What Next?
The reality of Brexit remains some months away, and we are yet to see what flavour of Brexit the UK agrees, or has forced upon it. For most aspects of commercial activity, it is too early to make firm predictions about what the new trading landscape will look like, or how businesses might want to prepare for it. Having said that, and looking through a legal lens rather than an economic one, there are some commercial issues which affect business where the issues themselves are already becoming clear and where businesses who trade within Europe might want to start thinking ahead on contract commercials and the points to revisit, or open afresh, in that next contract review with your UK or European trading partners, or internal board meetings on operational matters. These comments apply to UK businesses but also to European business trading with or from the UK under relationships governed by English law. Put bluntly, if you are entering into new trading contracts now, to what extent can you Brexit-proof them based on what we currently know? If you are planning or undertaking legal or legally influenced work as part of your day to day activity, what should you be thinking about? How much might the future legal landscape change in a commercial context?
Some areas of commercial activity are going to be affected more than others as they are more subject to EU regulation. Anything to do with data protection, employment, environmental, food processing, energy and financial services could see greater impact. Much less affected are issues to do with property, tax (other than VAT), litigation and company law.
The easy bits first: what parts of your current commercial arrangements are not likely to be affected? English contract law is built around English legal principles rather than European ones, and so the fundamentals of any trading contracts which are subject to English law should not need to change as a result of Brexit. But some elements within them, such as the dispute resolution clauses, may benefit from fresh thought. Reciprocal enforcement arrangements currently exist which allow a UK party to sue on contracts with its European partners in the UK courts and recover any debts or judgements from defendants or assets in European countries, with few problems, and of course the same applies for companies based in mainland Europe looking to enforce rights in the UK. Although changes to this arrangement may not be imminent, over a relatively short time this could change and if you are in the process of negotiating long term contracts, a Brexit-proof dispute resolution clause, or other bespoke adjustment, might be worth bolting into the contract. For those already using arbitration to resolve their disputes, little if anything will change and any arbitration awards will be just as easily enforced in the UK and Europe as anywhere else in the world.
But what about contracts that become much harder, if not impossible, to perform as a result of the relevant regulatory regimes changing or disappearing altogether, or some other fundamental contract assumption no longer being valid as a result of a bumpy Brexit? Many agreements contain a force majeure clause which suspends or terminates the contract if one party is prevented from being able to perform its obligations due to reasons outside its control. Does Brexit fall within such a provision? Almost certainly not, based on the way such clauses are currently drafted. But do you want specific potential aspects of Brexit to become a force majeure event that enables, say, one party to terminate a European distribution or agency agreement, or perhaps remove exclusivity over territory, under which you may have distributed goods to the UK or mainland Europe over many years, if customs or other fundamental economic or regulatory assumptions change? If you are that contract principal, would you prefer a new distributer based in mainland Europe to avoid tariffs, in which case a contractual clause that enables you to terminate the existing contract without breach might be very useful.
As for those heavily regulated areas such as employment or data protection, the impact is most likely to come from the inconsistences and uncertainties as the UK slowly disentangles itself from the umbrella of EU regulations over a period of many years. The day after Brexit, whatever the flavour of the deal, all of this existing regulation will continue largely unaffected as it remains separately embodied in UK law and will take substantial time and effort to disentangle, even assuming that the political will is there.
Employment has been heavily influenced by EU policies and the freedom of movement of people has been liberating for international employers. It is also the area which, perhaps more than any other, featured in the UK referendum debate and became part of the reason that the UK opted for Brexit. This area is going to see significant changes to the legal and regulatory framework, and for those wishing to keep up to date you may wish to follow our programme of updating seminars in London, Paris or Milan. The current view is that it is very unlikely that the EU and the UK will agree to maintain freedom of movement, which means a system of visas and perhaps difficulties for low skilled workers.
