The vote of the UK electorate on 23 June to leave the European Union will have far-reaching economic, political and legal repercussions for both the UK and Europe as a whole.

Although there has been some economic and political reaction already, it seems clear that this process is only in its infancy and, as lawyers, we offer no predictions as to how matters will play out in this regard. At this stage, all that can be said with certainty is that we are in for some very interesting times.

It is clear however that there are likely to be significant changes to the legal regime under which businesses in the UK operate and to which they will need to adapt in the near future.

Many of these changes will depend upon the outcome of the negotiations to be undertaken between the UK and the continuing EU Member States (“C-EU”) and so cannot be predicted in detail at this stage.

What we can be foreseen however, is the broad outline which the Brexit process will take under Article 50 of the Treaty on European Union (“TEU”) and the areas of law most likely to be affected by Brexit.

In this briefing, we set out: (i) the likely chronology of the Article 50 process; and (ii) a high level summary of the areas of law most likely to be affected and what these effects might be.

The withdrawal process under Article 50 TEU

Article 50(1) provides simply that:

"Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements."

All that is required to invoke Article 50 is that a “Member State which decides to withdraw shall notify the European Council of its intention".

Probably deliberately (in order not to encourage Member States to withdraw) Article 50 does not set out any detailed procedural machinery for withdrawal.

Article 50(2) simply states that, on receipt of the “resignation letter” referred to above:

“In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union [emphasis added]. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament."

The underlined portion of the above quote is the most significant in the context of the current discussion of the nature of any “deal” which the UK can expect in any withdrawal “negotiation”.

Put simply, Article 50 places no onus on the C-EU to negotiate any deal at all with respect to future relations with the UK.

All that Article 50 requires is that the C-EU negotiate an agreement setting out arrangements for the Member State’s withdrawal from the EU. That withdrawal agreement should “take into account” the likely shape of the withdrawing Member State’s future relations with the EU, but an agreement on the nature of the future relationship is not, as a matter of law, a precondition for the conclusion of the withdrawal agreement.

This is borne out by Article 50(3) which states that the EU Treaties shall cease to apply to the withdrawing State on the entry into force of the withdrawal agreement or failing that within 2 years of the resignation of the State concerned, unless the Council decides unanimously to extend the period.

By Article 50(4), from the date of its resignation, the withdrawing Member State shall not participate in any discussions of the Council or in any decisions concerning it.

It is not, therefore, a foregone conclusion that the UK will obtain any “deal” in terms of its continued relations with the EU other than one covering the mundane practicalities of withdrawal itself – e.g. the employment position of UK nationals employed by the EU institutions, etc.

In such a scenario, the UK’s position vis à vis the C-EU would be little different to that of any other member of the World Trade Organisation (“WTO”), with all the restrictions on travel and trade that this would entail.[1]

On the other hand, given the multi-layered inter-dependence that exists between the UK and the EU, not least in relation to the number of EU nationals living in the UK and of UK nationals living in other EU countries, there would seem to be a very strong mutual interest in negotiating an enhanced level of partnership between the UK and the C-EU that reflects this inter-connectedness.

One option would therefore be for the UK to join the European Economic Area (“EEA”) – this is sometimes referred to as the “Norway Model”. Membership of the EEA gives access to the EU single market but requires adherence to EU rules (including those on free movement of workers), with only very limited ability to shape those rules. EEA States must contribute to the EU budget as their “entry fee” to the EU single market. The EEA model may therefore be politically unpalatable to those who voted for the “leave” side in the referendum.

Another option would be to seek a bi-lateral relationship with the EU which offers partial access to the single market along the lines of that concluded between the EU and Switzerland. However, such agreements are complex and time-consuming to negotiate and, again, in practice involve substantial adherence to many aspects of EU law.

A still further option would be for the UK to join the EU customs area (as Turkey has done) which offers partial access to the single market but without free movement rights.

Whatever option is pursued, EU law is likely to remain applicable in the UK for some time at least. This is because although Article 50(3) states that the EU Treaties shall cease to apply to an EU Member State following its withdrawal, that does not mean that EU law will cease to apply within that country. Many aspects of EU law have been incorporated into domestic UK law by the European Communities Act 1972 and subsequent legislation so that, for example, the controversial (in some circles) Working Time Directive now exists in UK law independently of its origins as an EU legislative instrument. Specific UK legislation would be required to reverse that position.[2]

We set out below some of the principal areas of law that will be affected by Brexit.

Possible effect of Brexit on specific areas of law

FINANCIAL SERVICES

This of course, an area of fundamental importance for the UK economy. The EU Treaties currently provide for the “passporting” of financial services which means that a financial services institution domiciled in one Member State may supply its services in all other Member States. Alternative arrangements for access to the market by financial services institutions based in the UK would therefore need to be made if these institutions are to continue to be able to supply services in the C-EU.

EMPLOYMENT LAW

Many aspects of UK employment law derive from EU law and, as stated above, have been incorporated into national law. Specific UK legislation would be required to undo this. The position of workers from other EU Member States resident in the UK and vice versa will no doubt be dealt with in the withdrawal agreement concluded between the UK and the EU.

