Boardroom Brexit - the Withdrawal Agreement

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Government Affairs Alert

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We've been holding back on the next edition of Boardroom Brexit until there were concrete developments in the negotiations to report on. After a long wait, the UK and EU published the draft Withdrawal Agreement on 14 November 2018. At 585 pages long, the draft Withdrawal Agreement is a detailed and complex read.

The political reaction in the UK has been as divided as the country is divided on Brexit. All eyes will be on the survival of the UK Prime Minister and whether the House of Commons approves the deal in the "meaningful vote" on 11 December.

In this edition we summarize the key takeaways you need to understand. In the next edition, we look at the framework for the future relationship, which is being negotiated in Brussels this week.

The Draft Withdrawal Agreement

Key points

  • The three million EU-27 citizens living in the UK have the right to stay, permanently. EU citizens who move to the UK before the end of the transition will also be able to stay permanently. The same rules apply to the one million UK nationals living in the EU-27, or those moving to the EU-27 before the end of the transition.
  • The transition period is due to end on 31 December 2020. But there is now a right to extend it by mutual consent.
  • A series of "separation" (continuity) provisions have been agreed on IP, data, civil law and EU legal and administrative proceedings.
  • Under the Northern Ireland Protocol (backstop) the UK and EU enter into a customs union at the end of the transition period, thus forming a single customs territory. There will therefore be no tariffs, quotas and checks on rules of origin between the EU and the UK, with the exception of fishery and aquaculture products. Goods entering the UK from a third (non-EU) country will attract the same tariffs as the EU external tariff. Regulatory checks for goods, and dual regulatory approvals may still be required, however.
  • Northern Ireland, as a constituent part of the UK, will be part of that single customs territory. In addition, however, Northern Ireland will apply the full extent of EU customs law (the Uniform Customs Code) and approximately 300 EU single market laws in goods and agricultural products. These extra measures for Northern Ireland are required to avoid a hard border.
  • The UK and EU are currently negotiating the political declaration on the framework of the future relationship. This, together with the draft Withdrawal Agreement, will be put to a vote in the House of Commons on 10 December. If it is not approved, the draft Withdrawal Agreement is unlikely ever to enter into force.

Citizens' Rights

The draft Withdrawal Agreement (Agreement) enables both EU citizens living in the UK and UK nationals living in the EU-27 and their close families to continue to live in the country of their choice, with the same rights as they have now. After five continuous years of residence, they will gain permanent residence - what the UK Government has called "settled status".

The Agreement extends those rights to EU nationals who move to the UK, and to UK nationals who move to an EU-27 State, before the end of the transition period. This is currently 31st December 2020, but can be extended (see below). So, a Dutch engineer can start working in the UK three days before the end of the transition, and build up permanent residency rights.

Transition

The Withdrawal Agreement provides for a transition period set to end on 31 December 2020. During this period, all EU law will continue to apply to the UK as if it were a Member State, including participation in the EU Customs Union and the Single Market. Any changes to or new EU law will automatically apply to the UK. The UK will play no part in the formulation of EU law during the transition period. In a new development, the Withdrawal Agreement can be extended once, by mutual agreement, but the decision has to be taken before 1 July 2020.

"Separation Provisions"

This part of the Agreement provides for legal continuity in certain policy areas after the end of the transition period.

  1. Goods placed on the Market

    Goods lawfully placed on the market in the EU or the UK before the end of the transition period may continue to freely circulate in and between these two markets, until they reach their end-users, without any need for product modifications or re-labelling.

  2. Customs Procedures, Value Added Tax and Excise Duty

    For customs, VAT and excise purposes, movements of goods which commence before the UK's withdrawal from the EU Customs Union should be allowed to complete their movement under EU rules which were in place at the start of the movement. After the end of the transition period, the EU rules will continue to apply for cross-border transactions that started before the transaction period in terms of VAT rights and obligations for taxable persons, such as reporting obligations, payment and refund of VAT.

  3. Intellectual Property

    The IP provisions have been largely unchanged from the March 2018 draft of the Agreement discussed in our previous post here. Holders of registered EU trade marks (EUTMs) and Registered Community Designs which were granted before the end of the transition period will automatically benefit from an equivalent UK right with the same filing and priority dates, and with no examination required. No fee will be payable to take advantage of such equivalent UK rights. Similar provisions creating equivalent UK rights apply to unregistered Community design rights, geographical indications and designations of origin. If an EUTM application is still pending at 31 December 2020, then up to 30 September 2021 its owner will have a right to file a UK national application which claims "priority" from the pending EUTM. The draft Agreement also extends the protection of EU database right (which is currently limited to EU nationals/ residents/ companies) to UK nationals/ residents/ companies.

