On June 23, 2016, more than 30 million people voted in a referendum to decide whether the United Kingdom (UK) should “Leave” or “Remain” in the European Union (EU). The referendum turnout was 71.8 percent and the Leave Campaign won by 52 percent to 48 percent, making “Brexit” an important and imminent probability with potentially significant implications for a range of stakeholders, including the chemicals industry.

The following statement from current UK Prime Minister (PM) Theresa May, who replaced former PM David Cameron following his resignation the day after the referendum vote, symbolizes her Government’s strong commitment to Brexit and upholding the result of the referendum:

Let’s state one thing loud and clear: We are not leaving the [EU] only to give up control of immigration all over again and we are not leaving only to return to the jurisdiction of the [European Court of Justice (ECJ)]. That’s not going to happen.

Pertinent Brexit Facts, Issues, and Possibilities

England and Wales voted relatively strongly for Brexit, whereas Scotland and Northern Ireland supported remaining in the EU. The Leave Campaign, which included the UK Independence Party (UKIP) and approximately half of the Conservative Members of Parliament (MP), suggested that the EU imposes too many rules on businesses and charges billions of pounds annually for membership fees while providing little in return. Additionally, the Leave Campaign cited sovereignty and democracy as reasons for leaving the EU, indicating that the UK alone should make decisions on its borders.

Mr. Cameron was the leading voice in the Remain Campaign, after reportedly reaching an agreement with other EU leaders that would have changed the terms of the UK’s EU membership if the Remain Campaign won the referendum. Mr. Cameron stated that the deal would have given Britain “special” status and assisted in managing some aspects of EU membership that UK residents dislike. The Remain Campaign, which Ms. May supported, argued that the UK benefits immensely from EU membership in terms of trade, and that immigration fuels economic growth and helps pay for public services. Additionally, the Remain Campaign suggested that the UK’s global reputation and status would be damaged by leaving the EU and that it is more secure as part of the “28 nation club.”

Article 50, Withdrawal Agreement Negotiations, and Mechanics for Brexit

For the UK to leave the EU, it must notify the European Council of its intention to withdraw by invoking Article 50 of the Lisbon Treaty, which gives the UK and EU two years to negotiate and approve a Withdrawal Agreement. Notice under Article 50 cannot be withdrawn once given. At the end of the two years, if there is no agreement, negotiations can be extended by the unanimous consent of the European Council and the UK. If, however, at the end of two years no agreement is reached on the terms of Brexit and there is no agreement to extend the two-year timeframe, EU Treaties will cease to apply in the UK. Ms. May stated that she intends to trigger Article 50 by the end of March 2017, although it appears possible that this could be delayed, given the ongoing High Court trial addressed below, and the upcoming German and French elections.

Once Article 50 is triggered by the UK, the remaining 27 EU Member States (MS) will agree on guidelines for EU negotiations on Brexit, following which negotiations will commence between the UK and EU. The European Parliament (EP) would need to approve the agreement by a Simple Majority, whereas the European Council needs to adopt the agreement by Qualified Majority (i.e., approval from at least 20 EU countries and 65 percent of the EU population). If the deal reached between the EU and UK is a “Mixed Agreement,” it would need to be ratified by each EU MS individually. Under these circumstances, the deal could be rejected by EU MSs, but this would not prevent the UK from leaving the EU. Following these steps, the UK would leave the EU and the UK Parliament would repeal and replace the European Communities Act 1972 (ECA 1972). After the UK’s departure from the EU, if it wished to rejoin, it would need to apply for membership under Article 49 of the Lisbon Treaty.

Negotiations on the Withdrawal Agreement must be conducted in accordance with Article 218(3) of the Treaty on the Functioning of the EU and are likely to focus on the mechanics of the UK’s withdrawal from the EU and transitional provisions in policy areas currently covered by EU Treaties. It is unclear whether the UK’s future relationship with the EU would be covered by the Withdrawal Agreement or negotiated as a separate agreement alongside the Withdrawal Agreement, or neither. Withdrawal and transitional provisions will require discussions for a wide variety of policy areas, including transfer of regulatory responsibilities; arrangements for contracts prepared in accordance with EU law; access to EU agencies that play a role in UK domestic law; the status of the UK’s environmental commitments made as a party to United Nations (UN) Conventions and currently implemented through EU legislation; cross-border security arrangements, including access to EU databases; and cooperation on foreign policy, including sanctions.

