Brexit - an expensive divorce? The key legal issues

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The UK's exit from the EU was never going to be easy. Increasingly, it is looking as though it might also be very expensive. In recent months, there have been various reports that the UK could have to pay anything up to €60 billion on its departure, in order to cover outstanding spending commitments and liabilities. Alongside the number-crunching, a number of difficult legal issues are also beginning to take shape.

The legal basis for any exit payment is fundamental, but still needs clarification. The House of Lords European Union Committee recently released a report on the EU budget based on evidence taken from economists, lawyers, MEPs and others. The report weighed up a number of possible legal positions and concluded that - from a purely legal perspective - the UK is able to leave the EU without being liable for any outstanding financial obligations. If this is right, then there would be no exit bill at all. This is on the basis that the EU treaties and all obligations - including financial - arising under them simply fall away on Brexit.

However, this could be an over-simplification. First of all, this conclusion is not binding and other opinions on the legal position have been expressed, not least in evidence to the House of Lords. Meanwhile in Brussels, working groups of Commission and Council - working on the basis that there are commitments for the UK to honour - have extensively reviewed the various relevant budget lines that should be taken into consideration in preparing the separation bill.

Background

EU budgeting is very complex and any attempt to put a precise number on the sums involved at this stage is inevitably somewhat speculative. However there are certain core elements that fall to be considered.

Central to any exit calculation is the EU's Multiannual Financial Framework. This comprises an agreed maximum spend across a seven year period on specific EU programmes across a range of areas, including agriculture, research and economic development. The current Multiannual Financial Framework sets out the EU's planned spending for 2014 to the end of 2020 and allows the EU to commit to spend €960 billion across this period. Now that the UK has triggered Article 50, subject to an agreement to extend the two year negotiation period this will see the UK leaving the EU more than 18 months before the current MFF expires.

Another large slice of potential liabilities comprises "reste a liquider". These are commitments that have already been made to specific projects but are yet to be paid out. Some of those projects may proceed, others may not. The size of the "reste a liquider" has been growing since the 2008 recession. Current levels are more than €200 billion.

Finally, there are pensions liabilities, due to former employees (and in due course current employees) of the various EU institutions. Pensions liabilities are paid out of the EU budget.

In addition to liabilities, the EU also has assets, such as property, equipment and loans. It is unclear whether the UK has a claim to a proportion of these assets. If it does so, in financial terms this number might be set off against liabilities. Finally, the UK is also a shareholder in the European Investment Bank and there is likely to be a value in this equity.

Eight legal considerations

The core legal considerations are these:

  1. This is uncharted territory. There is no precedent. No analysis currently being undertaken is binding. This makes it a classic "shade of grey area".
  2. Article 50 of the Treaty on European Union, which sets out the mechanism for a Member State to leave the EU, is very short-form. It offers no specific guidance on the question of budget or financial liabilities.
  3. The Vienna Convention on the law of treaties states that, unless the treaty provides otherwise (or the parties agree otherwise), the termination of a treaty releases the parties from an obligation to perform further, but does not affect any right or obligation created through the execution of the treaty prior to its termination. According to the House of Lords report, Article 50 does not need to be interpreted in light the Vienna Convention, because the TEU provides for a complete process for withdrawal. But there are other views on this question. Is the Vienna Convention relevant and if so, what are the implications? At the same time one can argue that in the EU Aquis Communautaire sufficient obligations have been created that are agreed and these should also be honoured as part of an exit from the EU: The UK's financial obligations are sufficiently enshrined in the Aquis Communautaire.
  4. The multiannual framework provides for what happens if the EU is enlarged within the seven year period covered. But it is silent on what happens if a Member State leaves the EU - not surprising since the EU Institutional architecture is not designed for departures.
  5. The multiannual framework can however be revised in the event of unforeseen circumstances. Is Brexit "unforeseen" for these purposes? The departure of a Member State is unprecedented, but the possibility of this happening has been allowed for, in Article 50 of the Treaty on European Union, since 2009.
  6. What if there is a dispute about the UK's liability post-Brexit? It is unclear who would hear the case. Currently, Section 3 of the European Communities Act gives the ECJ precedence in the UK. But ending the jurisdiction of the ECJ is one of the UK Government's key objectives. Once the UK has left the EU, another forum will be needed to decide disputes. Expectation is that such test before the ECJ will take place in the next two years, before the UK effectively leaves the EU.
  7. How would any judgment about outstanding liabilities be enforced? Again, this is unclear although individual Member States have already indicated that there will be no new arrangement unless the UK honours the existing obligations and exit bill.
  8. If the UK does have to make a payment, can it set off its share of the EU's assets against that number? Once again, the position is unclear. The EU is a standalone entity with its own legal personality. It may be that the UK simply has no rights to its assets at all, unless agreement to the contrary is reached (and this is the view taken by the House of Lords report).

A legal debate or a political one?

The legal arguments will remain untested, and the legal answers unknown, until such point where they come to be heard in an appropriate forum. In reality this may never happen, because the solution to the question of the exit bill is likely to be found in a political negotiation, with give and take on both sides. But in Brussels it is expected that - even with clarification of some of the elements - the remaining bill could be anywhere between €55-60 billion. The consequences of the UK leaving the EU without reaching an arrangement about the EU budget would be significant in terms of establishing future relationships with the remaining EU Member States.

All in all, a negotiated solution looks preferable to protracted and complex legal wrangling in an untested forum that risks resulting in an outcome that suits no-one. That said, if the UK Government feels it has a strong legal argument that there will be no liability on the UK on Brexit at all, this may provide a useful negotiating tool.

Once again, though, it seems as though the implications of Brexit will turn as much on the legal as the political issues.