Brexit update: EU-UK infringement proceedings

Key points

• The EU has initiated an Article 258 TFEU infringement procedure against the UK for breach of the UK's good faith obligation under the Withdrawal Agreement.

• The infringement procedure will, if not resolved, be referred to the CJEU.

• Proceedings brought to the CJEU before the end of the transition period will remain under the CJEU's jurisdiction even after 31 December 2020.

• The domestic position on the liabilities and obligations under the Withdrawal Agreement (including the obligation to enforce a CJEU judgment against the UK) is unclear and prone to challenge.  Some political commentators are already questioning whether the outcome will have any bearing on the UK.

• It is unclear whether the good faith obligation under the Withdrawal Agreement survives the end of the transition period.

What happened?

On 09 September 2020 the UK government published the UK Internal Markets Bill (the "Bill") which addresses the possibility that different parts of the UK may in future make different rules in key policy areas from 01 January 2021. The Bill was passed by the House of Commons on 29 September 2020 and is now in the House of Lords for consideration. The first reading of the Bill in the House of Lords took place on 30 September 2020, but no further timetable has been set.

Controversially, the Bill creates powers for the UK Government to override provisions contained in the Withdrawal Agreement's Protocol on Ireland / Northern Ireland ("NI Protocol") and part of the Withdrawal Agreement by stating that:

• there should be no new checks on goods moving from Northern Ireland to Great Britain (clause 43);

• ministers may modify or disapply exit procedures for goods moving from Northern Ireland to Great Britain (clause 44); and

• ministers may make regulations to disapply or modify the effect of Article 10 of the NI Protocol on state aid, or make provisions on its interpretation (clause 45). Such regulations could include a provision for Article 10 not to be interpreted in accordance with the case law of the CJEU or "rights, powers, liabilities, obligations, restrictions, remedies and procedures that would otherwise apply in relation to aid, as a result of relevant international or domestic law, not to be recognised, available, enforced, allowed or followed".

The EU has repeatedly stated the Bill is in breach of international law and has requested that the UK withdraw the Bill. On 01 October 2020, the President of the European Commission (the "EC"), Ursula von der Leyen, announced that the EU issued the UK with a formal notice (the "Notice") to initiate infringement proceedings against the UK for breach of the Withdrawal Agreement. The UK has one month to submit its observations to the letter of formal notice.

What has the UK done wrong?

According to the EC's press release, the infringement process is being initiated against the UK for breach of its obligation under Article 5 of the Withdrawal Agreement ("WA") to act in good faith.

Article 5 WA obliges the UK to, inter alia, refrain from any measures that could jeopardise the attainment of the objectives of the WA.

What is the EU doing about it?

Article 131 WA states that during the transition period the CJEU has jurisdiction as provided for under the TFEU, in particular as regards the interpretation and application of the WA¹.

As a result, the correct forum for the EU's action is the CJEU, the relevant procedure being the infringement procedure under Article 258 TFEU.

What happens now?

Step 1 - UK observations and Reasoned Opinion: Once the UK has submitted its observations in response to the Notice (it can also choose not to respond), the EC will examine the UK's observations and, if deemed appropriate, issue a Reasoned Opinion. A Reasoned Opinion is a formal request to comply with EU law and includes a request that the UK inform the EC of the measures taken within a specified period, usually around 2 months.

Step 2 - Referral to the CJEU: If the UK does not comply with the request in the Reasoned Opinion, the EC may decide to refer the matter to the CJEU.

Step 3 - Finding of breach: If the CJEU finds that the UK has breached EU law, the national authorities (including the UK courts) must take action to comply with the CJEU's judgment.

Step 4 - Second referral to the CJEU: If the UK does not comply with the CJEU's judgment, the EC can refer the UK back to the CJEU for a second time, proposing that the court impose financial penalties (either a lump sum and/or a daily payment).

