UK: Brexit Stage Right - What Is The Legal Position Now The UK Has Voted To Leave The European Union?

On 23 June 2016, the UK voted to leave the European Union, the final count confirmed 48% in favour of Remain and 52% for Leave.

Against this background, our public law experts examine the process for withdrawing from the EU, the options for the UK as it negotiates a new relationship with the EU, and the pace and degree of change to the UK's legal landscape as it prepares for full Brexit. Our Brexit Untangled site contains a range of other resources for industry sectors and legal specialisms.

The exit procedure

The starting point is that, now the UK has voted to leave the EU, the process by which it does so will take a number of years, and in the meantime our legal landscape is likely to remain substantially unchanged.

The mechanism for exit lies in Article 50 of the Treaty on European Union. Under Article 50, the UK must notify the European Council of its intention to leave the EU. There will then follow a period during which the government and the European Council negotiate the withdrawal agreement covering the terms of the UK's exit and its future relationship with the EU.

The UK would formally leave the EU - in the sense that the EU Treaties cease to apply to it - on the date on which the withdrawal agreement comes into force or two years after the date of its notification of withdrawal, whichever comes earlier. However, this period can be extended by unanimous decision of the Council in agreement with the UK government.

The negotiation process is likely to take at least two years due to the complexity of the issues in play and the range of interests to be considered. Indeed, the government's view is that the negotiations will take up to 10 years.

The leave campaign considers that to be a gross overestimate - during the Q&A session which we hosted at our Birmingham office on 1 June, Michael Gove indicated that he considers that the negotiations will take around four years. Evidence given to the House of Lords European Union Select Committee indicated that on the basis of negotiations for other trade deals between the EU and non-EU countries concluding the withdrawal agreement could take between four and nine years.

At the end of the negotiations the withdrawal agreement will need to be ratified by both sides, a process which - at least in the EU - is itself unlikely to be swift.

In the UK, the withdrawal agreement will be subject to the same process for ratification as any other international treaty. Under sections 20 and 24 of the Constitutional Reform and Governance Act 2010 the agreement would be laid before Parliament with an explanatory memorandum for 21 sitting days. During that time either House could resolve that it should not be ratified, but only the Commons could delay ratification indefinitely.

How smoothly that process goes will depend on a range of political considerations. These include the extent to which the government keeps Parliament apprised and 'on side' during the negotiation process and whether the pro-EU majority of MPs wish to use their numbers to frustrate attempts by any anti-EU successor to the current government to establish a very limited form of ongoing relationship with the EU.

Once ratified, the withdrawal agreement will be implemented by an Act, or Acts, of Parliament. Legislation will also be required to resolve the position in relation to existing domestic law which gives effect to EU law - the foremost example being the European Communities Act 1972 and the regulations made under it (which we discuss below).

However, on the EU side the withdrawal agreement may touch on areas falling within the competencies of the 27 remaining member states, as well as the EU itself. To the extent that this is the case, member states will need to be involved in the ratification, which could make the process much longer and more complex - particularly where their own domestic arrangements require a referendum on ratification.

Further complexity may be added depending on the specifics of the UK's ongoing relationship with the EU, as some of the options discussed below would themselves require negotiation of a separate treaty.

In view of the above, and despite the vote to leave the EU, it will be some years before the UK can actually do so, during which time there may be huge political, but very little legal, change. Indeed, it was an interesting feature of the new settlement with the EU negotiated by the Prime Minister prior to the referendum that it would immediately lapse in the event of a vote to leave but would take effect if the UK voted to stay. In the immediate period following the referendum the UK may have seen more legal change - such as the 'emergency brake' on benefits - than if we had voted to stay.

The options following the exit

The nature of the ongoing relationship that we negotiate with the EU will in turn shape the way in which the UK's legal framework is likely to change when we eventually do exit. There are a number of possible models which the UK could use as a basis for negotiations depending on the degree to which it wishes to distance itself from the EU. As a general rule of thumb, the greater the distance, the greater will be the possibility of change to the UK's existing legal framework.

The WTO model and free trade agreements

The first two models are those which involve the most comprehensive legal break from the EU. In the most radical of these the UK could simply rely on trade governed by the World Trade Organisation's ('WTO') Most Favoured Nation criteria.

Under this model the UK and the EU would each be in the same position as regards the other as any other country with which they had no specific agreement. UK companies that wished to trade with the EU would need to pay tariffs - which range between 0.9% for wood and paper up to 42.1% for dairy products. UK products would also need to continue to meet EU standards.