There are several procedural uncertainties related to Article 50 as it has never been invoked. Similarly, only Greenland has ever left the EU and it is anticipated that the UK’s potential departure from the EU will present far more complex issues than in the case of Greenland. Greenland’s departure from the EU took three years and over 100 meetings with EU officials -- these figures are likely to cause concern among those that believe Brexit negotiations can be completed within the two-year timeframe. All Brexit-related negotiations will likely be complex and contentious, and present unprecedented challenges.

R (Miller) v Secretary of State for Exiting the EU

On November 3, 2016, the High Court of Justice Queen’s Bench Division Divisional Court issued its judgment in R (Miller) v Secretary of State for Exiting the EU. The issue before the Court was whether, as a matter of UK Constitutional Law, the Government is entitled to give notice of a decision to leave the EU under Article 50 by exercise of the Crown’s prerogative powers without reference to the UK Parliament. The Summary of the Judgment of the Divisional Court states: “This is a pure question of law. The court is not concerned with and does not express any view about the merits of leaving the [EU]: that is a political issue … It is accepted by all sides that this legal question is properly before the court and justiciable: under the UK constitution, it is one for the court to decide.”

The Court observed that the case turns on the extent of the Crown’s powers under its prerogative and stated that the extent of the powers of the Crown under its prerogative is delineated by UK Constitutional Law. The Government accepted that neither the EU Referendum Act 2015 nor any other Act of Parliament confers on it statutory authority, as distinct from the Crown’s prerogative power, to give notice for the UK to leave the EU under Article 50 of the Lisbon Treaty.

The Court opined that Parliamentary Sovereignty is a fundamental rule of the UK’s Constitution, and therefore Parliament can “make and unmake any law it chooses.” The Court stated that as an aspect of the sovereignty of Parliament, it has been established for hundreds of years that the Crown (i.e., the Government of the day) cannot exercise its prerogative powers to override legislation enacted by Parliament. The Government sought to rely on the general rule that the conduct of international relations and the making and unmaking of Treaties are matters falling within the Crown’s prerogative powers, however, the Court viewed that this general rule “exists precisely because the exercise of such prerogative powers [generally] has no effect on domestic law, including as laid down by Parliament in legislation.”

The Government accepted and positively contended that if notice is given under Article 50, it will inevitably have the effect of changing domestic law. The central contention of the Government was that Parliament must be taken to have intended when it enacted ECA 1972 that the Crown would retain its prerogative power to effect a withdrawal from EU Treaties (then Community Treaties), and therefore that Parliament intended for the Crown to have the power to choose whether EU law should continue to have effect in the domestic law of the UK. Additionally, the Government’s lawyers argued that the Crown’s prerogative powers were a legitimate way to give effect “to the will of the people.”

The Court did not accept the argument put forward by the Government and indicated that there is nothing in ECA 1972 to support it. The Court viewed that the Government’s argument was contrary to: (1) the language used by Parliament in ECA 1972; (2) the fundamental constitutional principle of Parliamentary Sovereignty; and (3) the absence of any entitlement on the part of the Crown to change domestic law through exercise of its prerogative powers.

The Court concluded that the Government does not have the power under the Crown’s prerogative to give notice pursuant to Article 50 for the UK to withdraw from the EU, and that Parliament must vote on whether Article 50 can be triggered.

The Government is appealing the Court’s decision, and a further hearing is expected in December 2016. The Court’s decision has potentially significant implications, on both the timing and terms of Brexit. It would appear that MPs are relatively likely to vote in favor of triggering Article 50 to uphold the result of the referendum and the political will of Ms. May’s Government, however, UKIP’s Nigel Farage stated that as a consequence of the Court’s ruling, “[w]e are heading for a half Brexit.”