If the EC sets a period for response to its Reasoned Opinion which ends well before the end of the transition period, it will be able to refer the matter to the court (Step 2) before the end of the transition period at the end of the year. This will allow the EC to make use of Article 86 WA which confirms that the CJEU continues to have jurisdiction in any proceedings brought against the UK before the end of the transition period, applicable to all stages of the proceedings.

It has been reported² that EU member states have also received legal advice that the EU has up to 4 years after the end of the transition period to bring an action against the UK for breach of the WA during the transition period³. This would be by virtue of Article 87 WA which enables the EC to bring an action against the UK before the CJEU within 4 years after the end of the transition period (up to the end of 2025) if it considers that the UK failed to fulfil an obligation under the Treaties or Part Four of the WA (Transition) (as opposed to the WA as a whole).

Part Four of the agreement includes a confirmation that Union law is applicable to and in the United Kingdom during the transition period under Article 127(1) WA. A breach by the UK of Union law during the transition period breaches Article 127(1) which, in turn, triggers the EU's 4-year right to bring infringement proceedings against the UK.

However, for Article 87 to apply, a breach of Article 5 WA must amount to a breach of the Part 4 of the WA, which would require that Article 5 constitute Union law. One reading which allows this is the definition of "Union law" at Article 2 of the WA, where it is defined inter alia as "the international agreements to which the Union is party" (Article 2 WA), which arguably includes the whole of the Withdrawal Agreement. The issue with that argument is that it does not leave any room for the possibility that parts of the international agreements might not be Union law.  For example, the provisions on dispute resolution in Part Six of the WA (and, by extension, the arbitration rules and procedures of Annex IX), are evidently not Union law as they do not fall within the jurisdiction of the CJEU. In that same vein, it is evident from the need to have an alternative dispute resolution mechanism in the WA that some disputes arising out of the WA will not involve Union law and will therefore need to be resolved via Part Six. This lack of clarity leaves no explicit way to tie the UK's obligation of good faith under Article 5 WA to Union law.

What would be the impact of a CJEU judgment?

Should the matter be brought before the CJEU, the Court is unlikely to issue a judgment finding a breach (i.e. Step 3 above) before the end of the transition period; and perhaps even less likely to issue a judgement imposing a penalty on the UK (i.e. Step 4) before the end of the transition period. However, considering the special circumstances, the CJEU may act faster than it normally does as it has demonstrated in the application for interim measures by Advocate General Eleanor Sharpston following her replacement as a result of Brexit. In that case, the application to the General Court was made on 02 September 2020, the General Court ruled on 4 September 2020 and, in appeal, the CJEU ruled on 10 September 2020 (see here).

The UK would be bound by the WA to comply with the court's judgment (under Article 89 WA). However, the domestic law position is unclear.

On the assumption that the CJEU's judgment is made after the end of the transition period, section 6(1)(a) of the European Union (Withdrawal) Act 2018, as amended ("EUWA 2018") states that a UK court or tribunal is not bound by any decisions made on or after the end of the transition period by the European court. This is directly opposed to Article 89 WA which states that judgments handed down after the end of the transition period where they relate to proceedings referred to in Articles 86 and 87 WA are binding on and in the UK. This tension is resolved partly by section 7A EUWA 2018, which ensures that the obligations in the WA are given effect and enforced domestically: liabilities and obligations, remedies and procedures arising by virtue of or under the WA are "to be recognised and available in domestic law and enforced, allowed and followed accordingly". One interpretation is that section 7A constitutes an implied repeal of section 6(1)(a), such that the UK courts would have to give effect to a CJEU judgment given within the remit of Article 89 WA. This is supported by section 7A(3) which states that "every enactment (including an enactment contained in this Act is to be read and has effect subject to subsection (2)".

However, this position is untested in the UK courts. We also note that section 38 of the European Union (Withdrawal Agreement) Act 2020 ("WAA 2020") caveats the obligations in the WA by restating the concept of parliamentary sovereignty, with express reference to section 7A EUWA 2018. Again, the effect of section 38 WAA 2020 is untested, and may be no more than a mere political statement. But one interpretation could be that only prior acts of Parliament are subject to section 7A EUWA 2018, and later acts are subject to the Parliamentary doctrine of sovereignty, such that the relevant provisions of the Internal Market Bill would themselves act as impliedly repealing the UK's relevant obligations under section 7A EUWA 2018.

