BREXIT ALERT: legal issues upcoming for a no deal or for an extended Brexit

BREXIT ALERT: legal issues upcoming for a no deal or for an extended Brexit
05/04/2019 , 03h55 Vie du Cabinet

BREXIT ALERT: LEGAL ISSUES UPCOMING FOR A NO DEAL OR FOR AN EXTETED BREXIT  

This is a crucial period during which there is a high risk of a no deal Brexit with the UK leaving the EU without any agreement on 12th April. This follows the failure of the UK Parliament to ratify the Withdrawal Treaty by the latest deadline on 29th March.

Two possible scenarios exist at the moment:

-a ‘no deal’ exit on 12th April. The UK will become a third country and EU law will no longer be applicable in the UK.

-an extension of the exit date beyond 12th April to allow further negotiation. This remains possible but uncertain.

Section A briefly sets out the background; and various consequences and questions are mentioned in section B.

 

This note recommends a review of current business contracts or those in negotiation, as well as a check on the legal and regulatory position for activities in the UK.

 

A) Background to the current situation

a) the draft Withdrawal Treaty and Political Declaration on future relations

The Withdrawal Agreement was negotiated between the UK and the EU for almost 2 years and deals with the complex details for the exit of the UK from the EU.

It provides for a transitional period enabling the status quo to be maintained until the end of 2020 (with a possible extension) pending a final agreement on future relations.

If the withdrawal treaty were ratified:

-this would mean that businesses could continue their activities on the basis of the single market and customs union during the transitional period

-the UK would leave the EU on the date agreed, (currently 12th April unless a further extension were agreed at the last minute) and would no longer be part of the European Union which would not be without legal consequences for certain activities.

-a foreseeable calendar would be established within the scope of the treaty and the negotiation of future relations, which will involve, whatever happens, permanent adaptations to relations with British businesses and the activities of subsidiaries or branches in the UK, depending on how matters evolve, at the latest by the end of the transitional period.

A specific protocol on Northern Ireland (‘Northern Ireland Protocol’), to avoid a hard border between the two parts of Ireland, is contained in a schedule to the withdrawal agreement. If the negotiations for future relations were prolonged, Northern Ireland would remain aligned on the single market and the rest of the UK would stay in the customs union (“backstop”) for a period which should only be temporary.

This “backstop” is considered essential to the maintenance of peace in Northern Ireland. In spite of this, it has been the major, (but not the only), reason for the refusal of the British Parliament to ratify the withdrawal treaty.

A Political Declaration for the negotiation of the commercial and other aspects of future relations, has also been negotiated, which sets out a road map for future discussions.

The British government and the EU signed these three documents in November 2018. On the EU side the agreements were based on a mandate given by the other 27 member states.

The EU had indicated that in no event will the withdrawal treaty be renegotiated, but that it remains possible to discuss the conditions of the political declaration, if the UK changes its “red-lines” to enable other scenarios such as a customs union or participation in the EEA.

 

b) the two possible scenarios

 

1) ratification of the withdrawal treaty

Even though the UK Parliament has refused ratification of the treaty negotiated by the UK government and the EU signed in November 2018, it is still possible that a political compromise may be found. Last ditch negotiations are continuing in London at the moment between the two main political parties!

A compromise might be found on the content of the Political Declaration on future relations.

But the Conservatives will be obliged to abandon one of their red-lines, particularly on keeping the UK within the Customs Union, which is being proposed by Labour. There may have to be a referendum to confirm the position, which will prolong uncertainty.

Even if such a political agreement were found, it would be essential for the UK to propose a clear position and calendar before the EU Council of Ministers on 10th April and to obtain the agreement of the other 27 member States for an extension of the time limit currently expiring on 12th April, in order to finalise and negotiate the modified terms of the Political Declaration.

Depending on what happens, if the agreement enabled finalization and implementation by the end of May (EU Parliament elections), the UK would leave the EU on 22nd May, and would go into a transition period  until the end of 2020, or perhaps a bit longer.

If not, it would be necessary to envisage a postponement of the UK’s exit for a longer period, probably of more than one year, (for example to enable a referendum or a general election in the UK). In such a case the UK would have to participate in elections to the European Parliament in June.

 

2) Exit without agreement

In this case the UK will become a third country from 12th April 2019.

Customs tariffs and formalities as a third country will apply.

The free circulation of people and goods will cease at the same time as access to the single market and customs union. Many other situations related to EU law will be deprived of their current legal basis.

An agreement under WTO rules will have to be negotiated.