TAX

Direct (as opposed to indirect) taxation is not currently harmonised at EU level and therefore remains within the competence of the individual Member States – though the Commission is currently attempting to use the lever of State aid law to attack what it sees as artificial intra-company arrangements by which multi-national (often American) companies seek to account for revenues in Member States with low rates of corporation tax such as Ireland or Luxembourg and therefore reduce their tax bill. This will be largely un-affected by Brexit.

COMPETITION LAW

UK competition law, in the form of the Competition Act 1998, is modelled on EU competition law and this is unlikely to change. However, the current specific requirement that UK Courts and regulatory bodies follow the relevant judgments of the European Courts may be removed which could lead to a divergence between the legal approaches under UK and EU competition law going forward.

In addition, there may be changes in the domain of merger control where currently larger mergers “with a Community dimension” are reviewed by the European Commission under the EU Merger Regulation which provides a one stop shop merger clearance covering all 28 Member States. The benefit of this “one stop shop” is likely to be lost with the result that parallel merger control proceedings (potentially with divergent results) in the UK and EU will become more common.

If, as is to be hoped, the UK negotiates some form of access to the EU single market, it seems likely that EU State aid law (or a domestic variant closely modelled on it) will continue to apply.

It should of course also be noted that EU competition law applies to anti-competitive conduct that potentially affects trade between EU Member States, irrespective of where the companies concerned are based. In fact, the criticism has been levelled against the EU in the past, particularly by the US authorities, that it disproportionately penalises foreign companies. If true, there seems no reason for this to change post-Brexit.

DATA PROTECTION

Although the UK Data Protection Acts of 1998 and 2003 derive from EU Directives, they are self-sufficient pieces of UK legislation and will not be affected by Brexit unless they are repealed by the UK Parliament. Nevertheless, in time one could foresee divergence between data privacy standards in the UK and those in the C-EU which may affect the ability of companies to transfer personal data between the UK and C-EU.

INTELLECTUAL PROPERTY

There is a significant potential impact in this area as many intellectual property rights, such as EU Trade Marks and design rights are granted across the EU.

Given the complexity and level of detail on this point, we have prepared a separate briefing on it.

COMMERCIAL CONTRACTS

It would seem unlikely that Brexit itself would affect the validity of commercial contracts, except in some unusual situations in which contractual performance depends upon the status of one or other of the parties as an EU national. However, it cannot be excluded that Brexit will trigger contractual provisions that terminate, or at least render more difficult the performance of, contracts but that would depend upon the drafting of the agreement in question.

A related issue is the jurisdiction of Courts and the mutual enforcement of judgements. Within the EU, this is covered by the Brussels Convention, to which the UK is a party but will cease to be on Brexit. The Lugano Convention provides for similar rules as between the EU and EFTA Member States. The UK will probably need to accede to this convention on Brexit.

Arrangements will also be required to ensure the recognition of international arbitration awards and decisions by insolvency authorities.

Finally, as a Member of the EU, the UK benefits from trade agreements negotiated by the EU on behalf of its Member States with over 50 other countries around the world. Following Brexit, the UK will no longer benefit automatically from these deals and will have to negotiate replacements (or at least obtain the agreement of the counterparties that the UK will continue to be given the benefit of these deals).

ENVIRONMENTAL AND CLIMATE CHANGE LAW

As with other areas of law, much UK law on, for example, emissions reduction and water quality derives from EU Directives. Without specific regulation repealing these rules, they will remain in place though divergence with EU norms may emerge over time if the UK fails to transpose Directives issued by the EU in future into national law. Such divergence may put single market access at risk.

UTILITY REGULATION

Much of the UK legislation governing the organisation and economic regulation of the energy, tele-communications and water sectors is derived from EU legislation (which in turn was in many cases inspired by the UK’s pioneering privatisation of those industries). As before, Brexit will not automatically dis-apply domestic law derived from EU principles but future divergence is possible, threatening single market access by UK firms.

On a more practical note, with its increasing reliance on electricity generated from intermittently available renewable sources, the UK currently imports significant quantities of (nuclear generated) electricity over the interconnector with France. Arrangements will need to be put in place to ensure energy security going forward.

However, the continued willingness of State-owned Électricité de France to invest the many billions of euros that will be required to develop the planned Hinckley Point C reactor must now be in doubt.

We intend to update our guidance in this area as the implications of Brexit become clearer. For any queries please contact us.

[1] As an aside, we note that Article 50(5) provides that where a Member State that has withdrawn from the EU requests re-admission, it must go through the full accession process in the same way as, for example, Turkey (which has been a candidate State for accession for many years).

[2] For simplicity we refer here to “UK legislation” but the devolution settlements for Scotland, Wales and Northern Ireland confer, to varying degrees, legislative competence on the Scottish Parliament and the Welsh and Northern Ireland Assemblies. It is quite possible, indeed likely given the results of the referendum in Scotland and Northern Ireland, that the respective devolved administrations will seek to maintain in force as much EU-derived legislation as possible, potentially in the case of Scotland at least to support an EU accession process as an independent country.

Brexit: Briefing Note