Although a free trade agreement with the EU, such as that concluded between the EU and Canada in 2014, could facilitate tariff-free trade, it would not lift the burden of regulatory compliance. Given the importance that the EU places on regulatory convergence as part of such free trade agreements, it is highly likely that the UK would be required to retain - and businesses comply with - EU compatible regulation with respect to the areas on which the agreement touched.

Customs union

Another option would be to enter a customs union with the EU. This is the model which has been adopted by Turkey - although in that case it was intended to act as a staging post to eventual EU membership. A customs union would allow the UK to access the Single Market for goods without the need to pay tariffs, the main difference being that the UK would levy a common tariff with the rest of the EU on imports from countries outside the customs union.

Again the UK would need to continue to apply certain EU rules in relation to such goods and so there would be little substantive change in this area. In addition, in some areas - such as competition, intellectual property and consumer protection - Turkey is required to harmonise its laws with those of the EU and if a similar model was adopted by the UK it is likely that we too would need to ensure that our domestic law tracked that of the EU in certain respects.

A customs union would not apply to services and theoretically the UK would therefore be able to shape its own regulation in this area - a freedom offset by the importance of the EU to the UK's service industry.

European Free Trade Association ('EFTA') and the Swiss example

Alternatively, the UK could re-join EFTA which it co-founded in 1960 and which currently includes Iceland, Liechtenstein, Norway and Switzerland. EFTA is a regional free trade association built upon a series of free trade agreements which govern economic interactions both between its members and with other countries.

However, it does not have a free trade agreement in place with the EU and therefore membership of EFTA alone would not provide the UK with a particular form of relationship with the EU. For Iceland, Liechtenstein and Norway that relationship is secured through the European Economic Area Agreement - discussed below - which EFTA manages.

By contrast, Switzerland rejected membership of the EU's predecessor - the European Economic Area (the 'EEA') - in a referendum in 1992 and instead concluded a series of bilateral agreements with what became the EU allowing it access to the Single Market in specific sectors. Switzerland has around 120 such bilateral agreements covering areas such as the free movement of persons, the elimination of technical barriers to trade, public procurement markets, civil aviation, overland transport, agriculture and research. It is also an associate member of the EU's fragile Schengen common travel area (to which the UK has not signed up).

The Swiss agreements provide for the free movement of goods (although not services) by removing tariffs, but Swiss goods must still meet EU regulatory requirements and, like Turkey, Switzerland is bound to follow EU law in certain areas. However, for reasons of economic policy even where it is not so obliged, a large part of Swiss domestic law aligns with EU law in areas such as technical standards, intellectual property, consumer protection and employment law.

Following such an example may not therefore lead to a great deal of change in many areas of UK law which are influenced by the EU. In any event, the Swiss model is unlikely to be available to the UK. The complexity of having to put in place such a large number of agreements that continuously need to be updated - together with the Swiss referendum in February 2014 which voted to cap immigration (including from the EU) - led the EU to conclude that the Swiss model is not viable in the longer term and in May 2014 negotiations were launched with a view to concluding a framework agreement (something akin to the EEA Agreement), including the possibility of a role for the Court of Justice of the EU as a dispute resolution mechanism.

The EEA

The other three EFTA countries - Iceland, Lichtenstein and Norway - have developed a relationship with the EU through membership of the EEA (it is not possible to be a member of the EEA without also being a member of either the EU or EFTA).

The EEA Agreement enables these three states to participate fully in the Single Market. It covers the four freedoms - the free movement of goods, capital, services and persons - together with competition and state aid rules. It also covers areas related to the four freedoms such as consumer protection, company law, environment, social policy and the collection of statistical data for the purposes of political and economic decision-making.

In addition, the EEA Agreement provides for cooperation in policies such as research and technological development, education, training and youth, employment, tourism, culture, civil protection, enterprise, entrepreneurship and small and medium-sized enterprises.

Iceland, Lichtenstein and Norway are bound by the EFTA Court - confusingly named as its jurisdiction does not cover Switzerland - which was set up to enforce adherence to the EEA Agreement and through this the relevant EU laws. Through Article 6 of the EEA Agreement, the provisions of the EEA Agreement must be interpreted in conformity with the relevant rulings of the EU's Court of Justice given prior to the date of signature (2 May 1992). Beyond this obligation, the EFTA Court tends to refer to both EU jurisprudence and the opinions of the EU's Advocates General to ensure uniform interpretation of EU and EEA law.