“Soft” and “Hard” Brexit, and Possible Models for the UK’s Post-Brexit Relationship with the EU

The terms “Soft” and “Hard” Brexit are being increasingly used, and although there is no strict definition for either, the terms refer to the nature of the UK’s post-Brexit relationship with the EU. The term Soft Brexit is typically associated with a closer and more cooperative post-Brexit relationship with the EU. Supported by many “Bremainers,” a Soft Brexit would maintain unfettered access to the single market for the UK, although the UK would no longer have a presence in the EP or European Council. In contrast, the term Hard Brexit, associated with a more distant relationship with the EU post-Brexit, has been used to describe the UK potentially leaving the EU and giving up full access to the single market and the Customs Union. Among the potential consequences of a Hard Brexit, the option favored by ardent “Brexiteers,” are that the UK would be regarded as a “third nation” and would therefore trade on World Trade Organization (WTO) terms until bilateral agreements are concluded with the EU.

Several possible models exist for the UK’s post-Brexit relationship with the EU. These include:

  • European Economic Area (EEA) Membership: If the UK joined the EEA alongside Norway, Iceland, and Lichtenstein, it would maintain access to the single market, be obliged to make financial contributions to the EU and accept the majority of EU laws, and accept the EU principle of Free Movement of Persons. Ms. May’s Government faces the possibility of a second legal challenge involving Article 127 of the EEA Agreement, which provides the mechanism for leaving the EEA. Lawyers have suggested that Article 50 does not provide for leaving the EEA and that the Government would be acting unlawfully if it did not trigger Article 127 to do so, however, Ms. May’s Government has stated that the UK is a party to the EEA Agreement only in its capacity as a member of the EU, and so the UK would depart from the EEA when it left the EU. This recent development may result in MPs voting on the UK’s EEA membership.
  • European Free Trade Area (EFTA) Membership and Bilateral Agreements: If the UK joined EFTA alongside Switzerland, it would maintain access to the EU market through a series of bilateral agreements agreed with the EU over the last 30 years, which cover some but not all areas of trade. The UK would be required to make a financial contribution to the EU, although this contribution would be smaller than if the UK obtained EEA membership. Under this model, there would be no general duty to apply EU laws, however, the UK would need to implement certain EU Regulations to facilitate trade. EFTA membership would mean agreeing to the principle of Free Movement of Persons, although there could be an option to give UK citizens the “first option” for jobs.
  • Membership of the Customs Union: If the UK were to obtain membership of the Customs Union, alongside Turkey, there would be no tariffs or quotas on industrial goods exported to EU MSs. The Customs Union does not apply to agricultural goods, public procurement, or services. Under these circumstances, the UK would be required to apply the EU’s external tariff on goods imported from outside the EU.
  • Free Trade Agreement: If the UK were to negotiate a Free Trade Agreement with the EU, similar to Canada, rules on international trade would be set by the WTO. Under this arrangement, the UK would not be required to make financial contributions to the EU or accept the Free Movement of Persons. There would also be no obligation to apply EU laws, although traded goods would need to meet EU standards.
  • WTO: If the UK traded under WTO rules post-Brexit, there would be no Free Movement of Persons or financial contributions to the EU. There would be no obligation to apply EU laws, although traded goods would need to meet EU standards. Trade in services would be restricted under this model.
  • New Model: Ms. May has expressed that the UK will be seeking a unique model for future relations with the EU. This unique model could take the form of an Association Agreement, and would need to be agreed in unanimity by the European Council and approved by the EP. If the UK were to develop a unique relationship with the EU post-Brexit, it may seek to become part of the Customs Union, while securing its high-level political priorities.

The post-Brexit trade deal will likely be particularly challenging because it needs unanimous approval from numerous national and regional parliaments across Europe. It is expected that the UK’s access to the single market and the right of EU citizens to live and work in the UK will be among the important topics for negotiation in determining the UK’s post-Brexit relationship with the EU.

