The United Kingdom (the UK) has voted by 51.9% in favour of leaving the European Union (EU), which once followed, will effectively end its 43-year membership. Since the EU Referendum the UK Government has been clear that it will follow the result. Therefore, the vote to leave means that, ultimately, the UK will leave the EU.
During this period of uncertainty and beyond, Arnold & Porter will continue to monitor the Brexit developments as they unfold and seek to provide our best assessments on the likely legal outcomes when relevant. If you have any specific questions relating to the impact of Brexit, please contact the relevant attorneys as listed below.
WHAT HAPPENS NEXT TO THE UK'S POSITION IN THE EU?
The vote in favour of leaving does not automatically trigger the UK's withdrawal from the EU. The withdrawal process needs to be triggered formally by the UK (and the UK alone), by giving its notice under Article 50 of the Lisbon Treaty on European Union. This sets in motion a two-year period of negotiation between the UK and the remainder of the EU concerning the withdrawal process. Negotiations would also be likely to cover other arrangements governing the UK's future relationship with the EU. This two-year period can be extended if the remaining 27 EU member states unanimously consent to do so. The UK Government has said it will not trigger Article 50 before 2017.
WHAT COULD A FUTURE UK RELATIONSHIP WITH THE EU LOOK LIKE?
This is impossible to predict with any certainty. However, various models have been cited as possibilities:
(1) the UK joins the European Free Trade Area (EFTA), and also becomes part of the European Economic Area (EEA), like Norway, Iceland, and Liechtenstein;
(2) the UK joins EFTA, but not the EEA, and negotiates a number of bilateral agreements with the EU, like Switzerland;
(3) the UK negotiates a customs union with the EU, like Turkey;
(4) the UK negotiates a number of broad free trade agreements with the EU, like Canada; or
(5) the UK relies upon its membership of the World Trade Organisation as the basis for its trading relationship with the EU.
Whichever route is taken, it would be unprecedented for most of these models to be put in place comprehensively in a two-year period.
WHAT ABOUT THE UK'S POSITION ON THE WORLD STAGE?
Currently the UK benefits from a large number of arrangements (for example, trading treaties with the US) that have been negotiated on its behalf through being a member of the EU. Once the UK has withdrawn from the EU, the UK will not be able to benefit from these (unless this is agreed otherwise during the withdrawal process) and it will need to negotiate its own alternatives. Again, it is almost unprecedented for all of such arrangements to be put in place in a two-year period from a standing-start, and in practice this is unlikely to happen.
WHAT DOES ALL THIS MEAN FOR CORPORATIONS WITH BUSINESS INTERESTS IN THE UK?
In the short-term, nothing changes. For now the UK's laws and regulations remain in place, and importantly, the UK still remains part of the EU (and will continue to be subject to EU legislation until the UK takes legislative steps to change that position). The withdrawal process will only start when formal notice is given under Article 50, and even then things will take time to change. For example, the UK is still subject to the EU legislation governing data protection, antitrust/competition, free movement, employment, and consumer issues. No member state of the EU has ever withdrawn under the Article 50 process and so the path is unclear. The UK has been a member of the EU for 43 years and EU law is very much intertwined with UK laws and procedures. Applicable EU directives have been enacted into UK law, and EU regulations are directly applicable without local enactment.
WHAT ARE THE LIKELY CHANGES TO UK LAWS THAT IMPACT BUSINESS?
The position is not clear-cut, but the following is our current best assessment of what laws may change or be impacted as a result of Brexit. However, until there is actually an "exit", the UK remains a member of the EU.
Legal areas potentially affected:
Corporate Agreements and Commercial Contracts
The system of English law as to the formation of contracts and as to their interpretation remains unchanged. Therefore, immediate steps that can be considered with regard to business contracts should focus on the effect under specific clauses of those contracts.
Although the exact form of the UK's relationship with the EU will remain unclear for some time, companies may wish to start thinking about the possible impact of Brexit when reviewing contracts that involve the supply or purchase of goods or services to or from the EU. In particular, any contracts that incorporate EU laws, guidelines, or standards by reference or by implication should be reviewed.