In practice, therefore, if the UK left the EU but remained a member of the EEA (which would necessitate re-joining EFTA), it would still be subject to the vast majority of current and future EU law which affects businesses. For example, Norway has incorporated nearly three quarters of EU legislative acts into its domestic law.

The pace and degree of change

If the UK chose to join the EEA, or followed the Swiss example, it is likely that a great deal of current EU law would still affect businesses through one mechanism or another.

If a more distant relationship was adopted - through a customs union, free trade agreement or reliance on the WTO's rules - there is no doubt that there would be some areas in which the UK would no longer be required to follow EU law and in which it would be free to legislate as it saw fit.

As with the process of withdrawal, significant change to our legal landscape would not - indeed could not - be immediate. Currently EU law impinges on UK law in a number of ways -

  • Direct effect - EU treaty provisions and EU regulations are directly effective in the UK, and do not require implementation by domestic legislation. Domestic legislation may, however, need to be amended to reflect the EU position.
  • Domestic implementation - EU directives need to be given effect in the UK through domestic legislation. This is most commonly achieved through regulations made under section 2(2) of the European Communities Act 1972 but has, on occasion, been effected through primary legislation.
  • Interpretation - UK courts must determine cases brought in relation to EU law (whether directly effective or implemented domestically) in line with the fundamental principles of EU law and the decisions of the Court of Justice of the EU.

Setting to one side any requirement to retain elements of EU law as part of our ongoing relationship with the EU, upon leaving the EU, the UK will cease to be bound by EU law which had previously had direct effect. This will leave significant gaps in the UK's legal framework which Parliament will be free to fill through domestic legislation.

However, the development of domestic policy, and the passing of legislation to enact it, will take time. An interim solution would be to legislate for such EU regulations to continue in force until domestic replacements can be enacted, and even this would not be entirely straight forward as domestic equivalents will need to be found to EU regulatory bodies which no longer have jurisdiction over the UK.

Nor would the development of domestic policy and legislation be a matter for the Westminster Parliament alone as some matters (such as the environment) will be within the competence of the devolved institutions. Whereas any divergence between the UK's constituent nations would previously have been constrained - at least to some degree - by the requirement of each to comply with EU law, this constraint will be removed.

The same points arise in relation to EU law which has been implemented through domestic legislation. Each piece of implementing legislation must be individually assessed to consider whether it can be retained, amended or replaced with something entirely different. In addition, those other pieces of legislation which, although not serving to implement EU law, are shaped to accommodate it, must also be capable of review. To give some indication of the scale of this undertaking it is estimated that - up to 2012 - the EU and the regimes which it succeeded (such as the European Economic Community) had adopted more than 100,000 legislative acts (directives, regulations and decisions).

The level of civil service resource required to complete such a review and the need for the government - together with the devolved administrations where necessary - to frame the relevant policy would require any such undertaking to take place over a period of years. At the same time the UK will begin negotiating its own free trade deals with countries outside the EU. It is likely, in the interim, that the only feasible approach will be to legislate so that the current position is preserved as the review process proceed.

When the UK's lawmakers do turn their attention to the law in relation to a particular area or sector there is no guarantee that they will take a different course to that which has been taken by the EU. For example, it may be necessary to maintain much of the regulation which ensures compliance with EU standards so as to facilitate access by manufacturers and service providers to the Single Market.

In addition, there may be no better or more preferable approach in a particular area than the one which the EU has taken. We will have had some influence in shaping that EU law and in some areas it will have actually been based on UK models. It may be unlikely that we would plot a fundamentally different course in such areas on leaving the EU.

It is also interesting to consider what approach the courts will take when considering laws originating in the EU which have been retained post-exit - even if only pending review. Although there would no longer be an obligation to apply EU principles or follow EU jurisprudence it is likely that UK courts would have regard to the latter when considering domestic laws of EU origin. This is particularly the case where the purpose of retaining the law is to ensure access to the Single Market for UK products and services.

Conclusion

Although there may be short term economic effects of a Brexit - the Commons Treasury Select Committee refers to the plausibility of a weakened pound, reduced foreign and direct investment and increased borrowing costs - the consequences for the UK's legal landscape will take some years to manifest. Any change is likely to take place in a gradual and piecemeal fashion with different areas affected at different rates and times depending on the priorities of government policy.

The degree to which any change is substantive, when it comes, will depend on our ongoing relationship with the EU - a relationship which, if we are to believe the Chancellor, the government has yet to begin thinking about. If we choose to retain close economic ties with the EU there may actually be little change to the laws affecting businesses and even if we rely on the WTO's rules or negotiate a free trade agreement with the EU, UK products will still need to meet EU regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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