Countdown to Brexit: what are the legal implications?

Following confirmation of a “leave” vote, many businesses will already be turning their attention to what happens next. The most important message is that the referendum result does not trigger any automatic legal changes; neither does the UK’s formal notification that it will be withdrawing from the EU. The UK will continue to be a member of the EU for the time being, and the status and effect of all UK and EU law remains unchanged for now, and possibly for some time in the future.

Beyond that, however, much remains to be debated and negotiated – such as the shape of trading agreements between the UK and the EU, the status of EU-derived law, thorny issues such as acquired rights, and the UK’s relationships with non-EU states.

We examine below some of the pressing questions arising from the UK’s decision to withdraw from the EU. For more detail on some of the specific legal areas in which we foresee major change on the way, see our dedicated Brexit page here.

What are the main take-away points?

• Neither the referendum result nor the UK’s formal notification to the EU has any immediate legal effect. From a legal perspective, it will be ‘business as usual’, probably for some time to come.
• The next step is for the UK to give formal notification to the EU of its intention to leave. This will start the withdrawal process, which must be concluded within two years unless an extension can be agreed (which requires the consent of all twenty-seven remaining Member States).
• The future trading relationship between the UK and the EU could take one of a number of different forms; which form it takes will have significant implications in terms of the movement of goods, services, people and capital.
• The UK will also need to undergo a major legislative project to identify which areas of EU-derived law will stay, which will be modified and which will no longer have effect in the UK.
• Each of these processes is likely to involve much consultation with the UK public and industry. Businesses have an important part to play in shaping the environment that they will be trading in, domestically and cross-border.

How does the withdrawal process work?

The legal mechanism for a Member State to leave the EU is set out in Article 50 of the Lisbon Treaty:

• the process starts when the UK provides formal notice to the European Council of its intention to leave;
• once that notice has been given, negotiations will begin on the arrangements for the UK’s withdrawal. This will almost certainly take place in parallel with negotiations on a second agreement, governing the relationship between the UK and the EU post-Brexit;
• the EU’s negotiating position will be driven by the remaining EU Member States, through the European Council and the separate Council of the European Union, which will set a mandate for the European Commission to carry out negotiations. Any deal concluded would need to be approved by the European Parliament, meaning that MEPs from non-governing parties in Member States will have a say, and are likely to have an influence during the negotiation stage;
• Article 50 places a two year time limit on the negotiation of a withdrawal agreement, failing which the UK ceases to be a member of the EU without any provision on either side for what happens next. That time limit can be extended, but only with the agreement of all other EU Member States, an outcome which cannot be guaranteed by any means;
• if an agreement cannot be reached by expiry of the notice period (either the original two years or as extended), the UK and EU would revert to trading on WTO terms, involving tariffs being applied to the export of goods and services. The UK would be free to negotiate deals with individual Member States in the short term, but the EU would likely insist on any such deals being replaced by an EU-wide agreement in due course.

What will the UK’s relationship with the EU look like post-Brexit?

It is too early to predict what the withdrawal agreement between the UK and the EU will look like, but possible options include:

• the UK being part of the European Economic Area (the model currently followed by Norway, Iceland and Lichtenstein), through one main agreement. Under this arrangement, the free movement of goods, services, people and capital would continue, subject to the UK remaining bound by certain EU legislation in those areas (and co-operating in others);
• the UK being part of the European Free Trade Area (the model currently followed by Switzerland), and enter into a series of bilateral agreements. This might provide for different arrangements concerning the movement of goods, services, people and capital, and would be likely to involve less EU legislation being retained and adopted; or 
• the UK agreeing a single free trade agreement with the EU (as many non-European states such as Canada and South Korea currently have in place).
  

The referendum was not intended to seek views on what the UK’s relationship with the EU should look like post-Brexit. Being such a fundamental issue, there has been some speculation that the government will call a snap general election, with the aim of obtaining a clear mandate for how the UK wishes to trade with the EU. That itself would require a two thirds majority in the House of Commons (so would require the support of opposition MPs), or else the loss of a no-confidence vote in the government.

