Article 50 triggered: Deal or no deal - the count down to Brexit begins

On 29 March 2017 the UK Government served notice under Article 50 of the Treaty on European Union ("TEU") of the UK's intention to withdraw from the European Union (the "Notification"), formally commencing the process by which the UK will leave the EU. The clock is now ticking to the UK's withdrawal from the EU which, absent agreement to the contrary, will occur on 29 March 2019.

Introduction 

There has been no shortage of drama in world affairs during the first quarter of 2017, and events relating to Brexit have been no exception. Preceding the Notification, the UK Government announced its key objectives and principles for the Brexit negotiations, suffered defeat in the UK Supreme Court over its ability to trigger Article 50, but obtained a clear majority of Parliament for an Act of Parliament empowering it to serve the Notification. The Notification was followed by a UK Government White Paper, outlining proposals for a "Great Repeal Bill" which will have the effect of removing the supremacy of EU law over UK domestic law following the UK's withdrawal from the EU (the "Great Repeal Bill White Paper").

The European Council (i.e. the body, comprised of the Heads of State for each of the EU Member States, the President of the European Council (Donald Tusk) and the President of the European Commission (Jean-Claude Junker), which sets the political agenda for the EU) quickly responded to the Notification by publishing its draft guidelines for the negotiation of the UK's withdrawal from the EU (the "Draft Guidelines"). The Draft Guidelines, which will provide the European Commission with its mandate to conduct the Brexit negotiations on behalf of the EU, are expected to be approved at an extraordinary summit of the European Council to be held in late April 2017.

Our timeline for the Brexit process is shown below.

The notification and the draft guidelines - key points to note

Whilst the extended length and conciliatory tone of the Notification may have been a surprise to some, the actual content was not. The UK Government's ultimate objectives remain clear; the UK expects to withdraw from the Single Market and the Customs Union, and agree a broad "partnership" with the remaining 27 EU Member States ("EU27"), encompassing both economic and security co-operation. Beyond that, the Notification contained little new as to either the UK's negotiation strategy, or what it expects any trade agreement to contain (which is perhaps unsurprising at this stage).

Nonetheless, the Notification did at least provide some indications as to what the UK Government wants, and how it might achieve its goals. We set out below key points to note from the Notification, consider any aspects of the Draft Guidance relevant to those points, identify the potential challenges to the UK's position, and state our predictions on the outcome of negotiations for these key areas.

A broad future partnership

The Notification confirmed the UK Government's wish to negotiate a "bold and ambitious free trade agreement with the EU27", covering "sectors crucial to our linked economies, including financial services and network industries". The Draft Guidelines suggest that there is sufficient appetite for such an agreement but there are some obstacles to be overcome:

• Timing:

o Article 50 refers to an agreement "setting out the arrangements for [the relevant Member State's] withdrawal" being concluded. However, the Notification makes clear that the UK Government expects to negotiate withdrawal arrangements and a free trade agreement in parallel. To some extent, the Draft Guidelines do allow for that but only if "sufficient progress is made … towards reaching a satisfactory agreement" on the withdrawal arrangements. What this is likely to mean is that, as a minimum, agreement will need to be reached on (1) the UK's budgetary contributions, and (2) the rights of EU27 citizens living in the UK and UK citizens living in the EU27, prior to the negotiation of trade terms.

o The two year time period provided under Article 50 is unlikely to be sufficient to conclude the detailed terms of such an agreement (other, less complex, trade negotiations have taken far longer). Moreover, the phased approach proposed by the Draft Guidelines may make that timetable even more pressured. However, the Notification can be read as aiming to secure only outline agreement on the key elements of the future partnership within the two years. If key principles can be agreed, and transitional arrangements put in place which prevent the feared "cliff-edge" becoming a reality (see below "A smooth, orderly Brexit"), the detailed terms could be finalised after the UK ceases to be a Member State. The Draft Guidelines accept this as a possibility, noting that Article 50 does require account to be taken of "the framework of…[the UK's]…future relationship with the Union", and acknowledging that negotiations may also "seek to determine transitional arrangements" and "provide for bridges towards the foreseeable framework for the future relationship".

