The Withdrawal Agreement was agreed between the United Kingdom’s and European Commission’s negotiators on 14 November 2018, potentially bringing to an end the withdrawal negotiations that had started with the UK government giving notice on 29 March 2017 to leave the European Union. Much has been made of the Withdrawal Agreement by politicians and the press since its contents were announced, but there has been little to explain what the Withdrawal Agreement will mean in practice to businesses.

In this downloadable article we explore the following:

  • How the Brexit Withdrawal Agreement will affect trade
  • What the Withdrawal Agreement means for employers
  • Litigation during the transition period and beyond

How will the Brexit Withdrawal Agreement affect trading?

The Withdrawal Agreement was agreed between the United Kingdom’s and European Commission’s negotiators on 14 November 2018, potentially bringing to an end the withdrawal negotiations that had started with the UK government giving notice on 29 March 2017 to leave the European Union. Much has been made of the Withdrawal Agreement by politicians and the press since its contents were announced, but there has been little to explain what the Withdrawal Agreement will mean in practice to businesses. In this article we seek to explain the key parts of the Withdrawal Agreement and their practical relevance to UK businesses.

Overview

Is the Withdrawal Agreement now final? The Withdrawal Agreement still needs to be approved by the UK parliament and by the EU. An EU summit has been called for 25 November 2018 to approve the deal and it is also expected to be put before Parliament for UK approval in December 2018. If the Withdrawal Agreement is not approved by the UK Parliament and the EU then it may be possible for certain elements of it to be renegotiated. If the Withdrawal Agreement cannot be agreed and approved in any form before 29 March 2019 (the date the UK is to leave the EU) then it is possible the UK could leave the EU without a deal. This article focuses on the contents and effect of the Withdrawal Agreement, but unless and until it is agreed and approved it would be prudent for businesses to continue to plan for a no-deal scenario.

Transition Period

 Assuming the Withdrawal Agreement is approved in its current form then on 29 March 2019 (the official date of the UK leaving the EU) a transition period will commence, which is scheduled to last until 31 December 2020 (although it may be extended – see “How does the transition period end?” below). During the transition period the UK will, in general, be treated as an EU member state, except that it will not participate in the institutions and governance structures of the EU (e.g. the European Commission and European Parliament). The UK will continue to participate in the EU single market and customs union during the transition period and will consequently be subject to EU law during that time, together with the EU’s supervisory, judiciary and enforcement mechanisms (including the European Court of Justice).

How will the transition period end?

The UK and the EU have agreed to work towards agreeing and ratifying an agreement on the future relationship between the UK and the EU by 1 July 2020. If they do so then the agreement should take effect at the end of the transition period. What this agreement will say is not currently known, although a non-binding political statement has been released which sets out some basic terms. Alternatively, the UK may request an extension of the transition period, which must be submitted by 1 July 2020. If the extension is agreed then the transition period will continue for the extended period. If there is no agreement on the future relationship by the end of the transition period (whether extended or not) then the “backstop solution” will apply.

What is the backstop solution?

 The backstop solution has been developed to ensure that there is no hard border between Northern Ireland and the Republic of Ireland. It will be a single EU-UK customs territory, which will mean that there are no tariffs, quotas or checks on rules of origin between the UK and the EU (although there will be some compliance checks – see below). There will be rules to ensure a “level playing field” between the EU and UK and the UK will remain aligned with EU single market rules that are needed in order to prevent a hard border. The most relevant of the level playing field rules to most businesses’ everyday affairs are likely to be the rules surrounding competition and labour and social protection. These will ensure that anti-competitive laws continue to apply to the EU and the UK and that the UK does not reduce the protection currently afforded to employees and workers (such as non-discrimination and equal pay). In order to ensure there is no border between Northern Ireland and Ireland, Northern Ireland will also be subject to an additional layer of EU regulation over the rest of the UK – the EU’s Customs Code. As a result of this there will be checks on goods travelling from the rest of the UK to Northern Ireland (but not on goods travelling from Northern Ireland to the rest of the UK), to ensure compliance with EU standards to protect consumers and businesses in the single market.

 

What does the Withdrawal Agreement mean for employers?

In all the drama following the publication of the draft Withdrawal Agreement, some pertinent and practical questions have gone unanswered regarding what the Withdrawal Agreement means for employers.

