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The impact of Brexit on businesses: The legal path out of the single market

It’s been almost three months since the fateful referendum vote that established the exit of the United Kingdom from the European Union. The decision by British voters to leave the Union has had immediate financial consequences on global markets. The day the referendum results were announced the pound fell to a 30 year low, dropping 11% against the dollar, while the London Stock Exchange lost 8% at the opening.

After three months, economic forecasts seem to sound less dramatic: it will not likely be a recession, as many analysts had feared. Nevertheless, Brexit – according to the latest signals from the British Chambers of Commerce (BCC) – can only negatively impact UK growth in the coming years.

The BCC has just revised down the forecasts for the UK GDP for the next three years: the estimates for the current year increased from 2.2% to 1.8%, from 2.3% to 1 % in 2017 and from 2.4% to 1.8% in 2018. While these figures could turn out to be wrong, they give a clear sense of distrust companies feel towards the British business environment.

This contraction affects all sectors starting with finance – Ernst & Young is predicting a slowdown of 2% in 2017. Manufacturing is certainly not exempt and the same fate seems to be reserved for construction and real estate. This increase in uncertainty is likely to put a brake on investments, while it is expected that rising inflation and a moderately weaker labour market may inhibit spending.

However, the legal and business impact of Brexit will mainly depend on the strategy that will be adopted for the UK’s future relationship with the EU.

The EU Commission informed that by the 1st of October the ‘Task Force for the preparation and conduct of negotiations with the United Kingdom’ for Brexit will be operational. Even if the UK tried to negotiate a unique model of access to the EU market, Juncker – President of the EU Commission – has stated the UK “will not have an access à la carte” to EU benefits and therefore will not be part of the single market. The alternatives for the UK do not allow loopholes: the access to the single market constitutes acceptance of freedom of movement of people soundly rejected by the vote on Brexit.

The ‘Norwegian model’ is one that has often been invoked by promoters of Brexit to support that the exit from the European Union would bring the UK all the benefits of members to the EU, eliminating the hassle of having to surrender its sovereignty to Brussels bureaucracy. But the reality is not as rosy as it seems. Norway, which in its 1994 referendum declined (slightly) EU membership, since then is part of the European Economic Area (EEA). The country has indeed access to the single market of the EU, but is subject to most of its rules, and has no say in decision-making. What the promoters of Brexit during the campaign did not explain at all, moreover, is that the Norwegian model, while ensuring access to the single market, also provides the acceptance of some of the basic principles of the EU, including the freedom of movement of persons – one of the most detested principles by British Eurosceptics.

Another apparent option for the UK is the ‘Swiss model’. Switzerland does not have an ‘agreement’, but rather has about 120 bilateral treaties with the EU, since it did not want to join the European Economic Area. However, the Swiss model appears to be an unlikely route for the UK. Given the complexity of the bilateral agreements with Switzerland, it is to be excluded that the EU Member States will replicate this process with another country – especially with a country that has just voted to leave the EU.  Further, the most important British economic sector is the financial industry. Being part of the EU, Britain could offer its financial services throughout the EU without having to relocate its activities to other countries. In fact, the large Swiss investment banks have been conducting their operations from London. If Britain was to find itself in the same situation, it would have to relocate its activities related to financial services elsewhere on the continent.

Whatever the exit strategy may be, there are some areas of EU legislation that will continue to be of interest to British companies. For example, British companies operating in the EU must continue to comply with product standards and competition rules of the EU. In case the UK will not follow any of the existing models of trading with the EU, the UK will continue to operate in the global market and this would require the UK Government to balance the temptation to create different or less stringent rules in order to attract non-European companies in the UK instead of an ongoing consistent relationship with European companies and investors.

Especially concerning is the fate of jurisdiction agreements or clauses in favour of the courts of England, Wales, Scotland and Northern Ireland. The UK has long built its reputation as one of the leading centres for international dispute resolution. The International Court of Arbitration (ICC) in London is probably the oldest among all major institutions of international arbitration.

However, after Brexit the country may face the prospect of its court judgments becoming less effective across Europe. Businesses will need to consider the possibility of additional disputes arising as parties seek to extract themselves from contracts that are no longer attractive since the UK is not part of the EU. Also, European companies are wondering if the English decisions will be enforceable in their country of origin and whether English law will treat EU citizens equally.

Parties may challenge their activities in Europe (UK and outside), and look for creative ways to circumvent the contracts that they wish they had not signed – that is, taking into account Brexit as a case of force majeure which prohibits to pursue the elective domicile stated in those contracts.

As a member of the EU, the UK currently benefits from various regulations and conventions (particularly the Brussels Regulation, The Hague Convention and the Lugano Convention), which ensure that the courts of Member states of the EU and EEA-EFTA apply common rules on competition to determine when they accept jurisdiction over a dispute, and set as effective and mandatory in all member states’ territories a decision taken in another State.

It is debatable what the rules applicable by the courts of the UK to the jurisdiction agreements in civil and commercial matters will be when the nation will exit the European Union.

First of all, The Hague Convention will not be applicable to the United Kingdom, since it was ratified by the European Union. Likewise, not the Brussels Regulation. Post-Brexit, whomever has concluded an agreement in favour of the jurisdiction of the UK Courts, relying on the validity and effectiveness of the Agreement, as well as the circulation of the judgment issued by the court, will be forced to reconsider the opportunity of the choice.

Some, however, in an attempt to save the situation, reassure about the future of jurisdiction agreements in favour of the UK courts pointing out that, once outside the European Union, the British judge will return to resort to anti-suit injunctions: a powerful tool with which to punish those who adopt or continue a trial in a foreign country in defiance of a choice of UK court. Yet, such a measure will continue to be a waste of paper outside the UK and indeed, will return to be an attempt on the so called international comity, legally nonbinding practices adopted by states for reasons of courtesy.

The legal path to the real exit of the UK from the EU is long and the results are difficult to predict. However, If the road that will likely take Britain will be the abandonment of the single market, aimed at complete recovery of the control of migratory flow, the price to pay will be 70 billion pounds: the estimated analysis of the Institute of Fiscal Studies (IFS). Alternatively, remaining in the single market – according to the IFS –  would be worth 4% of GDP, with benefits that outweigh the costs of access. In addition, remaining in the single market the UK would have a voice on possible reforms of the same market, not putting the country in a position to suffer the choices of the other European members.

The primary objective of the UK-EU negotiations of an exit strategy should thus be focusing on a smooth legal path out of the single market, which would still allow basic compliance with the major EU commercial and financial regulations that could structure a unique model of access to the single market.

By Deborah Civico, Legal writer.

Global Lingo provides both Translation and Transcription services to Law Firms, Intergovernmental Organisations and Corporate Counsel. Specialising in the translation of complex, confidential legal documents into multiple languages, Global Lingo supports Litigation and Arbitration cases and also works with internal investigations units to translate and transcribe sensitive material.  Contracts, lease agreements, capital markets transactions and corporate communications are all areas where Global Lingo provides industry specific experienced linguists.

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