Brexit update for General Counsel: A roundup of recent developments
This review of the main recent legal and commercial developments in the past week relating to Brexit provides a summary of the new relevant issues and potential areas of high level impact that businesses should be aware of. The review provided by our cooperation partners from Freeths LLP is not however a complete assessment of any business’s specific situation in relation to any particular development and will not cover all issues or developments that will impact on businesses or their operations.
Below are bite-sized summaries of the various legal and commercial implications of Brexit that have arisen recently, with signposts to the more detailed resources available through the Freeths Brexit Exchange, to help in-house counsel teams navigate the rapidly developing landscape.
The UK-EU Trade and Cooperation Agreement
It was announced on 24 December 2020 that the UK and the EU had agreed in principle on the long-awaited trade deal that would govern the UK-EU trading relationship after the end of the Brexit transition period on 31 December. The Trade and Cooperation Agreement (TCA) was
subsequently signed by both the EU and the UK, and applies on a provisional basis whilst European Parliament consent is obtained.
The TCA is a wide-ranging agreement, covering a number of pillars, including:
- Free trade, including zero tariffs and zero quotas on imports and exports provided products comply with rules of origin, as well as removing some technical barriers to trade. However, border checks and formalities will still be required, and cross-border trade will naturally not be as frictionless as it was pre-Brexit.
- Wider economic, social and environmental cooperation, including the ‘level playing field’ provisions that were the subject of much negotiation, requiring the UK and EU to maintain standards in areas such as workers’ rights and climate protection. A broad range of other measures are intended to facilitate ongoing trade, in areas such as aviation, energy, telecommunications and fisheries.
- Citizens’ security, including provisions around law enforcement and judicial cooperation in criminal matters, together with continued adherence to the European Convention on Human Rights, and a continued commitment to data protection standards.
The TCA does not cover areas such as foreign policy and external security, and there are some areas that are subject to unilateral EU decision such as an adequacy decision for data flows, and equivalence decisions for financial services.
The TCA will be reviewed every five years, with either the UK or the EU able to terminate at any time on 12 months’ notice. For further detail on the content of the TCA, see Brexit: Where are we now?
The ancillary agreements
Alongside the Trade and Cooperation Agreement, the UK and EU have agreed separate agreements in two areas: Firstly, in relation to security procedures for exchanging and protection classified information, a Security of Information Agreement has been put in place. Secondly, the UK and Euratom have negotiated a separate nuclear co-operation agreement known as the Civil Nuclear Agreement. The EU has similar such agreements in place with a number of third countries.
The status of European law in the UK
Although European law no longer applies directly in the UK as of the end of the Brexit transition period, what is known as ‘retained EU law’ will remain part of the UK’s legal system. This means that, where EU law was either implemented into UK law or directly applicable in the UK prior to 31 December 2020, that law will continue to apply in the UK, at least in the short term. In addition, the UK Government has over the past couple of years been carrying out a process of updating a large swathe of UK legislation, mostly to ensure that retained EU law would function correctly as part of UK domestic law. Finally, existing domestic law now has effect with such modifications as are required to implement the TCA. For further details of the effects on UK law, see Brexit: Where are we now?
Trade deals with the rest of the world
Although the recent headlines have been about the UK-EU trade deal, there are various discussions ongoing on other free trade agreements with countries outside the EU. Discussions have been ongoing with the USA, although the presidential election and subsequent statements made by President Biden that the US will not rush into trade deals suggests that a full deal may take some time yet. Meanwhile, the UK has put in place a number of trading agreements, some on a full basis such as the Comprehensive Economic Partnership Agreement with Japan, and some on a continuity basis which effectively preserves the existing position with countries such as Canada, Iceland, Norway, Mexico and Singapore. Other negotiations such as those with Australia, New Zealand and India are still in progress. For more information, see Brexit: Where are we now?
Commercial implications of the UK-EU trade deal
The signing of the TCA has reduced a degree of uncertainty for companies doing business crossborders,as the zero tariffs aspect of the free trade deal will remove a significant area of cost for goods that comply with the rules of origin. However, trade will, naturally, be considerably less frictionless than pre-Brexit, and businesses will need to make sure that they manage any risks posed by the new position under the TCA.
For instance, zero tariffs will be applied to goods that comply with the rules of origin requirements. These allow for ‘full cumulation’ which means that products can be considered to be products of UK origin, and therefore benefit from zero tariffs, if they incorporate inputs originating in the EU.
In addition, although the TCA contains a number of measures to simplify customs procedures and reduce technical barriers to trade, there will still be border checks and other processes and paperwork to deal with, and the responsibility for these needs to be accounted for in cross-border contracts. For further details on the aspects of the TCA that are likely to impact on contractual risk, see The impact of Brexit on commercial contracts Part 1: the potential disruptors.
Risk and uncertainty in commercial relationships can be managed both by contractual mechanisms, such as allocating responsibility for increased costs and delays in supply, or by more practical steps such as due diligence and early intervention in disputes. For our consideration of the options available, see The impact of Brexit on commercial contracts Part 2: what contractual protection to consider and The impact of Brexit on commercial contracts Part 3: the practical viewpoint.