Pricing mechanisms should be reviewed, as they may assume that there will be no tariffs, quotas, or other barriers to the free movement of goods and people between the UK and EU member states.
In addition, regulatory changes in the UK, divergence from the EU system, and financial market volatility could increase costs and risks, alter the parties' ability to perform the contract, and/or trigger termination provisions. As a result, companies may wish to include provisions within contracts that look to address specifically, mitigate or avoid such issues.
See Dispute Resolution below for further information on:
- choice of Governing law for contracts (questions 1 and 4 to 6);
- choice of Jurisdiction for resolution of contract disputes (questions 2 and 9 to 12); and
- tips for drafting your contract clauses on governing law and forum.
For the moment, nothing changes, as the UK has implemented the existing pan-EU data protection laws into its own legislation. Data protection law is currently facing significant reform in the EU, with the recently agreed General Data Protection Regulation (GPDR) due to replace the existing EU Data Protection Directive in 2018. Furthermore, following the invalidation of the EU-US Safe Harbour framework (in the Schrems judgement), and the introduction of the EU-US Privacy Shield (effectively the EU-US Safe Harbour replacement), and the seeking of a referral to the EU Court of Justice by the Irish Data Protection Committee to determine the legal status of the EU Model Clauses, current mechanisms for transferring personal data outside the EU are under scrutiny.
In order to avoid having to negotiate complex data transfer mechanisms between the EU and the UK post-Brexit, the UK is likely either to adopt whatever approach the rest of the EU takes, or to introduce broadly similar levels of data protection to the GPDR. The UK's data protection regulator, the Information Commissioner's Office (ICO), is supportive of adopting the GPDR and we suspect businesses operating across multiple EU states will want a common position too. That is likely to influence the UK Government's approach. Multi-national companies may also choose to comply with the GPDR anyway when operating in the UK if they are already doing so for the EU.
Once the UK has left the EU, data transfer mechanisms will also need to be put in place between the UK and other non-EU countries, including the US. Experience with the recently agreed EU-US Privacy Shield shows that negotiating this afresh is unlikely to be a simple process, and that the UK may therefore propose following whatever solution works for the rest of Europe. This might, in any event, be required by the EU as part of its negotiations with the UK, since the EU regulators will probably want to ensure proper protections for personal data that is transferred from the EU to the UK, and which the UK then transfers on to non-EU countries.
Despite any similarities with EU data protection law, the UK post-Brexit framework is likely to be separate from the EU mechanism. Companies may therefore face differing data protection authorities, investigator procedures, and sanctions. However, if current data protection practices are anything to go by, even if that were to happen, we suspect the UK would adopt a slightly lighter-touch regime and not a more onerous one.
We set out below current thoughts on key issues relating to the choice of governing law of contracts, and jurisdiction for contract dispute resolution, on the assumption that the UK exits the EU after the invoking of Article 50 without similar international agreements replacing those which fall away.
1. What factors make English law as the governing law of contracts a popular choice?
For cross-border corporate and commercial transactions English law remains the preferred choice of international business. It enables business to be relatively certain of the stated words being given effect and enables flexibility and adjustment to the circumstances of a case. It is suitable to document complex transactions in the English language and there is a well-established methodology for determining disputes under English law both in non-UK tribunals, by arbitration, and in the courts of England. There is a familiarity with English law concepts and usage in a range of complicated commercial and financial transactions and markets.
2. Will the English courts remain a popular choice for dispute resolution post-Brexit?
The English judiciary has a reputation for independence and neutrality. The English court system is more analogous to the US legal system than the continental European system and, for those entities favouring a requirement for full document disclosure and the ability to cross examine witnesses on those documents, it provides an attractive base for determining disputes. This will not change as a result of Brexit. What may impact on the choice of England as a jurisdiction to resolve disputes is a potential mid-term lack of certainty as to methodology for enforcement of judgments (see question 8 below).
3. What "European-based" legislation relating to choice of jurisdiction for dispute resolution is likely to remain post-Brexit?