It is anticipated that discussions on the UK’s post-Brexit framework with the EU will present novel challenges and that the UK’s viewpoints will reflect Ms. May’s Government’s political priorities (e.g., prioritization of free trade agreements, deregulation in the UK, and tighter control of UK borders). The outcome of the negotiations for the UK’s post-Brexit relationship with the EU will likely be impacted substantially by the EU’s receptiveness to the UK’s potential proposals and the UK’s flexibility on its standpoints. While EEA membership potentially presents a beneficial economic outcome for the UK, it may not be in line with Ms. May’s Government’s political plans.

Brexit and European Chemical Laws

Brexit may have a significant impact on the applicability of EU-level chemical laws to the UK. While significant EU chemicals legislation has historically been enacted in the form of Directives (e.g., Dangerous Substances Directive, Dangerous Preparations Directive) that required secondary domestic implementing legislation in the UK, EU Regulations now manage the most important topics in European chemicals law. Unlike Directives, Regulations are directly applicable to EU MSs -- national law typically only deals with enforcement and penalties. This makes Brexit particularly challenging for the chemicals sector as EU Regulations will cease to have effect in the UK upon Brexit. Important EU Directives such as Directive 2011/65/EU on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS 2) also raise questions because if the UK does not implement identical legislation, there is a risk that UK products will not be permitted into the EU.

Given the abundance of laws that will need to be considered and incorporated by officials pre- and post-Brexit, it appears relatively unlikely that new chemical Regulations will be prepared in final in the UK before its departure from the EU. It appears more likely that these laws will be gradually reviewed, and that interim legislation may be put in place. It remains to be seen whether the UK retains a Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) Regulation-like framework post-Brexit. If the UK is not required to comply with any EU laws as part of the Withdrawal Agreement, important Regulations such as REACH, the Biocidal Products Regulation (BPR), and the Classification, Labelling and Packaging (CLP) Regulation will cease to have effect in the UK upon Brexit. If the UK were to retain an EU REACH-like framework post-Brexit, the REACH Regulation will potentially require significant modification by UK officials to ensure any references to EU-specific processes are addressed appropriately.

Industry’s understanding has been that the direct effect of Brexit on REACH and BPR would commence once the UK leaves the EU, following trigger of Article 50 by the UK and the related negotiations. This understanding is complicated by the developments regarding Article 127 of the EEA Agreement, because if it is decided that the UK must trigger Article 127 to leave the EEA, REACH and BPR will apply until this process is completed and the UK is no longer an EEA member.

Until the UK departs from the EU and EEA, it is business as usual as important EU chemicals law continues to apply in the UK. Transitional measures for REACH are foreseeable to avoid creation of a “regulatory vacuum” and related widespread complications. It is now fairly clear that UK companies will be required to meet the REACH 2018 deadline as Ms. May’s triggering of Article 50 of the Lisbon Treaty in March 2017 would result in a departure of the UK from the EU in March 2019, at the earliest. The Article 127 proceedings may delay matters further. Unless the UK becomes part of the EEA, which appears relatively unlikely considering its political priorities, all UK chemical manufacturers will become “non-EU manufacturers” in the context of REACH upon Brexit, and will therefore be required to appoint Only Representatives (OR) for their imports into the EU -- otherwise their customers could face REACH registration obligations.

Similarly, non-EU manufacturers that previously appointed ORs in the UK will need to revise their European chemical compliance strategies following Brexit by appointing ORs in the EU. When Brexit occurs, provided the UK does not retain EEA membership, the UK will be outside the EEA, and therefore as of that moment UK-based ORs will be unable to transfer registrations to other entities in the EU as the REACH Regulation will no longer include them in its scope. ORs and non-EU manufacturers should consider the implications of Brexit and take suitable steps before the UK’s potential departure from the EEA to ensure continuous compliance. UK-based ORs have started establishing entities in other parts of the EU to support their clients’ compliance, and it is anticipated that this trend will gain further momentum once Article 50 is triggered.