Competition Law post-Brexit
With the Brexit separation of the UK and EU antitrust enforcement and merger control systems, the UK now has an entirely stand-alone competition regime. Although certain aspects of the regime remain unaffected by Brexit, such as market studies, market investigations, and the UK’s criminal cartel offence, there are a number of changes regarding antitrust, merger control and subsidies to be aware of which have now come into effect.
The UK regulators can now only investigate competition infringements under the Competition Act 1998, not under the equivalent EU provisions. In addition, the Competitions and Markets Authority is no longer prohibited from taking jurisdiction over mergers with a ‘Community Dimension’. This means that companies may now be subject to both UK and EU investigations and proceedings in relation to anti-competitive behaviour. However, many substantive rules remain unchanged, such as the vertical block exemption for distribution agreements, although longer-term these may well change at a UK level.
For further information and discussion of the practical ramifications, see Competition Law Post Transition.
State Aid post-Brexit
A fundamental change to the UK’s State Aid regime, now more rightly described as ‘Subsidy Control’ took place on 1 January 2021 with the coming into force of the State Aid (Revocations and Amendments) (EU Exit) Regulations 2020. These Regulations state that the State Aid restrictions in EU law cease to be recognised in domestic law, meaning that the UK is currently subject to the less rigorous ‘anti-subsidy’ obligations under the World Trade Organisation Rules. Whilst the UK has an obligation under the newly-signed UK-EU trade deal to create a new State Aid Regime in order to prevent unlawful competition between the UK and other European countries, we suspect that the creation of such a regime is probably quite a long way down the Government’s ‘shopping list’. In the interim, there are some general principles expressed in BEIS guidance which echo the content of the TCA and are obliged to be followed for any aid given by a public body over a ‘de minimis’ level of £350,000. For further details, see State Aid post Brexit.
National Security and Investment regime
The UK is bringing in wide new powers to capture both UK and foreign investors planning to acquire interests in businesses, land and assets connected to the UK. Introduced to Parliament on 11 November 2020 and currently in the House of Lords, the National Security and Investment Bill will create a standalone regime for Government scrutiny of investments that present a possible risk to national security in the UK.
Key features include a mandatory notification requirement for transactions involving acquisitions of ownership or control over entities active in one or more key sectors in the UK, and the ability for the Government to ‘call-in’ transactions whether or not they have been notified, with the current proposals seeing that call-in ability having retrospective effect for transactions entered into on or after 12 November 2020.
For further details on the proposed regime, see The New National Security and Investment Regime.
Data protection implications of the UK-EU trade deal
The UK Government has expressed a commitment to retaining the high standards of EU data protection law, and this is underlined in the TCA together with specific references to the key elements of the GDPR including data minimisation, purpose limitation, technical and organisational security, data subject rights, data breach notification, and control of transfers to third countries. The GDPR itself is enshrined in UK law by way of the Data Protection Act 2018, and although it is open to the UK Government to deviate from this over time, now that it is not subject to the overarching EU legislation, the provisions of the TCA will to a degree limit the amount of deviation that can take place.
Meanwhile, although many had hoped that the trade deal would be accompanied by an adequacy decision for the UK, legitimising transfers from the EU to the UK, the EU has made it clear that any adequacy decision would be a unilateral decision for it to take. As part of the TCA, the UK and EU have agreed a six-month transitional period that permits the free-flow of personal data from the EU to the UK. The purpose of this transitional period is to give EU time to determine an adequacy decision. Although the six-month transition period gives businesses some useful ‘breathing space’, the UK is not certain to receive an adequacy decision in its favour at the end of that period. Businesses should therefore make contingency plans to legitimise transfers from the EU (for example by putting in place standard contractual clauses) in the event that the UK is not deemed adequate.
For further detail see How will Brexit impact Data Protection and what should we be doing?, and in particular How should you handle EU Data Transfers upon Brexit?
Jurisdiction and cross-border enforcement
The TCA made no long term provision for jurisdiction (that is, where a claim should be heard), or the enforcement of court judgments between the UK and the EU following the end of the Brexit transition period. The reasons for choosing the laws of England and Wales to govern contractual relationships (freedom of contract, certainty and clarity) are not impacted by the end of the transition period, the law governing contracts made under English lw also does not change substantively, and courts across the EU will continue to respect the parties’ express contractual choice of governing law.
However, the end of the transition period does change the rules applicable to contractual disputes and where those should be heard, with Hague convention rules only applying to exclusive jurisdiction clauses, and the courts in EU Member States now able to apply their own local rules when considering an express contractual choice of jurisdiction outside of the Hague rules.
Streamlined procedures for cross-border enforcement of judgments no longer apply to UK judgments, and there are likely to be additional procedural hurdles to enforcement, resulting in increased cost and time, and local law advice will be required in the relevant jurisdictions due to the lack of uniformity across the EU. The challenge of enforcement remains even where both English law and the jurisdiction of the English courts are chosen in the contract.
