However, until then, it is "business as usual".
"During the negotiations, UK nationals will be able to travel freely and work in the rest of the EU, and EU nationals will be able to do the same in the UK. UK and EU nationals will continue to enjoy freedom of movement rights until the UK completes the legal processes for leaving the EU. If the UK leaves the EU and does not negotiate to maintain freedom of movement rights, EU workers might be required to apply for visas under UK immigration rules. UK nationals living in the EU would similarly have to apply for visas to work there. This could be costly for international employers. In addition to the cost of visas, low-skilled workers are unlikely to satisfy the eligibility requirements for UK work visas, which might result in staff shortages and the need for employers to raise salaries to attract staff."
As Rupert Shiers, a partner at Hogan Lovells International LLP, points out, there will be few direct changes to the tax system, even post-Brexit, but of those, perhaps the most important relates to withholding taxes on cross-border payments. "These are generally eliminated for payments within the EU by various directives," he says. "When the UK leaves, payments to and from the UK will not be protected in the same way. There will only be a complex patchwork of protection under tax treaties. The UK will be looking to restore the simple position. But the European Parliament proposed this week a withholding tax on all (apparently) dividends out of the EU. This would make the UK's job harder.
"The Anti-Tax Avoidance Directive agreed this week will likely never be enacted in the UK. And public country-country reporting of tax liabilities will not apply to the UK unless the EU designates it a tax haven. This is perhaps the only tax benefit arising from Brexit.
"More interesting is what the UK and EU states can do once the UK leaves. The UK can pass legislation without regard to EU law. Last year's Diverted Profits Tax would almost certainly have been more draconian if Brexit had occurred. And EU states can start to impose heavier taxes against subsidiaries of UK companies, and services provided from the UK.
"We are likely to retain the current VAT system and at the moment of Brexit it will be same as the EU system, but over time they will diverge. This will put UK businesses trading in Europe, especially smaller ones, at a disadvantage.
"And what of the big tax reclaims under EU law? A cynical HMRC might delay the process until after Brexit and then refuse to pay."
Trustees will be looking closely at the impact of market volatility on current investments and longer-term strategy, says Helen Powell, PSL Counsel at Allen & Overy LLP. "They will also be concerned about how economic/trading factors will play out for their scheme sponsor, and may seek greater security or additional funding to cover downside risk. It's important for both trustees and sponsors to be aware of any terms in current funding arrangements that are designed to protect the scheme if the corporate group is adversely affected: for example, funding triggers based on corporate credit ratings. Significant changes to domestic pensions law are unlikely in the short term."
Brexit will certainly have an impact on investment treaties and their dispute arbitration rules, says Dr Nikos Lavranos, Secretary General of EFILA (the European Federation for Investment Law and Arbitration).
"As far as the EU is concerned, the already finalised treaties such as CETA (the EU-Canada trade agreement) and EU-SING (EU Singapore) will have to be re-opened again to accommodate for the exit of the UK," he says. "This will further delay their signature and ratification process, which will put those treaties on hold for a long time and may be even prevent their entering into force. Also, the Transatlantic Trade and Investment Partnership (TTIP) negotiations will be further delayed, which makes any conclusion of TTIP within Obama's presidency practically impossible.
"As far as the proposed international court system (ICS) reforms are concerned, the post-Brexit UK will not necessarily have to adopt them. In fact, there has not been much enthusiasm for this ICS from the UK in the first place. So, the post-Brexit UK could maintain its 100-odd bilateral investment treaties (BITs) with the current dispute arbitration rules in place. This also applies to the so-called intra-EU BITs. From an investor perspective, this may be reassuring development. Also, London as an arbitration place would gain attractiveness without the interference of the European Commission and the European Court of Justice.
"As far as the post-Brexit UK is concerned, it remains to be seen whether it can maintain current market access and low levels of tariff under the WTO, which it currently enjoys. It probably needs to re-negotiate new trade and investment treaties with many countries, which takes many years. In the meantime, legal uncertainty will cause investors to hold back their investments."
As is the case in other areas, the impact on this area of regulation depends on the outcome of the UK's negotiations with the rest of the member states; it is also an area that is potentially vulnerable to deregulation. If access to the single market is retained, then the UK will almost certainly be expected to continue to comply with EU environmental law, albeit with little, if any, influence over its content, explains Sarah Holmes, a legal director at Bond Dickinson LLP.
However, if a bespoke free trade agreement is agreed, or the UK is either unable to or does not enter into a trade agreement with the EU, then EU environmental law will no longer apply.
"The sheer scale of environmental law within the UK and its reliance on EU law would make a law-by-law assessment of changes a significant and time-consuming piece of work," Holmes says. "Legislating that all EU law should continue to have effect unless revoked or amended could be an alternative option. However, at some point an environmental policy framework would be needed, and there will be significant logistical challenges to developing this as one of many essential strands pre-withdrawal."
Holmes draws attention to the devolved powers, another area that will cause considerable complexity in the decoupling process from the EU. "Constrained resources aside, environment is one of many competencies that is devolved to Scotland, Wales and Northern Ireland," she says. "Withdrawal from the EU could enable each jurisdiction to develop its own environmental policies and laws, to the extent compatible with new trading agreements. However, unless power is ceded back to Whitehall to enable the establishment of a joint UK environmental regulatory framework post-Brexit, loss of the common EU framework could lead to greater differences between UK jurisdictions, increasing red tape for business.
"Whilst it would be up to each of England, Scotland, Wales and Northern Ireland to retain as much or as little of environmental impact assessment, habitats and species protection, air quality and water quality as they wished or agreed, subject to international environmental treaty obligations, such standards and processes are not generally compatible with free market economic models and so will be vulnerable to removal as part of a deregulation agenda."
