Riding the Roller Coaster
Right now, there is a great deal of uncertainty about the implications of Brexit. This guide intends to give a concise outline of the immediate concerns that you and your clients might have and possible trends to watch out for.
The outcome of the UK’s referendum on its membership of the EU has two, intertwined, effects on the law:
Right now, the question of the future dynamic of the UK’s legal and economic relationship with the EU is a political, not a legal, one. There are a swarm of possibilities, ranging from the UK remaining part of the European Economic Area all the way to a relationship under World Trade Organisation rules accompanied by a wholesale repeal of all EC/EU law.
Given how deeply enmeshed EU law is within the UK’s legal system, it is very unlikely that ‘all’ EU law will simply be repealed. Furthermore, as the EU remains a significant trading partner, many sectors will want to see at least some equivalency between the UK’s legal system and that of the EU.
The immediate effects: despite the immediate turmoil and froth on the markets, business is adopting a watching brief to the effects of Brexit. Notwithstanding this, it is likely that there will be at least some financial shock.
Legally, this referendum has no binding effect on the Westminster parliament, unlike the 2011 alternative vote referendum. Realistically, however, some kind of separation of the UK from the EU will almost certainly take place.
Insolvency: with GDP likely to fall and the banks under pressure, it is possible that short-term cash flow will become a problem. The Bank of England might intervene with quantitative easing but it is possible that liquidity and access to lending will become an issue. In the short term, you should consider the effect of an insolvency event on your agreements (including tenancy agreements, contracts of the sale of land / options, and retention of title clauses) and consider the lessons of 2007-9.
In the longer term future, UK insolvency law is already reasonably well aligned with the UNCITRAL Model Law on Cross-Border Insolvency. Along with company law, there is the possibility that the UK will adopt more ‘company friendly’ provisions along the lines of the BVI Business Companies Act 2004, depending on the future political and economic direction adopted.
Break clauses and early termination: in the last recession, parties attempted to get out of onerous obligations and tenancies by activating break clauses and early termination clauses. These clauses are often interpreted strictly and the courts will expect compliance with them. The Supreme Court recently handed down a decision on break clauses in BNP Paribas v Marks & Spencer  UKSC 72: property lawyers might be well advised to keep its lessons close to heart in the next few months.
Intellectual property: trade marks granted by the UK IPO will be essentially unaffected. National trade mark law is, however, harmonised across the EU and we are likely to see future divergence, especially as EU legislation is amended and decisions of the Court of Justice of the European Union cease to apply.
There are likely to be transitional or parallel provisions for Community trade marks and European Union Trade Marks, as well as for Community design rights.
As the European Patent Convention is a free-standing international treaty not based on EU law, there are unlikely to be changes felt in this field. The UK will, however, lose out on the future European unitary patent.
Merger and competition law: UK competition law is unlikely to be fundamentally changed. Any company doing business in the EU will still, however, be caught by the EU rules: the regulatory burden could increase as companies might have to comply with both EU and UK regimes.
Data privacy and security laws: this field represents both risk and opportunity for the UK. The EU has recently overhauled data-privacy laws (such as the Global Data Privacy Regulation), which were due to come into force in 2018. The ICO has provided a press release responding to the referendum, confirming that it will seek data protection standards ‘equivalent’ to the Regulation’s framework.
Insurance: UK insurance companies will lose a number of EU market access advantages. They will have to consider re-locating at least existing books of business. Given the UK’s strong relationship with the US, it is possible that UK regulation could be aligned close to the US model.
Taxation and border revenue: VAT, customs duties and the taxation of payments between EU group companies are likely to be affected. Much of the UK’s law in this area is derived from EU law. On the other hand, this could represent an opportunity to re-shape this area of the law to simplify it, especially in relation to trade with non-EU countries.
There are other significant aspects of our tax code which are affected by EU law. For example, the EU’s Parent-Subsidiary Directive states that dividends paid by an EU subsidiary to its parent in another EU member state are exempt from withholding tax. British citizens living in the EU are likely to feel changes to the tax regime of their country of residence. Tax advisors will have to follow developments very closely indeed, and report to their clients rapidly.
Procurement: much of the UK’s public sector procurement laws are derived from EU legislation. These enactments have come under much criticism for their failure to reflect private sector best practice. Brexit will represent an opportunity to re-shape this area.
Construction law: the big house builders have already sold their proposed housing developments for the next few years and have a secure pipeline. There will be a collective pause for thought as the industry considers the financial effects of Brexit. It is entirely foreseeable, for example, for a future government to consider stimulating the domestic economy with a large-scale infrastructure programme.
On a more basic level, parties would be well advised to consider their protection from insolvency and cash flow problems from others in the supply chain.
International litigation and jurisdiction clauses: London is presently a leading centre for international litigation and arbitration. The ICC released a pessimistic infographic ahead of the Brexit vote. Fundamental strengths such as the use of the English language, the rule of law, a large and well skilled legal profession and international transport links will remain. Barriers to EU markets and the freedom of movement of peoples might, however, make the jurisdiction less popular for international litigation. The Bar Council released a cautionary press release, but went on to state that “Despite all the turbulence, however, I am confident that London will remain a leading centre for international dispute resolution. The reputation of barristers and our judiciary overseas, beyond the EU, is very high and I expect it will remain so in the years to come.”
Currency clauses and other standard terms: there are a number of standard terms that lawyers might want to consider adopting if they are dealing with international clients or parties. For example, the terms of an agreement could express the currency used to be the US dollar or another reserve currency. Rather than fixing interest rates, they could be linked to the Bank of England rate or even another, international, index. Retention of title and insolvency event clauses should be considered.
Brexit clauses: prior to the Referendum, a large number of contracting parties included Brexit clauses in their agreements. Now those clauses might be stress tested.
Parties will need to ensure that they do not unintentionally waive their ability to rely on these clauses, or become estopped from relying on them. If parties do intend to activate Brexit clauses they might very well be treated in the same way as break clauses and termination clauses and strictly construed.
Consumer law and worker rights: much of our consumer protection law is based on EU legislation. For example, the Consumer Rights Act 2015 enacted much of the Consumer Rights Directive, while the Defective Products Act 1991 also brought into force EU legislation. It should not be assumed, however, that consumer protection will simply be wound back.
Likewise, whereas much health and safety and employment legislation is based on EU law, it is unlikely that the Westminster Parliament will simply delete large swathes of it.
The author would offer the following five conclusions:
David Sawtell / 27th Jun 2016
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