Whatever the case, the UK will be required, under international law, as a first step, to negotiate the conditions for its withdrawal from the EU, and to settle all outstanding matters (particularly financial), before being able to negotiate an agreement on future commercial relations.

 

A certain number of temporary arrangements may be granted by the EU authorities and certain States, for certain areas of activity such as:

-air, rail and road transport

-financial markets

-presence of British citizens in EU countries

However, that will depend on reciprocity being given by the UK on a case by case basis. For the moment there is uncertainty on this point.

 

 

B) Some consequences and questions (non-exhaustive list)

If the UK leaves the EU without a withdrawal agreement and without a transitional period, there are a number of foreseeable and immediate consequences:

*customs tariffs for third countries will apply to imports and exports. The UK has already published a list of provisional tariffs for the event of a ‘no-deal’.

https://www.gov.uk/guidance/check-temporary-rates-of-customs-duty-on-imports-after-eu-exit

 

This page contains a link to the tariffs and a tool to check which tariff applies :

https://www.gov.uk/government/publications/temporary-rates-of-customs-duty-on-imports-after-eu-exit

See also :

https://www.gov.uk/government/collections/trading-with-the-eu-if-the-uk-leaves-without-a-deal

It is proposed to exempt a certain number of imported products from tariffs until 29th March 2020.

In certain cases, 20% VAT may be applied on import, to be checked for the relevant product. The current EU intra-community VAT system will no longer apply (affecting current transactions and procedures).

*customs formalities for third countries will become obligatory for import/export with risks of delay at borders, extension of delivery times and affecting supply chains and costs of manufacture…

https://www.gov.uk/guidance/customs-procedures-if-the-uk-leaves-the-eu-without-a-deal

 

 

(N.B. check for updates to the above : customs tariffs and formalities on the UK government web site: .gov.uk)

*EU law will no longer apply in the UK. (The UK has passed legislation to integrate EU law into the British legal system at the date of exit, but the government has the power to modify or abrogate EU law in its discretion). In the event of disputes in British courts and tribunals, recourse of British and foreign litigants to the EU Court of Justice will no longer be possible.

*circulation of persons (including for work purposes) will be limited (Schengen 2 rules: visas except for short stays).

The two scenarios mentioned also raise the question of the continuing performance of certain contracts or activities, even their survival.

 

Without being exhaustive, a number of points can be considered:

-the position at the possible deadlines (e.g. 12TH April 2019 and at the end of any transitional period or any other period which may be agreed between the UK and EU);

-the effects of Brexit on contractual rights and obligations, costs and financial liabilities, delay in performance…

free circulation of persons (employees, secondees, citizens…) resulting from the cessation of relations with the EU (visas, work and residence permits)

regulatory rules and approvals for products and services subject of contracts between French and British companies

-rules applicable to data, and intellectual and industrial property

tax including intra-community VAT; customs, duties… (intra group provisions)

social security cover for employees on secondment or on business travel between France and the UK after 12th April 2019, to carry out services, after sales services…

civil liability and validity of insurance policies  and their sufficiency in the new situation

litigation and execution of judgements

 

 

There will be other difficulties not mentioned here, such as administrative and regulatory matters.

To mention only the example of current sales and purchase contracts, there follows a non-exhaustive list of questions :

-nature of the deliverable: import/export Incoterm chosen (who carries out customs formalities, who pays duties, tariffs and taxes?)

-risks of difficulty with transport of goods, delays at frontier and delivery, increase in costs

date of signature of the contract (question of what difficulties were foreseeable when the parties entered into their agreement, and force majeure)

Certain contracts signed after the 2016 referendum (and even before) contain Brexit clauses defining no deal as an event of force majeure

-has Brexit rendered performance impossible or only more difficult or expensive ? For example, what were the delivery times provided? Are they threatened or made impossible by Brexit?

-which law and court was chosen?

 

 

Recommendations

Whatever the outcome of the current situation, clients are recommended to check the contractual and regulatory position relating to their UK business and activities. Even in the transitional period, there may be changes already occurring. The position will inevitably change at the end of the transitional period, and depending on the longer-term commercial agreements which may have been negotiated between the UK and the EU.

Lexcase has an informal network of best friend law firms in the UK who can be consulted as needed. Your usual contact at Lexcase is at your disposal to assist with any question.

 

Simon Wesley

Avocat Honoraire

International consultant

LexCase Société d’avocats

swesley@lexcase.com


Hubert Mortemard de Boisse

Managing partner

Head of Economic Law Department

LexCase Société d’avocats

hdeboisse@lexcase.com