The answer to this depends on which system the UK will adhere to post-Brexit.
The principal treaties now governing choice of jurisdiction (the Brussels Regulation EU 1215/2015 – Recast Regulations), and governing how to determine the choice of governing law on contractual matters (Rome 1) and non- contractual matters (Rome II), will cease to apply to the UK following Brexit. The Recast Regulations will continue to apply amongst EU members such that a party (including a UK party) can seek to apply those regulations to determine how jurisdiction will be determined in a case taking place in an EU court.
In place of the Recast Regulations, the Brussels Convention (a predecessor to the Recast Regulations) may apply, but this should not be assumed.
The 2007 Lugano Convention (Lugano Convention) may be acceded to by the UK, in which case there would be some restriction upon starting multiple EU parallel proceedings but not to the same extent as under Recast Regulations.
The Hague Convention on Choice of Court Agreements 2005 (Hague Convention) might apply but that may require the UK to accede formally to the treaty. If it did apply, it would cover only those disputes where there is an exclusive choice of the jurisdiction of a contracting state and for recognition and enforcement of judgments rendered pursuant to that decision by a contracting state.
If the UK adopts the Brussels or Lugano Conventions, these would take precedence over the Hague Convention; in which event there would be a need, as there was before the Recast Regulations applied, for disputing parties to race to their preferred court, to establish jurisdiction of that court first and have that court determine if it has jurisdiction.
4. What will happen to contracts which provide for English law to govern the relationship?
The English courts will give effect to the choice of law of the parties.
5. Will there be any change to the way the English courts work out what law should be applied to a contractual claim after Brexit where that law is not specified in the contract?
The English common law principles for choice of law in contractual matters are not dissimilar to those provided for in Rome I, so there should be no change.
6. How will courts in the EU work out what law should be applied to a contractual claim after Brexit where that law is not specified in the contract?
Again, there will be no change: the EU member states will continue to apply Rome I and II in relation to disputes involving the UK or where there are no EU parties, in the same way as for cases which do involve EU parties. This rule was designed to prevent forum shopping amongst the EU member states.
7. How will the English courts work out what law should apply to tortious or non-contractual claims after Brexit?
In essence, the general rule applied is that the applicable law is the law of the country in which the events constituting the tort or claim took place (see the Private International Law – Miscellaneous Provisions Act 1995). There are specific rules for certain torts and provisions to deal with what happens if the events occurred in more than one country.
8. What will happen to the enforceability of English judgments after Brexit?
Again, the answer to this depends on which system the UK will adhere to post-Brexit.
The Recast Regulations provide for the automatic enforcement and recognition of judgments of one member state in the courts of another (subject to limited exceptions). If the UK does not adhere to a replacement system, then the question will be dealt with on a case-by-case basis in light of any bilateral treaties between the relevant countries. For example, if the UK becomes a member of EFTA and thus accedes to the Lugano Convention, then the system of enforcement of judgments would be similar to that under the Recast Regulations. Likewise, acceding to the Hague Convention would enable the mutual recognition and enforcement of judgments, but only where there has been an exclusive choice of jurisdiction in the relevant contract.
9. How will the English courts give effect to an exclusive choice of forum clause after Brexit?
The English court will generally give effect to the parties choice of exclusive jurisdiction for the resolution of disputes.
10. How will the English courts work out the appropriate jurisdiction for a dispute in the absence of a choice of forum clause?
The English court will, under common law, apply the well-established principles of forum non conveniens, and thereby determine the most appropriate forum for the dispute to be determined.
11. How will an EU court treat a clause giving exclusive jurisdiction for the resolution of disputes to the UK after Brexit?
Absent an applicable convention, an EU court is not bound to give effect to an exclusive choice of jurisdiction clause in favour of the UK or any non-member state. It is arguably up to that national court to apply its own laws (in much the same way as the English courts now give effect to exclusive jurisdiction clauses in favour of non-member states). There would be no obligation on the English court to halt its proceedings pending the outcome of such national court's determination, and the English court would be free to invoke the anti-suit injunction to restrain the other national court proceedings (see question 13).