Michael Bowsher QC of Monckton Chambers considers the potential implications for the EU procurement regime, a key area for criticism from those who have campaigned to leave the EU.
"At a very simple level, it is hard to see politicians, administrators or courts wanting the disposal of the money raised from taxpayers to be done without some transparent framework in which to operate. Perhaps even more fundamentally though, these are not just the EU's rules (which of course reflected many of the UK's demands). Any modern trade agreement between industrialised nations includes a chapter regarding the opening up, and therefore also the regulation of, government procurement markets. The EU rules themselves are actually the expression in the EU of the requirements of the WTO's Government Procurement Agreement (GPA). The UK or England and Wales could join the WTO without joining the GPA, but it would be very strange if it did given the list of countries that are already signed up.
"Finally, it already seemed likely that the EU would soon legislate to provide for the means of closing its own government markets to countries that did not provide reciprocal access. If that happened, we would have to put in place something comparable to the GPA rules just to continue trade for this 20% or so of the EU market, and those GPA rules require something very like the EU directives with some appropriate remedies. So, while there will be a lot of change, some elements of the current system are likely to remain.
"In the short term, there will be an immediate impact on projects, research and so forth funded by the EU, or in some way related to the EU. Those dependent on those projects and research that are funded may be immediately affected. The volume of government funded work generally may reduce and this will affect the practice of procurement law, although history shows that this can be unpredictable. Quite often when there are more people chasing less work, there is more concern as to how that smaller pie is distributed and more disputes over the result."
Another complicating factor will be those areas where power has been devolved to a certain extent, such as tax, property and environmental law. "The time needed to undertake a massive and complex legislative programme of unprecedented scale across what are now four separate legal systems and across government departments in order to prevent legal vacuums on withdrawal from the UK, let alone to develop new legal and policy frameworks, should not be underestimated," says Sarah Holmes, a legal director at Bond Dickinson LLP.
At present the legislative competence of each of the devolved legislatures is linked expressly to compatibility with EU law. "In principle, there is nothing about the Brexit decision that prevents that from continuing to be the case," comments Daniel Greenberg, Parliamentary Counsel at Berwin Leighton Paisner LLP, "albeit that it would involve a significant imbalance between legislative powers for England and for the other units of the UK on devolved areas.
"The case for continuing the link to EU law would be primarily that any deal on industrial and trade compatibility between UK and the EU would be likely to require consistent application of certain aspects of EU law within the UK; and the control on devolved legislative competence might be the only way to ensure that degree of required consistency. But there might be other and better mechanisms. In any event, what is required will only become clear once the terms of the exit deal begin to shape up."
The only certainty is uncertainty
The full extent of the ramifications of Brexit will be a waiting game, as summed up by Gavin Williams, a partner at Herbert Smith Freehills LLP:
"The leave vote has very significant implications. In the short term, shifts in the financial markets, in consumer confidence and in investors' appetite for exposure to the UK will all require attention. As the UK's future relationships with the EU and the rest of the world take shape, we shall be monitoring and advising on the shape of future policy, trade negotiations, transitional arrangements and new bodies of rules.
"Although market volatility and consumer confidence may have abrupt and immediate effects, the full impact of leaving the EU and putting in place something else won't be known for some years. The devil will be in the detail: there will be winners and losers. The one certainty is that we can expect a period of uncertainty."
The opt-out options
The possible models on which the UK could develop a new relationship with the EU, as summarised by Lucy Fergusson, a partner at Linklaters LLP, are as follows:
The EEA, which encompasses the EU, Norway, Iceland and Liechtenstein, enables Norway, Iceland and Liechtenstein to enjoy the benefits of the EU's single market and free movement of goods, services, people and capital without the full privileges and responsibilities of EU membership. The non-EU EEA member states are required to adopt much of EU law and contribute to the EU budget but do not have voting power or formal access to the decision-making process.
The Swiss model
Switzerland has concluded a large number of bilateral agreements with the EU to give it access to the single market. The agreements provide for the free movement of goods and people but not services. Swiss goods must meet EU regulatory requirements and Swiss law must be considered equivalent to corresponding relevant EU legislation. The Swiss financial contribution to the EU is much lower than that of the non-EU EEA member states. The EU has concluded that the Swiss model is not viable in the longer term and has stated that a framework agreement along the lines of the EEA agreement will need to be agreed in the future with Switzerland.
Turkey is part of a customs union with the EU that allows for tariff-free access without quotas to the internal market for goods but not services. It has, to a large extent, control of its own trade policy and does not have to allow for the free movement of EU persons. It is required, however, to adopt a common tariff with the rest of the EU for third-country goods and is restricted in its ability to conclude agreements with other countries without EU consent. Turkey is required to harmonise its laws with those of the EU in relation to, among other things, competition, intellectual property and consumer protection.
Free trade agreement
Several countries, for example, Singapore and Canada, have standalone free trade agreements with the EU. The ability to export services, in particular financial services, may not be easily achieved through a free trade arrangement, as these tend to be designed for trade in goods not services. This would be a disadvantage for the UK, which is a significant exporter of services, particularly financial services.
World Trade Organisation
The UK is already a member of the World Trade Organisation (WTO), although as with all the member states, the EU currently acts on its behalf at WTO level.
If the UK were to trade with the EU as a WTO member but not as an EU member state, it would control its own trade policy, it would not have to allow for free movement of persons and would not need to contribute to the EU budget. EU law would not apply in the UK. UK exports to the EU would, however, face tariffs and exporters would continue to need to meet EU product standards. The WTO offers little protection to exporters on an individual basis as there is limited ability to enforce its rules.
The WTO arrangements are of less benefit in the area of services, so this would be a disadvantage for the UK.