Transition Period

Whilst a large proportion of UK employment law derives from the EU, existing employment rights and laws will not immediately fall away after exit day. The transition period that runs from 29 March 2019 to 31 December 2020 (but can be extended beyond this date), enables the UK to exit the EU while simultaneously maintaining some – but not all – of the advantages of EU membership.

 The UK will have no role in governing the EU, but EU laws, rules and custom arrangements will still apply during the transition period. This includes employment laws and rights that derive from the EU, such as Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), the Working Time Regulations 1998 and the General Data Protection Regulation.

Existing immigration laws will continue during the transition period. EU citizens will continue to have the freedom to move, live and work freely in the UK until the end of the transition period on 31 December 2020. EU citizens who already reside in the UK or move to the UK before the end of the transition period will be allowed to remain beyond the transition period. Anyone who remains in the UK for five years will be allowed to apply for permanent residence. The same rules apply to UK citizens moving to, living and working in the rest of the EU.

Those who wish to remain after the transition period must complete residence application forms. The UK has already announced details of its settlement scheme application process, due to open on 30 March 2019. Employers that rely on EU workers may wish to familiarise themselves with this application process, so that they can assist their workers that intend to apply.

In summary, for as long as the transition period lasts, the right to freedom of movement, the rulings of the European Court of Justice, and existing employment laws will continue to apply in the UK. Once the transition period ends, and assuming the backstop solution is not activated, the UK will be able to divert from EU employment and immigration laws as it sees fit, unless it agrees otherwise under an agreement governing the future relationship of the UK and the EU.

Despite the impact of the transition period on immigration and employment laws and rights being likely to be limited, some businesses have reported difficulties in filling positions that they might otherwise have recruited from EU applicants. Official figures back this up and indicate a slowdown in net EU migration since the start of the withdrawal process. It seems that the uncertainty surrounding the withdrawal process has already had an impact on migration, causing recruitment issues for some businesses. Whether this remains the case or whether there will be an increase in net migration if the Withdrawal Agreement is approved remains to be seen. In any event, it would be prudent for employers who rely on workers from the EU to take steps to ensure that they will not be left with a skills gap.

Backstop

In the event that a trade deal cannot be struck by the end of the transition period, the backstop solution within the Withdrawal Agreement would see the UK enter into a “single customs territory” with the EU. While this prevents a hard border between Northern Ireland and the Republic of Ireland, the UK would remain tied to EU laws around competition, environment, labour and social protection to ensure a “level playing field” between the UK and the EU while trade negotiations are ongoing.

Freedom of movement would still end with the transition period, but the UK’s ability to diverge from the EU employment laws would be restricted. Non-regression clauses in the Withdrawal Agreement ensure that certain employment rights and rules cannot fall below current EU standards, including “fundamental rights at work, occupational health and safety, fair working conditions and employment standards, information and consultation rights at company level, and restructuring”. This only applies to laws and protections in place upon the expiry of the transition period. Any new EU laws or rights introduced after the transition period will not apply to UK employees and workers.

In short, if the backstop solution is activated, the UK will be restricted in its ability to diverge from existing EU employment laws until the backstop arrangement is ended.

Beyond Brexit

As mentioned above, the Withdrawal Agreement will allow EU citizens to take up residence in the UK during the transition period and remain there even after the UK leaves the EU. Beyond this, employers know little about what UK immigration and employment laws will ultimately look like once the transition period and the backstop solution have ended.

However, post-Brexit, and subject to any future agreement between the UK and the EU governing their relationship, the UK Government will have the freedom to propose changes to immigration and employment laws as it sees fit.

At this point, the Government may seek to amend employment laws to make life easier for employers. Commentators have suggested that potential changes could, amongst other things, include introducing a cap on compensation for discrimination claims (currently uncapped) or making it easier for employers to harmonise employees’ terms and conditions after a TUPE transfer. However, whether UK employees and workers will be happy to part with rights that they have become accustomed to as EU citizens is another question.

 In respect of changes to immigration laws, Theresa May has recently commented that migration will become skills-based, with EU citizens no longer prioritised over “engineers from Sydney or software developers from Delhi”. This could involve quotas or restrictions on certain skill-sets, which may concern UK employers that rely on recruitment from the continent.

 

Litigation during the transition period and beyond

If the Withdrawal Agreement is approved it will provide welcome certainty regarding the application of EU law and the law governing contractual and non-contractual obligations during the transition period.