12. How will an EU court treat the existence of proceedings in an English court in circumstances where one of the parties is domiciled in an EU country, or where an EU court has jurisdiction in the absence of an exclusive jurisdiction clause?
Under the Recast Regulations, generally speaking, other than where there is an exclusive choice of jurisdiction made in a contract in favour of another member state, the regulations would require jurisdiction to be located in the court where the proceedings were first begun. The other member state's courts would have to decline jurisdiction. The Recast Regulations also provide for a member state's court to have a discretion to stay its own proceedings in favour of another state if another action (which is the same as or similar) was pending before the court of that state when a member state was first seized.
It is yet to be determined that the same will apply where proceedings are first begun in a member state, as it is not clear that the EU court would have discretion to stay its proceedings in those circumstances. This could lead to the possibility of jurisdictional manoeuvring in the post-Brexit landscape, and again lead to a race to commence jurisdiction in a party's favoured court first so as to disrupt future proceedings elsewhere.
13. How will the English courts treat their powers to regulate the conduct of parties domiciled in Europe or litigating in the EU after Brexit?
The Recast Regulations prevent the English courts from exercising jurisdiction to grant anti-suit injunctions, as the Court of Justice of the EU (CJEU) had previously held that one member state could not grant an anti-suit injunction to restrain proceedings in another member state. The English courts post-Brexit would no longer be subject to this inhibition and, accordingly, proceedings issued in member states in breach of exclusive jurisdiction clauses may be the subject of an anti-suit injunction by a UK court.
14. Will the English courts grant freezing and other interlocutory relief in support of proceedings in Europe?
The English court will retain its wide jurisdiction to take injunctive proceedings in support of foreign proceedings, including in the EU. The English court may have a wider discretion to intervene given that when assisting member states there needs to be "a real connecting link".
Tips to consider in the drafting of contracts relating to choice of law or forum after Brexit
a) One-sided exclusivity clauses that enable one party to take proceedings in a number of jurisdictions, but the other in only one, will be more likely to be enforceable by the English court post-Brexit. If you see this as valuable for your contract, you may wish to build in a one-sided jurisdiction provision so you can decide in which courts to take proceedings depending on the outcome of Brexit. Alternatively, a carefully drafted non-exclusive jurisdiction clause may be stipulated in favour of the English courts.
b) Provide for exclusive jurisdiction of the English court in the expectation that the UK will accede to the Hague Convention after Brexit, and will thus be able to benefit from enforcement in all signatory states.
c) Consider an arbitration clause, if enforcement in the EU and perhaps elsewhere is critical. All EU member states are a party to the New York Convention on the enforcement of arbitration awards.
d) Provide for a liquidated damages clause in the event of the commencement of proceedings in breach of the jurisdiction clause.
e) Include a choice of law clause for contractual and tortious matters; it will be given effect by courts of EU member states as well as of the UK.
f) Add a provision for service of process in the UK jurisdiction on a non-UK party; permission to serve on that party outside the UK may be required.
g) Consider the impact of interpretational issues arising from definitions which assume the UK's continued membership of the EU.
Whilst Brexit negotiations are ongoing, the UK remains part of the EU, and EU-based employment laws remain in place. Even after Brexit, however, it is not currently anticipated that any of the proposed Brexit routes are likely to result in wholesale employment law reform. Many of the relevant provisions are well-enshrined in UK law. Where EU directives have been incorporated into UK acts of Parliament, such as the Equality Act (regulating discrimination law in the UK), or the Data Protection Act (covering the processing of personal and sensitive personal data), the UK Government would have to repeal these laws if they were no longer going to apply. So far, there has not been much suggestion of that from the UK's politicians.
Much of this EU-derived "social" legislation has public support; for example, a recent consultation to water down the TUPE regulations (covering all manner of business transfers), in a manner permitted by the EU Directive, was actually rejected by business. Companies had grown accustomed to the law as it now was and it was felt that changing it would be unduly disruptive. It is likely that this would be a common position in relation to large swathes of employment law even after Brexit – although there may be some tinkering around the edges. Further, a number of other areas of employee protection outside the discrimination field, most notably the law of unfair dismissal, were never creatures of EU directives or regulations in the first place. They were implemented by the UK unilaterally and therefore will remain part of the domestic landscape, whichever Brexit route is adopted.
