Brexit in transition

Transition

The withdrawal agreement between the EU and the UK dated 17 October 2019 (the Withdrawal Agreement) creates a transition period which is due to end on 31 December 2020.

During the transition period the UK is deemed to remain a member state for the purposes of its relationship with the EU (and vice versa). The benefits of the transition period therefore include legal certainty and continuity.

Extension

The Withdrawal Agreement provides that the Joint Committee may extend the duration of the transition period by either 1 or 2 years and, if so, must adopt such a decision before 1 July 2020.

The Joint Committee is comprised of representatives from the EU and the UK and is co-chaired by a member of the European Commission and a representative of the UK Government at ministerial level.

Under the Withdrawal Agreement, no subsequent approval by the UK Government, European Commission or European Council is needed, nor is any ratification required by the parliaments of member states. They are considered to have delegated their powers in this respect to the Joint Committee when they approved or ratified the Withdrawal Agreement.

UK Government’s Position

On 9 June 2020, Penny Mordaunt MP (the Paymaster General) made a speech in the House of Commons in which she informed the House that the UK Government would not be extending the transition period.

This is consistent with section 15A of the European Union (Withdrawal) Act 2018, as amended (EUWA 2018) which provides that no minister may agree to an extension of the transition period.

Extension after 1 July 2020

Might the UK Government seek an extension after 1 July 2020 when the wider economic effects of the pandemic become felt?

It is possible in theory but problematic in practice because it implies an amendment to the Withdrawal Agreement and there may be insufficient time within which to approve such an amendment before 31 December 2020.

From an EU perspective, the legal basis for the Withdrawal Agreement is Article 50 of the Treaty on European Union but the Article would arguably not be the legal basis for an amendment because, first, the amendment would not follow the UK’s notification to leave the EU and, second, the UK is no longer a member state.

To the extent that the amendment constituted a variation of treaty obligations, the EU may not have exclusive competence and an amendment may require approval and ratification by each of the member states (which may also require the approval of certain regions within member states), in addition to approval by the EU Council and EU Parliament.

From a UK perspective, an amendment would require approval by the UK Government and ratification by the UK Parliament.

Consequences – Until 31 December 2020

The failure of the Joint Committee to adopt a decision to extend the transition period before 1 July 2020 will have no immediate consequences for UK domestic law.

Similarly, it will have no immediate consequences for the UK in terms of its legal relationship with the EU because it will continue to be deemed to be a member state until the end of the transition period.

Consequences – From 1 January 2021

UK domestic law will change fundamentally on 1 January 2021 when EUWA 2018 comes fully into force. EUWA 2018 will introduce the concept of retained EU law into domestic law, will end the jurisdiction of the Court of Justice of the European Union and will make rules regarding the interpretation of retained EU law.

How the relationship between the EU and the UK will change on 1 January 2021 remains uncertain because the basis of that relationship is still being negotiated. If and when agreement is reached, it will require ratification by the UK Parliament and incorporation into domestic law which may, in turn, require further amendments to be made to EUWA 2018.

The negotiations between the EU and the UK form part of a wider picture. The UK Government is presently negotiating a free trade agreement with the US. The UK may be constrained in the negotiating position it seeks to take with one by what it hopes to agree with the other.

What can be done now ?

Keep informed about negotiations

The EU published a draft treaty in March 2020 and the UK government published a draft UK - EU comprehensive free trade agreement (CFTA), and a suite of other documents, in May 2020.

It is likely that the documentation will evolve over time and should reveal the direction of travel which the parties are taking. It will be useful to keep informed of those developments.

Consider impact in key business areas

It will be important to consider the impact of negotiations in key business areas. We will be producing further information on these in the future but we mention two key topics below for now.

One key area is the provision of financial services between the UK and the EU (and vice versa). Chapter 17 of the CFTA seeks to create a regulatory regime by which both parties would recognise the financial services authorisations issued by the other. However, it remains unclear whether such a proposal will be accepted by the EU, without qualification. Michel Barnier made a speech at the European Economic and Social Committee Plenary Session on 10 June 2020 in which he said that, whatever the outcome of the negotiation, on 1 January 2021, “UK firms will lose the benefit of the financial services passports.” He described this as one of the mechanical consequences of the UK leaving the single market and customs union and added that “No FTA – no matter how ambitious – can change this.”

Another key area is the question of tariffs on trade between the UK and the EU. Both sides seek to negotiate a zero-tariff, zero-quota trading relationship for most goods but because the UK is no longer in the single market or customs union, additional border controls, regulations and documentary requirements may need to be met. As a result, businesses should continue to monitor developments, especially those involved in importing goods from or exporting goods to the EU. Additionally, the incompatibility of the EU’s insistence on a “level playing field” in this area and the importance the UK places on sovereignty mean that there is no guarantee of agreement.

Review Jurisdiction Clauses

The key question is what will take the place of the Brussels (Recast) Regulation at the end of the transition period. The UK Government has adopted a two-pronged strategy.

First, it will re-join the Hague Convention on Choice of Court Agreements in its own right, having previously been a party by virtue of its membership of the EU. This is helpful, but only for exclusive jurisdiction clauses and, very possibly, only for agreements entered into after re-joining the Hague Convention.

Second, it hopes to accede to the Lugano Convention, which is similar in scope to the Brussels (Recast) Regulation, although it contains some flaws which were subsequently remedied in the Regulation. Accession requires the consent of all other parties. On 8 April 2020, the UK Government formally requested to accede to the Lugano Convention after the transition period has expired. Iceland, Norway and Switzerland have each expressed support for the UK’s accession but it is much less clear whether the EU will do so.

Businesses should ensure that they are aware of what jurisdiction clauses their cross-border agreements typically include and, perhaps, identify and consider key contracts with counterparties based in the EU.

If the UK is not able to accede to the Lugano Convention, businesses may wish to consider obtaining advice on local laws in relevant jurisdictions to ascertain how likely jurisdiction clauses are to be upheld. One option would be to amend and restate the jurisdiction clauses where necessary, to make them exclusive and effective on a date that will attract the benefit of the Hague Convention after the UK has re-joined it.

Conclusion

UK domestic law will not change in the second six months of 2020 as a result of Brexit but, as 31 December 2020 draws nearer, there will be an increasing number of legal issues which arise and which businesses will need to address. Some of the issues can be predicted now with reasonable certainty but others remain unknown at present.