On June 23, 2016, the United Kingdom (UK) voted in a referendum to leave the European Union (EU). In the meantime, David Cameron, UK’s Prime Minister, confirmed that he will respect the outcome of the referendum and that the UK will exit the EU (referred to as 'Brexit').
Article 50 of the Treaty on the European Union states that Member States can withdraw from the Union in accordance with their own constitutional requirements. The second paragraph regulates how the State will negotiate its withdrawal with the European Council, and the third states that “the Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period”. In this context, the actual UK exit date will not be before June 2018.
In his announcement, the UK prime minister announced that a new government is to be elected and that this new government can take the necessary steps to withdraw from the EU. He foresees a time frame of 3 months for these new elections to be held.
Impact on Commercial Relations and Contracts
In the short term, nothing is likely to change. The UK will remain within the EU until at least June 2018.
Also, following the actual exit of the UK, many commercial agreements will not be affected by the UK leaving the EU. Some commercial relations can, however, significantly change. In heavily regulated areas of law, the UK and EU may develop different legal frameworks and the actual point in time on which the UK leaves the EU may be the point in time that several of these legislative changes take effect.
In practice, the following elements of your contracts deserve consideration:
- the territorial scope of your agreements: if legislation between the UK and EU will start to diverge, the UK may have to be carved out of the scope of EU wide agreements.
- the free movement of employees and contractors: the freedom of employees and contractors to move between the UK and the EU and render services in the UK and EU alike, is likely to be affected by Brexit. Also, EU citizens will no longer have the automatic right to reside and work in the UK and vice versa, unless they have already obtained permanent residency.
- trade barriers: although both the UK and the EU would benefit from free trade, trade barriers are likely to increase.
From a regulatory perspective, a lot is expected to change post-Brexit.
In some areas of law, the UK is likely to adopt a more liberal position than the EU such as in data protection law where the UK may decide not to implement the new European General Data Protection Regulation (GDPR). On the plus side, this would significantly reduce the administrative burden on UK based companies but, on the down side, this would also mean that the UK will no longer automatically be considered to offer adequate protection for the transfer of personal data.
In other areas of law, the UK is likely to adopt a more restrictive position than the EU such as in the area of competition law where the UK is likely to allow the inclusion of more territorial restrictions than are currently permitted under EU competition rules.
From a legal point of view, the UK is likely to withdraw from the EU in application of article 50 of the Treaty on the European Union. This would mean that there is no immediate impact within the first two years.
From a commercial point of view, the current position of the UK as a stepping stone to European markets will be affected. A study by the UK government found that half of all European headquarters of non-EU companies are in the UK. Brexit is very likely to have a knock-on effect for business investment, particularly by these non-EU companies. The UK will become an important but separate European market. As a consequence, the UK will no longer serve as a point of entry into the EU and the UK cannot be entered using the EU centralized corridor.