  4. Civil law

    EU legislation on the law applicable to contractual obligations (Rome I) will apply to contracts concluded before the end of the transition period. EU legislation on the law applicable to non-contractual obligations (Rome II) will apply to events giving rise to damages where the event took place before the end of the transition period.

    EU legislation on jurisdiction (Brussels I Recast) will apply to cases commenced before the end of the transition period and related proceedings. This applies to proceedings concerning civil and commercial matters including Community intellectual property rights, data protection and posting of workers, family matters and maintenance.

    EU legislation on recognition and enforcement of judgments (Brussels I Recast) will apply to cross border civil and commercial, family and maintenance cases that are commenced before the end of the transition period.

    EU rules on insolvency proceedings will apply to main proceedings, secondary proceedings and subsidiary actions where the relevant main proceedings are started before the end of the transition period.

  5. Data

    The General Data Protection Regulation (GDPR) will continue to apply directly to the UK during the transition period - references to "Member State" can be read to include the UK, and there will be no restrictions on the cross-border flow of data between the EU and the UK. The Agreement also suggests that the Information Commissioner's Office will continue to be able to act as a competent supervisory authority.

    The GDPR will continue to apply within the UK as EU law after the transition period, insofar as any EU originating personal data continue to be processed within the UK post-transition, where the relevant data commenced before the end of the transition (referred to as the "stock" of personal data). This protective provision will fall away if the UK secures an EU adequacy decision at any time after the end of the transition. The UK is seeking an adequacy decision to allow for the continued free flow of personal data from the EU to the UK as part of its future relationship with the EU.

  6. Public Procurement

    Public procurement procedures launched before the end of the transition period should be completed under the same procedural and substantive EU rules under which they were launched.

  7. Ongoing EU litigation and administrative proceedings

    Cases pending before the Court of Justice of the European Union (CJEU) at the end of the implementation period, brought by or against the UK, or referred by a UK court, will be able to continue to a final resolution (including appeals). A ‘pending case’ is a case that is registered at the CJEU before the end of the transition period. The UK will be able to continue any proceedings it has before the CJEU seeking to challenge the validity of EU acts or measures.

    The European Commission can bring cases against the UK for up to four years after the end of the transition period for failures to comply with EU law prior to the end of the transition period. In addition, where an administration decision has been made after the end of the transition period which requires UK action and this is not taken, the European Commission may bring that matter before the CJEU for up to four years following the relevant decision.

    The resulting decisions from the CJEU will be binding and enforceable in the UK.

    Administrative procedures, such as competition and state aid, shall continue to be handled according to EU rules if they were initiated before the end of the transition period. The Commission will also be able to initiate new state aid procedures concerning the UK for aid granted before the end of transition period, for four years.

Financial Provisions

According to the Agreement, the UK will honour its share of financing all the obligations undertaken while it was a member of the EU. This is estimated to be €39 billion.

Governance and Dispute Resolution

A Joint Committee will be responsible for the implementation and application of the Agreement. It will be co-chaired by high level representatives from the UK and the EU and will meet alternately in Brussels or London. It will make decisions and recommendations by mutual consent and will meet at the request of either party or at least once a year.

Disputes regarding the interpretation and application of the Agreement after the end of the transition period will be heard at first instance in the Joint Committee. If no mutually agreed solution has been agreed within three months, there is a mechanism to establish an independent arbitration panel to rule on the dispute.

Protocol on Northern Ireland

This Protocol includes all the provisions on how the so-called “backstop” solution for avoiding a hard border between Ireland and Northern Ireland would work. The EU and the UK have committed that they will use their best endeavours to conclude and ratify an agreement by 1 July 2020 which would replace the backstop, on the condition that it too avoids a hard border. The backstop can only be brought to an end by mutual agreement, and is without an end date.

Under the backstop the UK and EU to enter into customs union at the end of the transition period, thus forming a single customs territory. There will therefore be no tariffs, quotas and checks on rules of origin between the EU and the UK, with the exception of fishery and aquaculture products. Goods entering the UK from a third (non-EU) country will attract the same tariff as the EU external tariff. The UK is not required to align with Single Market legislation, so regulatory checks may still be required between the UK and EU, and dual regulatory approval may still be required. The UK has also agreed to "level playing field" terms so that it cannot compete unfairly against the EU in the areas of competition, state aid, tax, the environment, labour and social protection.