• Access to the Single Market:

o The Notification confirms that the UK is not seeking membership of the Single Market, and understands that there can be no "cherry-picking" of the four fundamental freedoms of the EU (i.e. the free movement of goods, people, services and capital). It also acknowledges that UK businesses trading into the EU27 will have to comply with EU rules (e.g. in relation to product standards, tariffs, etc). The UK's recognition that this was an inevitable consequence of withdrawal from the EU was welcomed by the European Council in the Draft Guidelines. However, the Notification refers specifically to the UK not seeking "membership" of the Single Market, rather than "access" to it. The UK will seek access to the Single Market in some form, but, realistically, such access is likely to be limited to certain industries and sectors, and will be more restricted than that currently enjoyed.

o Even limited access will likely require the UK to retain broadly similar laws and regulations to those imposed on EU Member States for the relevant industries/sectors for which access is granted. Multiple references throughout the Notification to the close alignment of UK and EU regulatory frameworks and standards (to be retained post-Brexit in UK law via the Great Repeal Bill, discussed below), suggest that the UK would accept this. However, merely confirming that the UK will maintain close alignment with the EU's laws (or even identical ones), is unlikely to (of itself) guarantee access. Even in respect of those EU laws (which is by no means all of them) which expressly provide for third countries being determined to have legal frameworks which are "equivalent" to those of the EU (and therefore entitled to (usually more limited) access to the Single Market), such status is not a matter of right. Such access is a political concession which the EU may or may not decide to confer, and which would be revocable if it was felt that the regimes are no longer equivalent.

o Additional concessions will be necessary if the UK is to procure lasting access to the Single Market, which will most likely affect (1) UK sovereignty and control of its laws, (2) budgetary contributions, and (3) rights of UK and EU27 citizens.

• UK sovereignty:

o As explained, a condition of limited access to the Single Market is likely to be that UK law must remain, to some extent, in conformity with the corresponding EU regime, and most likely accept that EU institutions will have some form of supervisory and enforcement powers. The UK may therefore need to accept some concession to its stated aim of "taking back control" of its laws or risk losing any access which is granted.

• Budgetary contributions:

o Contributions to EU budgets is likely to be only one aspect of the withdrawal negotiations. However, it will be an important one, and may be a significant bargaining chip for both parties.

o The wording of both the Notification and the Draft Guidelines suggests that both sides recognise that the extent of the UK's legal obligation to fulfil its financial commitments regarding EU expenditure budgeted for after the UK ceases to be a member of the EU, is unclear. To some extent, this uncertainty arises from Article 50 itself, which states that the EU treaties (the source of an EU Member State's obligations to the EU) cease to apply with effect from the date of withdrawal. Some (including the UK House of Lords European Union Select Committee) have taken this to mean that, from the date of withdrawal, a departing Member State is no longer bound to comply with its obligations under the Treaties, including those that it agreed to prior to its withdrawal. However, this interpretation of Article 50 may not be compatible with other international law (particularly, the Vienna Convention on International Treaties).

o This issue will likely be settled on the basis of quantum rather than whether the UK is, or is not legally obliged to contribute. Clearly, faced with substantial deficits post-Brexit, members of the EU27 may want to hold the UK to at least some of its current financial commitments. Whilst Theresa May expressly rejected paying "vast contributions to the EU budget" in her speech in January, she reserved the possibility for "appropriate contributions" (presumably budgetary) to be made in exchange for access to certain European programmes. This appears to suggest that the UK is open to making budgetary contributions, potentially in exchange for access to specific markets.

• Rights of UK and EU27 citizens:

o The Notification calls for agreement on the rights of UK nationals living in the EU and EU nationals living in the UK to be a priority (i.e. finalised and announced ahead of the overall withdrawal agreement, which these issues will form part of). This is a positive statement, but it is no more than a negotiating proposal and it is by no means certain that early agreement will be possible (although the issue is also cited as a "matter of priority" in the Draft Guidelines). This issue, and that of immigration more broadly, may prove to be a critical battleground for negotiations.

o As regards future rights of EU27 citizens to reside in the UK and vice versa, the UK Government's objectives clearly reject the UK accepting free movement of people from the EU27. However, some free movement is likely to be a condition of access to the Single Market (as outlined above). To deal with this, an agreement based upon the principle of free movement of workers (rather than of people), able to move between the UK and the EU27 to take up specific offered employment (as was broadly the case under the original treaties establishing the EU) might be acceptable to both sides, and would still be consistent with the several UK Government statements in relation to access for skilled workers.