Companies will nonetheless be evaluating their UK businesses as the Brexit negotiations are pursued. Those that take a positive view about inward investment, particularly in the light of proposed reductions to corporation tax, and overseas companies able to take advantage of sterling's devaluation to purchase UK businesses at discounted prices, may end up needing to hire staff. Their focus may be on ensuring their employment contracts are up to scratch and non-poaching restrictions are in place if there becomes competition for highly skilled employees in short supply.
On the other hand, those who fear the impact of withdrawal may have a more negative impact and might begin reviewing staffing levels in contemplation of possible future redundancies. Alternatively, they may start looking at other options falling short of dismissal to cut overheads, if need be. This may involve those employers ultimately proposing changes to employment contracts, possibly involving wage cuts and/or removing of costly benefits. This may therefore be a good time for companies to assess whether their employment contracts and redundancy policies provide them with sufficient flexibility. Employers also need to bear in mind that where more than 20 redundancies are proposed at any one establishment within a period of 90 days, between 30 and 45 days consultation may be required – under EU laws that have become enshrined in UK domestic regulations.
Although companies may be rightly wary of jumping the gun before the likely outcome of Brexit negotiations is clearer, some of them may also start evaluating the feasibility of off-shoring some of their operations. In making this assessment, they will need to factor in the application of the TUPE Regulations in particular – again, an EU-based law that has been incorporated into domestic legislation. In most cases, TUPE will require employers to provide certain mandatory information to, and to consult with, employee representatives of affected staff, even if the employer does not recognise a union.
Presently, EU nationals enjoy freedom of movement and therefore have the right to live and work, permit free, in the UK. Companies that employ significant numbers of non-UK European nationals will be impacted if any of the Brexit outcomes result in the UK no longer being tied to accepting freedom of movement for EU nationals. Whilst abandoning freedom of movement was a goal of many of those supporting Brexit, the signals from Brussels are that tariff-free access to the single market will be conditional on adhering to the principles of free movement. Whether those principles will be watered down in any way remains to be seen.
Were the UK able to negotiate a lighter form of freedom of movement, new EU migrants to the UK might require some kind of work permit, just as most non-European nationals do currently. This may be a challenge for low-skilled EU nationals. Our prediction is that EU nationals already in the UK may well be permitted to stay and that this should certainly be the case for those who have lived here for more than five years, as EU rules currently in effect automatically afford EU nationals permanent residence. However, given the current uncertainty, we may in time see UK employers encouraging EU nationals amongst their workforce who qualify for permanent residence to actually apply for a certificate of permanent residence – just to be safe and to enjoy restriction free business travel.
Brexit will have no direct effect on the current UK patent system.
At the moment, patent protection can currently be obtained in the UK by obtaining either a UK national patent or a European Patent (EP) designating the UK. EPs are governed by the European Patent Convention (EPC), which was established outside the EU framework. Provided the UK remains a signatory to the EPC, it will remain a member of the existing European patent system.
Similarly, the process by which the UK designation of European patents is litigated in the UK courts will be unaffected, as will the legislation governing UK national patents. It is possible that the UK would revisit those (fairly limited) elements of the UK patent law that have been driven by EU legislation, as discussed further below, although this is unlikely to be at the top of any legislative reforms.
The UK patent system will therefore not be directly affected by Brexit.
Brexit will likely cause delay to the establishment of a future Unitary Patent and Unified Patent Court, and the UK is unlikely to be able to participate in such a court once it leaves the EU.
The European patent with unitary effect (UP) and the Unified Patent Court (UPC) if established, will provide a single unitary patent covering all EU member states, which would be litigated in a single court. Prior to the UK's referendum vote to leave the EU, the UPC was on track to enter into force in 2017 once formally ratified by the UK, Germany, and one other country.