The UK would also need to agree new free trade deals with non-EU states that are currently covered by trade deals with the EU, such as Canada and South Korea. These may closely reflect the current deals that the EU has in place with those states, but this would be dependent on the government’s approach and ability to negotiate a suitable deal with those states.

What will happen to existing EU-based law?

Law emanating from the EU can apply within the UK in one of three ways:

• it may be directly effective, as is the case for EU Treaties and Regulations, such as the incoming General Data Protection Regulation;
• it may have been implemented in the UK by domestic legislation, either as an Act or as a statutory instrument (for example the Public Contracts Regulations 2015); or
• it may be part of the common law (case law), following a decision of the Court of Justice of the EU.

It is extremely unlikely that this whole body of law would be revoked en masse, by simply repealing the European Communities Act 1972. The most likely scenario is that the government will choose to amend that Act to provide that no new EU law will apply after the UK completes its withdrawal, and that certain specific EU law (such as the Treaties governing the operation of the EU and financial contributions to it) would no longer have effect. Beyond that, all existing laws are likely to be preserved pending further review.

If that were the case, the government would then be faced with the daunting task of deciding:

• which EU-derived domestic laws should stay, be modified, or be repealed; and
• which directly effective EU laws currently apply to the UK, and which should be transposed into national law, either as they currently are or in modified form.

The government would also need to take into account the vast array of guidance from European regulatory bodies, such as the European Banking Authority and European Securities and Markets Authority in the financial services sector, which currently applies to businesses and consumers.

This exercise has been described as potentially one of the largest legal projects ever undertaken. In many areas, such as equality, consumer protection, and competition, EU-derived law has been developed largely in line with successive UK governments’ policies. A large amount of this law may therefore be left intact, although even in those cases amendments might be wanted or needed, for example to replicate guidance of EU regulators.

What seems inevitable is that there will be a sustained period of intense legislative activity. Where potential changes would affect the rights of businesses or consumers, we would expect this to involve consultations with industry. This is now the time to engage with regulators and consultations in order to have a say in the future shape of regulation in your industry.

Finally, the government will need to decide on whether previous EU case law that has been followed by UK courts should continue to be binding. If not, those UK cases relying on EU law will also cease to be binding, which could cause real difficulties in unpicking a large body of case law. In the absence of (or pending) legislation on this, the courts will need to decide how to treat EU case law, and domestic case law following it.

What about acquired rights?

One of the most keenly negotiated issues between the UK and EU will be that of acquired rights. Where a person or business has been granted rights under current or previous EU law (such as the freedom to establish, move or reside), the withdrawal agreement will need to make provision for whether they retain those rights, temporarily or permanently.

In the absence of agreement, there is some support in international law for the concept that rights which have been acquired under an international treaty should survive termination of that treaty. However, the reality is that each State will be able to act unilaterally when it comes to those within its jurisdiction.

This may well be an area of real concern for your business, both in terms of any rights you may have acquired as a business, and the rights and status of your workforce. On one view, there is a clear political benefit to both sides in taking a generous approach to acquired rights in order to protect businesses and citizens residing overseas. Failing that, it would seem sensible at least to allow for appropriate transition arrangements, in order to minimise disruption and economic damage to all.

The political reality

The guidance in this article is based on UK, EU and international law. However, very little of this is set in stone and the precise shape that Brexit will take will be determined more by political will than strict legal interpretation. This inevitably means a period of some uncertainty, initially while governments in the UK and other EU Member States look for a mandate upon which to commence negotiations.  This will be followed by an intense period of negotiation and, in all likelihood, an equally intense period of legislative activity.

We will continue to follow developments closely and provide advice based on the developing political and legal landscape, both generally and on areas of specific concern to businesses. We would be happy to discuss with you the areas that will most affect your business, and what you can do to prepare and minimise any disruption. For the time being, though, the key message that bears repeating is that we are not expecting any major changes in the immediate future.

Visit our Brexit page for more on the legal implications of Brexit for your business, or register to receive regular Brexit updates by email.