A smooth, orderly Brexit

•  The UK has always argued that transitionary periods will be required in order to avoid the much-discussed "cliff-edge". This is likely to be as important for EU27 businesses operating in the UK as it is for UK firms operating in the EU27. Both sides appear cognisant of the need to "minimise disruption" and to give "as much certainty as possible" to affected citizens and businesses.
• However, the Draft Guidelines propose that any such transitional arrangements might only be discussed after the terms of withdrawal and any future relationship have been agreed and only "to the extent necessary and legally possible". The Draft Guidelines also make clear that the UK will be expected to make necessary budgetary contributions to the EU to fund the supervision of any such arrangements by the relevant EU regulatory bodies.
• For domestic UK affairs, the Great Repeal Bill White Paper deals with the issue that the removal of EU law from UK law on the day of Brexit would leave large voids in UK law. It therefore sets out the process by which the body of existing EU law will be removed but then reimported into UK law, adapted as required. Further details are set out below.

Fall-back to WTO principles remains a possibility

The Notification confirms that, if no terms are agreed by the end of March 2019, the UK's default position will be to rely on WTO principles. Theresa May acknowledges that this would not be a desirable outcome for either party, but this makes it clear that the UK is prepared to revert to WTO principles if necessary, indicating that the UK is not looking for a deal "at any cost".

Devolved powers and sovereign territories

• The Notification states that the UK will negotiate as one United Kingdom, notwithstanding recent calls for a Scottish referendum on independence. However, the Notification states that the UK Government expects Brexit to generate "a significant increase in the decision-making power of each devolved administration". Areas of EU policy whose implementation has been devolved in the UK include agriculture, environment and some transport issues. However, the Great Repeal Bill White Paper seeks to allay fears that this may mean that the "UK single market" is prejudiced by divergence in law or policy between the different parts of the UK: "no new barriers to living and doing business within our own Union [will be] created as we leave the EU". Where policy was formerly set at EU level, Westminster may therefore reclaim the power to set UK-wide policy in devolved areas.
• One aspect of the Draft Guidelines which obtained significant headlines, was the proposal that any agreement on the future relationship between the UK and the EU which affected Gibraltar must also be agreed to by Spain. The dispute between the UK and Spain over Gibraltar is centuries old so this statement can only increase the difficulty of the negotiations.

How likely is it that agreement will be reached?

• Several sources within the EU have acknowledged that access to the UK market is as important to the firms within the EU27 as access to the EU27 is for UK firms. Equally, the supply chains of businesses on both sides will be affected by barriers to the Single Market caused by additional rules, bureaucracy and tariffs. As the Notification observes, in a time of increasing protectionism in many marketplaces around the world, it makes a great deal of economic sense to ensure that a mutually acceptable agreement is reached by both parties (and it is clearly the right conclusion from the perspective of national security).
• However, assuming that both sides can agree to the necessary concessions for an agreement to be reached, the timetable within which agreement is to be achieved is challenging to say the least (something which is acknowledged by Theresa May herself). This is particularly true given the dynamics of EU negotiation and the ratification process, and more so as a result of the phased approach which the Draft Guidelines propose. Whilst we believe that agreements on withdrawal and the UK's future relationship will be reached, it is doubtful that the latter will be within the two year timeframe. In order to avoid falling back to WTO principles, it will be crucial that the UK and the EU27 agree the principles of free trade and some form of interim arrangements and that any such arrangement is announced at the earliest opportunity. For businesses which depend to a material extent on relatively unfettered access to EU27 markets, there is a clear risk that such announcement will not come soon enough to avoid having to action Brexit contingency plans.