While the UK remains in the EU the UPC cannot enter into force without UK ratification. In addition, the pharmaceutical and biotech part of the central division of the UPC was intended to be located in London. Following an Opinion of the Court of Justice of the EU (CJEU) in 2011, it appears that only EU member states can participate in the UP and UPC, although possible alternatives are being considered by various stakeholders. For now there is an impasse: the UPC cannot start without ratification by the UK, but the UK probably cannot participate in the UPC once it leaves the EU.
The UK is a strategically important venue for patent litigation and was central to the operation of the UPC. The UPC is likely to be a less attractive venue for patent litigation without the UK for a number of reasons: a) the exclusion of an important market; b) the absence of experienced UK judges on UPC decision-making panels; and c) the lack of UK influence on procedure, including disclosure and cross-examination. At the very least, the outcome of the referendum will delay the implementation of the UPC and require amendments to the underlying agreement.
It is also possible that the UK's withdrawal could cause the UPC to collapse. However, given the amount of time and money invested into the development of the unified system, this seems unlikely until all alternatives are exhausted.
Supplementary Protection Certificates (SPCs) will no longer be available in the UK under the EU legislation.
SPCs are governed by EU legislation, and the UK will therefore need to amend its national legislation to implement its own patent term extension scheme post-Brexit. It is likely that the UK would give effect to existing SPCs and that any new UK law would be heavily based upon the existing EU law. However, the UK courts could interpret this legislation without reference to previous decisions of the CJEU.
Alternatively, Norway and Iceland have effectively "opted in" to the EU SPC regime through their EEA membership. Therefore, it is possible that the UK could come to a similar arrangement if it remains a member of the EEA.
Unitary EU trade marks and designs will cease to have effect in the UK after Brexit, subject to transitional provisions.
Registered and unregistered community designs and EU trade marks are governed by EU regimes and offer a single unitary right across the EU. These rights will cease to apply in the UK once it has left the EU.
It is unlikely to be possible for the UK to negotiate continued membership of these unitary regimes. The UK might unilaterally declare that EU registered trade marks and designs would continue to apply in the UK, although this would result in the UK being bound by these regimes without the power to influence them. Alternatively, if these EU regimes do cease to apply in the UK, transitional provisions will be essential to ensure businesses are able to maintain their rights, both in the UK and across the EU.
It is unclear what will happen to copyright and other national rights.
The law relating to UK national IP rights will not be directly affected by Brexit. However, no IP right is an island; the national law of almost all IP rights has been shaped by EU legislation. Once the UK leaves the EU, it will have to consider whether to keep this harmonised legislation and, if not, what should replace it.
For example, the UK legislation governing copyright has been amended significantly to bring it into compliance with EU legislation, particularly in the area of digital exploitation of copyright works. Much recent case law which has considered the legal issues raised by new technologies has interpreted EU law in this field. If the UK were to leave the EU, the UK would no longer be bound by EU legislation and decisions of the CJEU in this field.
The simplest option would be for the UK to retain its existing EU-driven legislation, although careful analysis would be required to ensure that this legislation still works post-Brexit. In addition, over time, the UK law would begin to diverge from the EU law as UK courts take their own approach to the interpretation of this legislation. The more complex option, although arguably the approach which is required to fully regain UK sovereignty, would be to assess each piece of EU-mandated legislation to determine whether it should be retained or amended. However, such a process is likely to be administratively unworkable given other current priorities.
The implications of the UK leaving the EU are numerous and potentially wide ranging. However, the extent of the impact of leaving will depend enormously on the nature of the ultimate relationship that the UK has with the EU. More generally, most of the laws that have been implemented while the UK has been a member of the EU reflect the development of common global standards, and of recognised means of incentivising research in particular areas such as orphan medicinal products and paediatric medicines. Therefore it is doubtful whether this basic legal framework will change, even though specific UK legislation will be needed in certain areas to preserve it. Moreover, operationally, the UK has been an influential player responsible for shaping the EU regulatory system over the last three decades. It would therefore be in the interest of the UK and EU regulatory authorities to adopt a working model that seeks to foster closer cooperation and collaboration.