For further details, see Brexit: jurisdiction and cross-border enforcement.
The Brexit Deal and Employers
The TCA has implications for the future of employment law and policy in the UK. Whilst all EU derived employment law became part of domestic law as of the end of the transition period on 31 December 2020, the TCA says that the UK and EU are able to create and amend their own employment law going forwards. However, as part of the ‘level playing field’ concept, such changes should not weaken or reduce the level of employment rights in a manner affecting trade or investment (i.e. to give UK employers a competitive advantage). For further information on how UK employment laws could change in the future, together with information about how the TCA affects professional qualifications and business travel, see What does the Brexit deal mean for employers?
The impact of Brexit on financial services regulation
Despite the UK financial services sector being the seventh largest in the OECD in 2018, and the majority of the UK’s financial services exports being to the EU (around 40%), financial services is notably absent in the TCA. In the main, it only contains general rules regarding financial services, for example an article covering the UK and EU’s commitment to work towards internationally agreed standards. Exit will therefore affect a number of UK financial services firms, in particular firms that previously passported their services.
Passporting between the UK and EEA states has now ended, and for EEA firms that previously passported into the UK, the Temporary Permissions Regime replaces it. However, UK firms will need to consider the domestic laws of any country that they are operating in. We are expecting a number of ‘equivalence decisions’ by the EU and UK that may allow some market access.
For further detail of the impact of the end of the transition period and the removal of passporting, see our Financial Services FAQs.
Geographical Indications and Brexit
One of the impacts of the end of the transition period on intellectual property relates to the use of geographical indications, or GIs. A GI is a sign used on products to denote that they are manufactured in a specific origin and possess certain qualities which flow from that origin. In the past, the EU Commission has been responsible for GIs in the UK. However, at the expiry of the transition period the EU GI scheme ceased to have effect in England, Scotland and Wales, (although Northern Ireland will continue to be protected by the EU scheme), and EU GIs no longer confer protection in England, Scotland and Wales. The UK will set up its own GI scheme which will be managed by DEFRA, and proprietors of existing EU GIs are granted an equivalent UK right as of the end of the transition period. The UK Government has said that the protection conferred by a UK GI shall mirror that conferred by an EU GI.
For further information on the arrangements for geographical indicators, including the effect on existing applications and how outstanding applications will be handled, see Geographical Indications and Brexit. For information on the effect of Brexit on intellectual property rights more generally, see Brexit and Intellectual Property Rights.
Energy, Waste and Sustainability
New UK Emissions Trading Scheme
Prior to 1 January 2021, the UK participated in the EU Emissions Trading Scheme (EU ETS), which applies to carbon dioxide, nitrous oxide and perfluorocarbons. The scheme operates on a ‘cap and trade’ principle, whereby a cap is set on the total amount of greenhouse gases that can be emitted by an installation, and companies receive or are able to buy emission allowances which can be traded with one another as required. As of 1 January 2021, the UK Government is operating a standalone UK ETS which largely mirrors the EU ETS, using the same ‘cap and trade’ approach and covering the same participant sectors.
For details of how the new scheme operates and how organisations can participate, see Brexit Update: The transition from the European to UK Emissions Trading Scheme.
Electric Vehicles and Renewable Energy
For those involved in the electric vehicle and/or renewable energy markets, four provisions of the TCA are of particular interest. Firstly, the UK and the EU have agreed a preferential tariff for UK produced electric vehicles and batteries. Secondly, the agreement provides that neither party can restrict access to markets for motor vehicles, equipment or parts on the grounds that a product being exported contains a new technology or feature that the other party has not yet regulated. Thirdly, the UK and EU have agreed to enhance their cooperation in relation to renewable energy and security of energy supply, including in areas such as offshore energy generation. Finally, there is an agreement to develop and implement a new and efficient energy trading arrangement by April 2022.
For further detail of these provisions, see The UK/EU Trade and Cooperation Agreement – Electric Vehicles and Renewable Energy.
Brexit trade deal implications for transport and haulage
Transport and haulage is an area in which the TCA was keenly awaited, given the critical nature of movement of goods and people between the UK and the EU. The TCA has improved the position as of the end of the transition period from the no-deal scenario, although it is of course a less favourable position than the UK enjoyed as part of the EU.
Across aviation, road passenger transport, and road haulage, the TCA permits broadly unrestricted travel between the UK and the EU (subject to requirements such as air operator certificates in the case of aviation, and driver hours in the case of road haulage). However, in all three areas there are limited rights to carry out travel between locations in the other territory; for example, UK aviation operators are not automatically entitled to operate routes between EU locations, and UK road hauliers are limited to making a limited number of journeys between EU locations only in connection with a UK-based journey.
For further details of the operations permitted under the TCA, and the requirements that apply to those operations, see Brexit trade deal implications for transport and haulage.
All articles for further details mentioned above are avaliable through the Freeths Brexit Exchange.