Northern Ireland, as a constituent part of the UK, will be part of that single customs territory. In addition, however, Northern Ireland will apply the full extent of EU customs law (the Uniform Customs Code) and approximately 300 EU single market laws in goods and agricultural products. These extra measures for Northern Ireland are required to avoid a hard border.

The Protocol repeats the possibility of extending the transition period. The UK Government says this is an alternative to the backstop, and for the Government to decide in the course of the transition period.

Protocol on Gibraltar

This Protocol forms a package with bilateral memoranda of understanding between Spain and UK in respect of Gibraltar. These arrangements will include Memoranda of Understanding (MoUs) covering citizens’ rights, tobacco, the environment, and police and customs cooperation, and will be concluded in the coming weeks. An agreement to conclude a treaty on taxation and the protection of financial interests is also expected to form part of the wider package. With the exception of provisions on citizens’ rights, the Protocol is limited to the duration of the implementation period. The MoUs will be similarly time limited.

One further update: Supreme Court refuses Brexit appeal by DEXEU

Continuing the legal controversy associated with Brexit, the Supreme Court today refused DEXEU leave to appeal against the decision of the Scottish Court of Session to seek an urgent preliminary ruling from the Court of Justice of the European Union on the vexed topic of whether notice under Article 50 of withdrawal from the EU could be revoked unilaterally. This should come as no surprise to the UK Government, as the reference to the CJEU was simply not capable of appeal in the UK, not being a final judgment. The stage is now set for the CJEU to hear the case on 27 November although the timing of its judgment is unknown.

Who are the winners and losers from the deal?

It is a good result for the EU. The Customs Union and Single Market stay intact - no slices have been taken from the cake. It receives a financial settlement and ensures that the UK stays aligned to many of its rules on a "level playing field" under the transition and the Irish backstop, without a say in the formulation of those rules.

It is a good result for Ireland too. North-South economic cooperation can continue unhindered by a hard border. Similarly, many in Ireland and Northern Ireland had fears that a hard border would undermine the 1998 Good Friday Agreement.

The deal on EU citizens is generous, grandfathering existing residence rights and delaying the end of free movement rights until the last day of the transition.

The transition period was a key demand of UK business. It provides all-important commercial predictability in the aftermath of Brexit which will benefit UK, EU and international businesses with cross UK-EU border operations. The fact that it can be extended will be welcomed.

UK and EU-based manufacturers, particularly just-in-time manufacturers, will benefit from the single customs territory created by the Irish backstop.

The main losers from the deal are "Brexiteers" in the Conservative Party and beyond who wanted full independence from the EU - control of laws, control of borders, and an end to the jurisdiction of the CJEU.

The ten MPs in the Commons from the Democratic Union Party (a Northern Irish political party) will be looking at the Irish backstop closely to see whether it creates trade barriers between Northern Ireland and the rest of the UK. If they conclude it does, they may withdraw their "confidence and supply" support for Prime Minister Theresa May's minority government.

The capacity for the UK to bring into force new trade deals with non-EU countries is restricted by the Agreement. It would be impossible for the UK to do so while it stays in the transition period and unlikely it could do while in the single customs territory with the EU under the Irish backstop. In addition, the more UK legislation that remains converged with EU legislation post-Brexit, the less it can diverge from it in other trade agreements. This will be a dent to those who believe that one of the main benefits of Brexit is the emergence of the UK as a new trade actor.

Perhaps the most striking omission in the Agreement is the services sector. Market access for UK and EU services will be maintained during the transition, but thereafter the slate is clean. It is hoped that the framework for the future relationship will provide more detail on future market access for UK services to access EU markets and for EU services to access UK markets.

How DLA Piper can help

If you would like to discuss how DLA Piper can help your business, please contact Paul Hardy, our dedicated Brexit Director in the UK, Jeroen Jansen, who leads our EU Government Affairs practice in Brussels or Richard Bonnar, chair of the DLA Piper Brexit Committee. The key to navigating Brexit successfully is informed analysis, accurate forecasting and practical contingency planning. DLA Piper has the combination of political, policy and legal expertise, as well as global coverage, to provide this level of Brexit advice.