Some UK companies undertaking the Lead Registrant (LR) role under REACH have been challenged by their co-registrants for substances already registered in 2010 and 2013. This has the consequence that a UK company that may be an ideal LR may not be accepted by others in the Substance Information Exchange Forum (SIEF). As 2018 swiftly approaches, this is a challenging scenario that leaves supply chains susceptible to non-compliance. Additionally, this situation creates significant possibilities for conflicts regarding data ownership and cost-sharing.

The status of EU chemical-related case law, the existing REACH registrations of UK entities, and the validity of certain contracts also require consideration. UK-based companies that have already registered their substances under REACH will be outside the scope of REACH upon a Hard Brexit, and so it is important that decisions are made timely regarding whether these registrations will be grandfathered -- or if another process is to be used. The UK has the second highest number of REACH registrations, after Germany. It remains to be seen what status will be granted to EU case law upon Brexit, and if a distinction is drawn between the effect of pre- and post-Brexit case law on legal and regulatory practice in the UK.

Under BPR and in a post-Brexit regulatory landscape, UK companies would be required to appoint an EU Representative for purposes of the Article 95 List, similar to the second OR scenario outlined above. Additionally, post-Brexit, businesses operating across Europe may not be able to include the UK in any EU-wide biocidal product permitting under BPR. The Plant Protection Products (PPP) Regulation raises fewer concerns than REACH and BPR because the PPP Regulation requirements related to representation in the EU are not as strict.

The UK’s Health and Safety Executive (HSE) currently acts as a MS Competent Authority (CA) under REACH and BPR. In cases where HSE’s evaluations are not completed by the date of the UK’s formal departure from the EU and EEA, tasks will need to be reassigned to other CAs or discontinued. It appears foreseeable that HSE will no longer take on a high volume of new tasks (e.g., substance evaluations), and will attempt to complete ongoing procedures prior to Brexit.

UK chemical companies will want to maintain access to EU markets, and will therefore be required to meet certain product standards mandated by EU chemical Regulations. Even if the UK did not join the EEA or EFTA, companies exporting to the EU would still be required to meet regulatory product and supply chain standards to be able to supply products and services into the EU (e.g., REACH and CLP). Similarly, UK chemical manufacturers trading internationally would be required post-Brexit to comply with the UN’s Globally Harmonized System of Classification and Labelling of Chemicals (GHS). That numerous companies in the UK’s chemicals sector trade internationally, within and beyond the EU, means that even if there is a degree of deregulation in the UK post-Brexit, its relevance may be limited as companies will continue to have important business interests in ensuring their products are up to global regulatory standards.

It is important that companies interested in maintaining a presence on the UK chemicals market post-Brexit evaluate the requirements that the UK could potentially impose. It appears quite possible, but not certain by any standard, that a modified version of REACH could apply in the UK post-Brexit. It remains to be seen how the regulatory framework for the UK will evolve, however, in a number of areas, it is difficult to envision the UK Government taking a radically different policy approach than that of the European Commission. Any significant reduction post-Brexit by the UK in environmental health and safety standards is likely to receive strong criticism from the public and non-governmental organizations. Companies placing chemicals on the EU and UK markets in a post-Brexit environment would benefit from appointing suitable entities in both jurisdictions to manage compliance.

Commentary

Brexit has become a labyrinthine, continuously evolving, and highly debated process. The implications of Brexit are potentially game-changing, and although a number of uncertainties prevail regarding Brexit, industry needs to ensure that it follows developments closely and takes proactive measures to maintain continued business success across Europe. It is likely that the entire Brexit process will be controversial, and that public opinion on the UK’s future important Brexit-related steps will continue to be divided. For the chemicals sector, the UK’s vote to leave the EU and important developments since then amplify the need to consider global compliance very carefully. With a new Toxic Substances Control Act in the U.S. and a potentially evolving regulatory climate in Europe, companies should develop comprehensive strategies to support global compliance and appoint suitable personnel and entities as needed.