Data Protection is one of those areas which is heavily EU regulated, but where there is obvious commercial and practical benefit in maintaining harmonisation of standards and activity. Trade reasons dictate that to do otherwise would create significant problems. The new General Data Protection Regulation, due to come into force in the UK on 25 May 2018, seems to be a very reasonable basis for continuing to operate and for businesses trading internationally with or from the UK, it is difficult to envisage sensible alternatives. As yet, however, there is no specific detail on how this area might evolve.
Areas such as competition law are likely to become more complex. If the UK follows EU competition legislation (perhaps with similar terms as Norway) then little may change. But if the UK follows other routes then it is likely that EU competition law would cease to apply to the UK and the UK would cease to be bound by its decisions. Over time, parallel regulatory regimes are likely to emerge with UK and EU regimes taking an interest in relevant commercial activity, which could quickly add to the cost of compliance. Watch this space for further commentary on potential competition issues as they emerge, from our Brussels based competition expert, Alberto Dal Ferro, an active advocate before the EU competition courts. How will this affect merger restrictions for public interest grounds, state aid and public procurement? It promises to be an interesting area.
Intellectual property issues lie at the core of many trading business, and the harmonisation offered by the EU has undoubtedly made it easier, and cheaper, to establish and maintain an IP portfolio across Europe. Even under the Article 50 process, EU trademarks and registered community designs will still provide protection until at least mid 2018, and after that, it seems highly likely that a there will be a process for them to be converted into UK rights, which would avoid the need for holder of these rights to rush to register them now as stand alone UK rights. The workload within the UK Intellectual Property Office would be vast, if it were otherwise.
And what should you do if you are in the process of filing new trademark or design right applications now? You could file both UK and EU applications, or just EU applications and follow whatever mechanism for conversion later emerges. Since most business will require protection in the EU after the UK has left, the latter option would seem most sensible. Similar comments apply to patents, which currently benefit from a concept under which it is possible to litigate the EU single (unitary) patent in Unitary Patent Courts, one of which is being established in London. Although the concept originates from EU regulations, the Unified Patent Court Agreement is an international agreement, not an EU agreement, and the European Patent Office is not an EU institution. At present the UK government is pushing ahead with the UPC despite Brexit. Uncertainty exists. This is an area requiring ongoing review.
Tax is a vast area, but one point to consider for those trading internationally are the current provisions for withholding taxes on cross border payments, which are generally eliminated by EU regulations. Post Brexit, payments to and from the UK will not be protected and complex tax treaties will have to fill the void. Will the UK adopt a taxation position which results in the EU declaring it a tax haven? Will the UK continue to implement directives such as the Anti-Tax Avoidance directive? Will the EU states seek to impose heavier taxes on subsidiaries of UK companies and services provided from the UK? Will UK VAT continue to align with the EU?
Environmental law is another vast area where the task of extracting the UK from EU regulation would be utterly overwhelming, at least in the short to medium term. This is likely to mean that the UK legislates for EU law to continue after Brexit unless amended or revoked. Over time, deregulation could occur, but if access to the single market is retained then expectations are that the UK would be required to continue to meet EU standards whilst having no influence over those standards.
Procurement is an area dominated by EU regulation, but in reality, it is global regulation that also impacts on this area. The World Trade Organisation’s Government Procurement Agreement (GPA) sets standards which have cascaded into EU regulation and from there into UK legislation, and it is difficult to envisage the UK withdrawing from the GPA standards. Politically, and arguably on any sensible basis, it is hard to see why the courts or politicians would want to permit a system under which public money could be spent without on objective, transparent and fair system for ensuring the best value is received. It seems likely that if the EU framework were abandoned then its replacement must be a form of GPA compliant rules which may not, in reality, be much different.
Summary
At some point the focus of attention will gently shift from the political and economic, to the commercial practicalities, many of which will be grounded in this new legal landscape. The uncertainty can create commercial risk; what worked yesterday may not work tomorrow. We are likely to see evolution not revolution so there is plenty of scope for incremental adjustment as the trading environment changes, but perhaps the biggest legal risk for business is assuming nothing has changed, and taking false comfort from out of date processes and procedures. The priority for the coming months is to stay up to date, and invest time in process and compliance review.
Article published: 11th April 2017
