On June 5 1975 65 per cent of UK voters elected for the UK to join the European Economic Community. Yesterday, on 23 June 2016, over 41 years on, 52 per cent of UK voters declared that it wasn’t for them anymore.
It’s currently very uncertain as to what will happen next but we hope to be able to give some confidence over the coming weeks as to what the Leave vote means for bidders, contractors, employers, and construction practitioners across the country.
The negotiation of the UK’s exit
The Lisbon Treaty says:
“Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.”
“A Member State which decides to withdraw shall notify the European Council of its intention…the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union…It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.”
EU law will cease to apply to the UK from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification to withdraw, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.”
So, before the UK can leave the EU it first needs to negotiate the terms of its exit. This is often referred to as the transitional period and is expected to last for a minimum of two years (as per the terms of the Lisbon Treaty). And a qualified majority of the 27 EU Member States, as well as the European Parliament, will need to approve the result of the negotiation process (although an absolute majority will be needed to extend the two year negotiation period). During this time the UK would still be subject to EU law and would be legally bound by the EU treaties.
So what sort of exit might the UK negotiate?
Unfortunately the answer here again is far from straight-forward. There are numerous iterations of how this relationship will look, but the three main models that have been discussed in the media are:
- The Norway model – where the UK becomes a non-member state member of the EEA (alongside Norway, Lichtenstein and Iceland), giving the UK access to the single market and free movement of goods, services, people and capital but this would still impose a number of regulatory obligations stemming from the EU on the UK (including things such as state aid, competition, consumer protection and environment).
- The Switzerland model – where the UK negotiates a series of bilateral agreements with the EU which provide for free movement of goods (but not services) through membership in the European Free Trade Association. Again, this would likely still require that the UK agree to continue to be bound by some of the EU regulations/directives (including state aid and environmental protection obligations).
- The World Trade Organisation model – where the UK relies upon its membership in the WTO to govern the basis of trade with the EU, this would continue to impose regulatory obligations on the UK which stem from the WTO some of which would be broadly similar to EU regulations.
The source of regulatory obligations
Depending on the exit model and the future trading relationship agreed between the UK and the EU, many EU imposed regulations may at first blush appear to “fall away”.
However, this overlooks the fact that many EU Regulations have either already been transposed into UK law, or stem from or are reflected in other public international law obligations (including WTO agreements and the UN conventions) which have been adopted and ratified by the UK.
These international obligations will continue in force even after the UK exits unless the UK takes further steps to repeal/secede from these international agreements. Doing so would be likely to have an impact on the UK’s reputation internationally and domestically, especially as many of the regulations in question relate to matters of public opinion/policy (eg, environment, labour law, air quality, etc).
There are a number of such regulations which fall within this category of EU regulations that are likely to continue to (substantially) have effect, including: the Strategic Environmental Assessment Directive (due to the UNECE Protocol on Strategic Environmental Assessment), the Environmental Impact Assessment Directive (UNECE Espoo Convention) and a range of procurement directives (WTO Government Procurement Agreement which is a close copy of the current EU public contracts directives).
While the uncertainty as to the applicability of EU based regulations will continue through the transitional period, it is important that parties to long term agreements/projects have a common understanding of what they anticipate their obligations would be going forward.
See our Procurement team’s blog: Five reasons why Brexit is unlikely to spell the end of procurement regulation in the UK, for a more in depth look at public procurement.
In addition to the impact on regulations, subject to the terms of the UK’s “exit deal” Brexit may open up UK companies/organisations to the possibility of double jeopardy; that is, facing two competition challenges on a single issue – one by the UK competition authority and one by the EU competition authority if that matter in issue had an impact on the EU market. Having left the EU there would likely no longer be the same coordination between the UK and EU competition authorities to determine the correct jurisdiction and this would open up UK companies/organisations to the potential of facing challenges from both authorities.
Further, it has been speculated that by leaving the EU, the UK would no longer be able to affect the development of EU contract law (or any EU law for that matter) and it is likely that there would be a stronger move towards a harmonised contract law in Europe. At the moment while the EU’s aim is to harmonise EU law there is a divergence as to how that should look (ie, should it follow the common law model or the continental model) and the UK has taken a key role in holding back a “European Commercial Code”.
If the UK was not part of the EU, there would be far more likelihood that the EU would move more quickly to harmonise contract law along the continental model. This would likely result in the popularity of English law as the choice of a “neutral jurisdiction” in European contracts diminishing. We would not anticipate that this will have a direct impact on construction contracts any time soon, but rather that it will likely initially affect financial services contracts (which may have a knock-on effect for construction projects) as the financial services would be governed by EU regulations and UK courts would be hard pressed to be interpreting EU law when they are no longer a member of the EU.
What happens next?
Many EU-based rules and regulations will likely substantively continue in force, in some form or another, after the UK exits the EU. When we also consider the lengthy transitional period preceding any exit during which EU law will continue to apply, the short term outlook in respect of applicability of EU law is relatively secure. The medium to long term is less certain.
We will have to wait and see what the immediate financial impact will be on the construction industry and we will be keeping a close eye on the exit negotiations as they progress.