The Great Repeal Bill or The Great Power Grab?

The Great Repeal Bill White Paper sets out the UK Government's proposals for a "Great Repeal Bill". The focus of the White Paper is the reinstatement of UK parliamentary sovereignty and of the UK courts as the ultimate arbiter of UK law. On the day of Brexit, the Great Repeal Bill will repeal the European Communities Act 1972 (which establishes the supremacy of EU law and the CJEU in the UK and implements EU law into UK law). However, repealing that Act will cause EU law to fall away, leaving large voids across the UK statute book. The UK Government therefore proposes that as far as possible, the whole body of existing EU law (known as the "acquis") will be converted into UK law (by cross-reference, rather than by being copied out).

Importantly, as the Great Repeal Bill White Paper notes, many aspects of EU law will not work in a self-standing UK regime. Accordingly, adaptation or amendment of relevant EU law will be required before it is workable in UK law. The Great Repeal Bill White Paper acknowledges that this vast process could not be completed within the two year period for Brexit if every step was scrutinised in full by Parliament. Where possible, therefore, the adaptation will be dealt with by legislative powers delegated to Government Ministers and (where appropriate) to devolved assemblies. Fears have been expressed that this delegation of broad law-making powers could allow the UK Government to amend swathes of primary and secondary legislation without appropriate democratic controls.

The process of adapting the EU acquis into UK law will be even more complicated than the Great Repeal Bill White Paper acknowledges. Recreating legal obligations is relatively straightforward – the EU requirements for product standards etc can be straightforwardly reinstated and enforced through the UK legal system. Recreating rights is more complicated: the UK cannot create a right which is not in its gift. In some situations this can be overcome: for example, the UK can adopt the principles for EU agricultural subsidies and pay them from its own coffers. In other cases, the difficulties of recreating the EU regime cannot be resolved unilaterally by the UK. Equivalence and mutual recognition regimes (as discussed above) depend on EU rights being granted, which depends on the UK's future relationship with the EU, still to be negotiated. The goal of having a fully functioning set of post-Brexit UK laws on the day the UK leaves the EU is not only a huge challenge for Whitehall but may not be achievable on some issues until very late in the day, if at all.

The Great Repeal Bill White Paper makes clear that, in the interests of legal certainty, a clean break is not possible. It is also clear that there will be no bonfire of EU-derived "red tape". The UK courts will be free, post-Brexit, to interpret the imported, adapted EU acquis differently to the CJEU. Accordingly, multi-jurisdictional businesses should not blindly assume that because the statute books were initially the same in the UK and the EU27, they will remain the same. There is also no doubt that the Great Repeal Bill will give a huge amount of legislative power to the Government, on issues which might ordinarily be considered in full by Parliament. Whilst there remains theoretical scope for each new statutory instrument to be reviewed by Parliament, the requirements of the timetable mean that, in practice, scrutiny may well be reduced.

Conclusion 

Importantly for businesses, until 29 March 2019 (subject to any transitional arrangements), nothing will change. EU law will continue to apply, new directives and regulations will continue to be implemented, and the UK will continue to contribute to the EU's budget. Even on the day of Brexit, the UK Government's current intention is that as little as possible will change as regards legal rights and obligations in the UK. However, for many key areas, that certainty is conditional upon what the UK secures as regards its future trading relationship with the EU. Equally, whether transitional measures can be agreed to give business time to adapt, remains to be seen. For those businesses which rely on EU-derived rights to trade from the UK into the EU27 (and vice versa), 29 March 2019 will be a date on which fundamental change occurs, unless agreement is reached between the UK and the EU.

Those materially affected will need to follow closely and monitor the UK/EU27 negotiations over the next two years to ensure that they are strategically positioned, capitalised and resilient enough to deal with whatever the outcome may be. Committed partisans will either rejoice that the UK is embarking on the (gradual) path to freedom from the choking embrace of EU regulation, or despair that it may be cut off from key markets. Ultimately, the reality of the result may well be more prosaic; there will be no bonfire of regulation, and markets in many goods and services will continue to be accessible, albeit at a cost.