What else can the EU do?

Survival of Article 5 WA

The EU could, once all its avenues within the infringement procedure are exhausted, also seek to establish an arbitration panel on the matter under the WA for breach of the Withdrawal Agreement. Note that the dispute resolution mechanism only takes effect after the end of the transition period.

However, tied up in this is also the question of whether the good faith obligation under Article 5 WA survives the end of the transition period. As already discussed above, Union law itself does not survive the end of the transition period. If Article 5 is taken as not constituting Union law for the purposes of Article 127(1) (and Article 2) WA, there is nothing in the agreement to suggest that Article 5 WA does not survive the end of the transition period.

NI Protocol

Assuming the Bill (or by then, the UK Internal Markets Act) is declared in breach, the UK Government may decide to simply delay passing the Act until after the end of the transition period. Would the enactment of the Bill itself be a breach of the NI Protocol? In a statement by the EC, following an extraordinary meeting of the EU-UK Joint Committee on 09 September 2020, Vice President Maroš Šefčovič stated that: "If adopted as proposed, the draft bill would be in clear breach of substantive provisions of the [NI] Protocol ... [including] Articles 5(3) & (4) and Article 10 on custom legislation and State aid"; not least because the NI Protocol is supposed to have direct effect in the UK (per Article 4 WA).

There is however a clear counter-argument which is that, although the discretionary powers in the Bill are a breach of the good faith clause in the WA, it is less clear whether they are actually in breach of the NI Protocol unless these powers are actually used by Crown ministers. This in turn raises the question of whether there could be a second, distinct, challenge brought by the EU against the UK for breach of the NI Protocol at the moment the UK Government actually uses the powers under the Bill. Infringements of the Articles mentioned by Mr Šefčovič would be subject to the CJEU's jurisdiction even after the end of the transition period (under Article 12 of the NI Protocol).

Concluding remarks

At first glance, these proceedings reflect the high priority which the EU places on legal obligations and correct due process. However, it is not clear at all whether these proceedings will have any real or practical consequences for the UK. This is particularly true so long as the domestic and quasi-constitutional position is not settled with regards to the effect of CJEU judgments post-transition period.

From a macro-political angle, one of the objectives of the Internal Markets Bill is to put pressure on the EU to reach a deal. In other words, the UK Government has established its position as being prepared to breach good faith obligations under international law to achieve the Brexit it wants. The proceedings brought by the EC can be seen as an indirect political reply to this, with the EU increasing pressure by taking steps that will put the UK in breach of other commitments as well.

In other words, whilst the EU's response may serve to increase the UK's international embarrassment and potential reputational harm, the Internal Markets Bill itself shows that the UK Government is willing to legislate its way out of a difficult position, particularly the way it insulates its actions from judicial scrutiny (see for example clause 45 of the Bill). With a strong majority, and confidence the public will not support the UK obeying orders of the CJEU or paying anything to the EU, the UK Government may feel there is little the EU's infringement proceedings can achieve.

Please get in touch with Charles Bankes, Mathieu Vancaillie, Romain Girard or Alice Lauterjung if you have any queries.

¹ Note also that under Article 185 WA, Articles 169 to 181 WA which set out the dispute settlement procedure under the WA only apply as of the end of the transition period. Annex IX WA contains detailed rules of procedure for the dispute settlement process.

² https://www.bbc.co.uk/news/uk-politics-54370226

³ The House of Commons phrases it slightly differently, saying that the EU has 4 years from the end of the transition period to bring infringement proceedings against the UK for breaches of EU law that took place during the transition period: https://commonslibrary.parliament.uk/brexit-next-steps-the-court-of-justice-of-the-eu-and-the-uk/.