With fewer than five months until the end of the Brexit transition period, it is worth considering what has changed in relation to Brexit since we published Brexit: Guide to Legal Consequences.
We therefore consider in this note what has happened, where we are now, and what the potential future developments may be in respect of Brexit. We conclude by running through what businesses should be doing in order to prepare for ‘IP Completion Day’ from a commercial contract perspective.
What has happened?
On 31 January 2020, the United Kingdom formally left the European Union, under the terms of the European Union (Withdrawal) Act 2018 (EUWA) and the European Union (Withdrawal Agreement) Act 2020 (EUWAA). The main purpose of EUWAA was to bring into UK law the Withdrawal Agreement between the UK and EU (Withdrawal Agreement). Since 1 February 2020, the UK’s relationship with the EU has been governed by the Withdrawal Agreement. Broadly, the EUWA was introduced to ensure the UK had a functioning statutory framework on exit day, whilst the EUWAA seeks to facilitate a ‘phased withdrawal’ of the UK from the EU, with a particular focus on:
- Addressing the financial and administrative burden of the UK leaving the EU and
- Establishing a transition/implementation period in which the UK and EU can negotiate the terms of their future relationship.
Where are we now?
The transition period
With the UK formally having left the EU, the UK and EU are now looking to agree on the nature of their future trading relationship. The Withdrawal Agreement creates a transition period, in which the UK and EU can negotiate the terms of their future relationship. During the transition period, most EU law will continue to apply to the UK, as though the UK were still a member state. Having begun on 1 February 2020, the transition period is due to expire on 31 December 2020. There was an option for the transition period to be extended by mutual agreement before 1 July 2020, however this deadline passed with the UK deciding not to seek an extension.
The current message from the UK government is that the UK will leave the single market and the customs union by the end of 2020, regardless of whether a trade deal is reached. Much of the reporting from the UK government and media emphasises the risk of a no-deal, however there are some signs that a limited deal may be reached in time.
Trade deal negotiations
The UK government has made it clear that it is seeking a trade agreement along the lines of that agreed between the EU and Canada or Japan. Considering it took seven years to negotiate the EU’s trade agreement with Canada, and with the EU having said that it would need a trade agreement with the UK to be agreed by the end of October in order to have it ratified and implemented for the start of 2021, this seems quite an ambitious goal. How likely is it therefore that a trade agreement can be negotiated in the nine months allotted?
There is certainly a good degree of common ground between the parties, for example both want a free trade agreement with no tariffs or quotas. Further, there is still time for a trade agreement to be agreed, with the UK and EU having recently agreed a further three rounds of negotiations to take place between August and October. However, there are still fundamental differences between the UK and the EU. On 4 August 2020, the House of Commons Library published a research briefing which asks whether a trade agreement is still possible. The briefing does not reach a conclusion but identifies two principle areas of difference between the parties, which must be resolved before an agreement can be reached (namely fisheries and the so called ‘level playing field provisions’). There are suggestions that there is progress in respect of the level playing field provisions. The EU is reportedly willing to drop its demand that the UK accepts future state aid rules and CJEU oversight, provided the UK signs up to a ‘shared philosophy’ on future subsidies, and agrees to an independent UK regulator to govern some form of equivalence mechanism with EU standards. These suggestions are however being met with reported resistance by elements of the UK government. In respect of fisheries, whilst the UK and EU have expressed a willingness to compromise, it is unclear what such a compromise would look like.
With the UK having fixed a ‘hard’ deadline for the end of negotiations by refusing to renew the transition period, this may focus the minds towards the end of 2020, resulting in an eleventh hour agreement. There are also suggestions that with Germany having taken over presidency of the EU Council on 1 July, the active involvement of the German government may increase the likelihood of a deal. Notwithstanding this, given the UK and EU’s respective positions in respect of fisheries and the level playing field provisions, it appears we may still be some way off reaching an agreement.
What are the potential future developments?
If no trade deal is agreed
If no trade agreement is agreed between the EU and UK by the end of the transition period, then at 11pm on 31 December 2020 (IP Completion Day) EU law will cease to apply in the UK as if the UK were still a member state. Instead, by virtue of the EUWA (as amended by the EUWAA), all EU law that applies in the UK at the IP Completion Day will be incorporated as a new body of law known as retained EU law. This retained EU law will be a snapshot of the EU law applicable in the UK at the IP Completion Day. The UK will not be subject to new EU laws, and its interpretation of the retained EU law will not be subject to the decisions of the European courts after IP Completion Day.
On IP completion day, the UK’s relationship with the EU will in part be governed by the EUWAA, with certain specific arrangements between the UK and EU continuing past IP completion day - of particular note:
- The protections afforded to UK and EU citizens living within the other’s borders
- The financial settlements between the UK and EU and
- The protocol on Ireland/Northern Ireland.
However, where there is no such agreement on future arrangements, the position will be less certain. By way of example, it will be unclear how UK and EU regulatory regimes will interact and areas such as customs and tariffs will be governed by WTO rules.
If a trade deal is agreed
It remains unclear what form any trade agreement would take, and more fundamentally, how wide-ranging any such agreement would be. The EU have made it clear that they expect an all-encompassing agreement that will govern each aspect of the EU’s relationship with the UK. Conversely, the UK has shown more willingness to address individual elements of the relationship independently, tabling 10 draft treaties on 19 May 2020, each addressing a separate aspect of the UK’s relationship with the EU (free trade, fisheries, air transport etc.).
Depending on which areas a trade agreement would cover, it may be that aspects of the relationship not subject to a trade agreement would be governed by the EUWAA. It is however unclear how those areas not covered by a trade agreement or the EUWAA would be governed.
What should businesses be doing to prepare for IP Completion Day from a commercial contract perspective?
With uncertainty surrounding whether or not a trade agreement will be reached by the end of the year, businesses would be prudent to plan for a no-deal scenario. With the potential for customs checks and the application of tariffs, some key considerations for businesses are as follows:
In respect of existing contracts:
- Consider the commercial impact and allocation of risk around changes in trading conditions, including:
- Currency fluctuations.
- Potential delays in delivery and
- New or additional tariffs and duties
- If contractual performance is reliant on a particular feature of EU law, such as free movement of services, goods or workers, any ‘force majeure’ and ‘material adverse change’ provisions should be reviewed.
- If faced with higher costs or unfavourable trading conditions, consider a commercial negotiation and variation of existing terms.
- Review termination clauses to understand whether higher costs and unfavourable trading conditions resulting from the UK leaving the single market and customs union would give rise to any right to terminate.
In respect of new contracts:
- Consider whether to include a price adjustment mechanism to take account of changes in performance costs, e.g. dealing with new import tariffs, new requirements for licensing, permits etc. following the UK’s exit from the single market and customs union.
- The definition of ‘force majeure’ and ‘material adverse change’ should be tailored so to remove any doubt as to whether the UK leaving the single market and customs union is covered.
- Consider whether any Brexit related factors should or should not allow a party to terminate, and expressly state the position.
- Specific dispute resolution procedures, such as arbitration, should be considered, as they minimise uncertainties surrounding the enforceability of judgments between the UK and the remaining EU member states.