Effect of the Withdrawal Agreement

Assuming the Withdrawal Agreement is ratified, we now know the following:

  • EU law will continue to apply during the transition period, which includes any new EU law enacted during that period.
  • UK courts will be required to interpret English law consistently with case law handed down by the European Court of Justice (ECJ) until the end of the transition period. In practice this means there will be no impact on the interpretation of contracts during the transition period.
  • In the case of a contract concluded before the end of the transition period, the question of which jurisdiction’s laws will apply to that contract will continue to be determined by the current EU regime (the Rome I Regulation).
  • Which jurisdiction’s laws will apply to non-contractual obligations will continue to be determined by the current EU regime (the Rome II Regulation).
  • For court proceedings which are ongoing, or which are issued in the English courts during the transition period, jurisdiction will continue to be determined by the current EU regime (the Recast Brussels Regulation).
  • The current EU regime on the recognition and enforcement of judgments (the Recast Brussels Regulation) will continue to apply to any judgment of the English courts which is given before the end of the transition period, even where steps to enforce may only be taken after the end of the transition period.

Litigating post Brexit

Despite now having clarification of the position during the transition period, there remains uncertainty about what the position will be period after the end of the transition period or in the event of a “no-deal” Brexit.

The very nature of disputes means that businesses are unlikely to be planning for future litigation, but many will be wondering how future claims and the enforcement of judgments will be affected after Brexit.

If the Withdrawal Agreement is approved, the Withdrawal Agreement provides that the UK will be required to “pay due regard” to the law of the ECJ after the end of the transition period. Exactly what that will entail is not yet fully known.

We know that the position on the applicable law relating to contractual and non-contractual obligations will remain unchanged. The current rules which determine the law applicable to contractual and non-contractual obligations will remain unaffected as they do not rely on reciprocity.

The position on jurisdiction and enforcement is less clear. Currently, an English judgment is recognised and can be enforced in another member state with ease.

In the event of a no-deal Brexit or if the Withdrawal Agreement is approved but no agreement is entered into on the future relationship of the UK and the EU during the transition period (meaning the “backstop solution” will apply), the current EU regime on jurisdiction and enforcement would cease to apply in the UK from the date of the UK leaving the EU (in a no-deal scenario) or the end of the transition period. In the absence of an alternative solution the UK would have to rely on domestic law for enforcement. Whilst in most cases judgments of the English courts would continue to be enforced in member states, there would undoubtedly be new procedural hurdles and greater time and expense involved. However, it looks likely that the UK government would participate in a number of conventions which would ensure the continued recognition and enforcement of English judgments in member states.

In the event of an agreement being entered into on the future relationship of the UK and the EU during the transition period, it seems likely that the UK government and the EU will agree on a solution to ensure there is cross-border recognition and enforcement of judgments after the transition period. Whether such an agreement can be reached and exactly what that agreement will entail remains to be seen.

 Practical steps for businesses

 There are some practical steps which businesses can consider taking now to help reduce the risks in relation to cross-border disputes which arise in the event of a decision to leave the EU:

  • Businesses involved in negotiating new contracts should think carefully about their dispute resolution and governing law clauses, and ensure those clauses are drafted so that they make clear which law is to govern the contract and which courts are to have jurisdiction in the event of a dispute.
  • Arbitration is not affected by Brexit. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which the UK already is and will remain a party, provides a framework for the enforcement of arbitral awards to 156 contracting parties, including all the EU member states. With the uncertainty ahead, businesses may wish to consider including an arbitration clause in any new contracts. Such a clause may provide greater certainty as a method of dispute resolution.
  • A business which has obtained a judgment of the English courts should take steps to enforce it as soon as practicable to ensure they are able to take advantage of the current EU regime on the mutual recognition and enforcement of judgments. In the event of a no-deal Brexit this enforcement mechanism will be repealed, and this could affect the way future judgments of the English courts are enforced in EU member states.
  • Businesses which are likely to be involved in litigation commenced after 29 March 2019 should seek legal advice on how a no-deal Brexit may affect them, given that the current EU regime on jurisdiction and enforcement of judgments will be repealed, and it is yet unknown exactly what alternative arrangements might be put in place
  • Parties could consider including a clause in a new contract allowing the parties to review their jurisdiction agreement after 29 March 2019.

Our dedicated Brexit team has analysed the potential impact of Brexit on UK businesses. For more information visit www.myerson.co.uk/brexit or call 0161 941 4000.

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