While many are predicting a turbulent and uncertain period for the UK and Europe following Thursday’s vote, from a legal perspective we expect the UK’s relationship with Europe to remain unchanged for some time to come because Britain and Europe will first each have to determine what kind of new trade relationship it wants with the other. But make no mistake, the referendum result is an historic moment in British and European politics that has thrown Britain and the EU into a tumult that may take years to stabilise and will likely result in fundamental change in the political and economic landscape throughout Europe.
One of the features of the referendum campaign was a lack of proposals of clear alternatives to the UK’s existing arrangements with the EU and so there may be a lengthy debate within the UK before even commencing negotiations with the EU. In addition to Britain’s Prime Minister resigning on Friday, over the weekend several leading Labour Party parliamentarians have resigned from the Shadow Cabinet and are seeking a vote of non-confidence in the Labour Party’s leader, Jeremy Corbyn, meaning both major parties may be preoccupied with leadership contests in the short term. Add to that the fact that the existing British Parliament is made up in large part by MPs who were not pro-Brexit and it is easy to see why there is a long continuum along which any form of Brexit may take and along which any timetable might unfold.
Leading political figures have talked openly since the result was announced on Friday of holding a second referendum once a new deal with the EU has been negotiated to give the British people an opportunity to vote on a specific alternative to the status quo. There has also been talk of a more fragmented political party system developing in the UK with moderates in both the Conservative and Labour parties possibly forming a new party and the Liberal Democrats announcing that they will campaign in the next election on a platform to stop any Brexit. Meanwhile in Scotland, the governing nationalist party has said the change in circumstances justifies calling a second referendum on Scotland’s independence.
The formal legal process of leaving the EU has not yet been commenced and would only be triggered once the UK gave formal notice to the EU under Article 50 of the Treaty on the European Union. Article 50 merely lays down a time limit of two years for agreeing exit arrangements but is untested. No member state has ever triggered the article and the UK’s referendum was only advisory in that there is no legal obligation on the government to take steps to commence the formal exit procedures. Although a straight exit deal could be approved by the usual majorities of the EU Council and EU Parliament, any new trade arrangements would likely have to be ratified by both sides and likely the national parliaments of all member states, again adding to the complexity and timetable of any exit. Although there are many options for alternative trade arrangements with the rest of the EU, including reverting to the existing World Trade Organization (WTO) rules or negotiating preferential agreements akin to those in place with Norway or Switzerland, it is expected to take many years for the parties to hammer out new trade and investment deals.
It therefore seems unlikely that Article 50 would be triggered, if ever, until there was clarity on what the new arrangements might look like and how soon they could be implemented. During the campaign the UK government suggested this all might take ten years to complete while the “Vote Leave” side suggested two or three years might suffice. Canada’s proposed trade agreement with Europe, the Comprehensive Economic and Trade Agreement (CETA), is now seven years in the making and might provide some guidance on a realistic timetable.
Aside from grappling with its post-Brexit relationship with the rest of the EU, the UK must also address its loss of preferential market access under the 36 existing trade agreements the EU has negotiated with 58 countries, not to mention the ongoing negotiations of significant trade and investment agreements, such as the Transatlantic Trade and Investment Partnership with the United States. As also recently noted by the WTO’s Director-General, even the continued membership of the UK in the WTO post-Brexit is not a simple prospect - it will require significant negotiations with the other 161 WTO members over most aspects of UK trade, including tariff lines, quotas, subsidies and market access for financial and other services.
There will be no immediate changes in the laws in the UK as a direct consequence of the result of the EU Referendum and any changes which might take place will only become clear once the UK’s future relationship with the EU has been agreed.
In recent months, as the possibility of Brexit became more real, some parties began inserting termination rights into contracts in the event of a Brexit while other parties held off on the completion of transactions and included conditions precedent related to the referendum result.
In any event, careful consideration will have to be given to the wording of contracts going forward as the legal landscape changes.
Canada-Europe Trade Agreement
The status of CETA is unclear. Because it could take some time for the UK to exit the EU, it is possible that CETA will remain on track and even be ratified by the European Council as currently anticipated in October of this year. Once, and if, Britain did leave the EU it would cease to apply to trade between Canada and the UK if a separate arrangement had not been agreed between the two countries by that time. We can expect the Canadian government to mount significant efforts to ensure that CETA ratification remains an important priority on the EU’s agenda. It is not clear at this time whether the referendum result will mean the EU becomes distracted on other matters but it is hoped the EU will see ratification as even more important now as a means of demonstrating that it is capable of completing trade deals which was a criticism levelled by “Vote Leave” during the campaign.
Much of the referendum focused around the issue of immigration and the limits on the UK’s ability to control immigration from other EU countries because of the fundamental tenet of free movement of people within EU member states. The proponents of the Leave side have proposed to follow an Australian style points system in future which would not discriminate against non-EU immigrants but again, it will take time to determine whether these proponents form a government and are able to implement such a procedure only after the UK exits the EU.
To add to the confusion, one of the leading “Leave” figures, himself currently a British member of the European Parliament, has said that any new deal could quite possibly continue to allow the free movement of labour and would continue to give British business access to the single market, an arrangement similar to Norway’s arrangement with the EU whereby Norway pays the EU for access to the single market and allows the free movement of EU citizens but does not actually sit at the EU Council or in the EU Parliament. This may come as a surprise to many who voted to Leave on the basis that doing so would allow Britain to significantly reduce immigration.
In theory, this new system would be to the advantage of Canadian and other non-EU companies trying to relocate staff in the UK but issues such as overall numbers of immigrants will likely be hotly debated before any new procedures could be implemented which could only occur once the UK was no longer in the EU.
The uncertainty surrounding the UK’s exit from the EU, next steps and what the future arrangements might look like may be the most significant risk of all, especially the longer that uncertainty persists. Our UK office in London and our colleagues across Canada stand ready to help you navigate the uncertain waters ahead. Please do not hesitate to contact us.