The latest round of Brexit negotiations has just concluded, with notably contrasting assessments from the UK and the EU.
David Davis, leading the UK delegation, observed that progress had been made in a number of important areas including healthcare rights for EU and UK citizens, mutual recognition of qualifications and reciprocal rights for citizens to set up and manage a business in the UK or the EU.
Michel Barnier, the EU's chief negotiator, accepted that there had been progress in some areas and that the discussions on Northern Ireland had been productive. However, he stated that "we are a long way from confirming that sufficient progress has been made to be able to recommend to the Council of Ministers that it should initiate discussions on the future relationship between the UK and the EU." In particular, he emphasised that there remain major disagreements on the key issue of the amount the UK should pay to the EU to settle its liabilities on departure.
Commenting on the UK's recent position papers, he also noted that "the UK wants to take back control, it wants to adopt its own standards and regulations. But it also wants to have these standards recognised automatically in the EU [….]. This is simply impossible. You cannot be outside the Single Market and shape its legal order."
What do the position papers tell us?
But rhetoric aside, how far apart are the two sides in reality? A comparison of the UK and EU's position papers provides some indication of the extent of disagreement. We have already commented on the UK's position papers on customs arrangements and the future role of the ECJ. This week we look at a number of other subjects which are of key relevance to business – namely the UK's position papers on legal matters, goods and data.
Judicial cooperation in civil and commercial matters
- Why it's important: a business suing in the English courts may need to enforce the eventual judgment in another EU member state. At present, EU member state courts are generally obliged to recognise English court judgments – but after Brexit, that may not be the case. Current arrangements with the EU also cover issues such as:
- how far EU member state courts will uphold exclusive jurisdiction clauses (obliging the parties to sue one another in the English courts, for example); and
- in relation to matters with a cross-border dimension, which national law should apply and which courts should have jurisdiction (including how far the parties' own choice of law in an agreement will be respected and which national insolvency rules should apply).
- The EU's position: the EU has so far only set out its position on these issues in relation to matters up to the date of Brexit (but not beyond). Key points include:
- any UK judgments issued prior to Brexit should continue to be recognised in accordance with the pre-Brexit rules; and
- similarly, choice of law and jurisdiction clauses in contracts entered into before Brexit should also continue to be dealt with under the pre-Brexit rules.
- The UK's position: the UK paper argues for close judicial cooperation to continue, but does not provide much detail on how this should be achieved. Much is likely to depend on the form that the UK's broader trading relationship with the EU will take. In the event of no agreement, the UK could seek to address some of the issues by participating in international agreements such as the Lugano Convention, but the paper admits that these would not replicate the full benefits of the current arrangements. That said, as regards the issues dealt with in the EU's paper (which is more limited in scope), the only area of significant disagreement appears to relate to recognition and enforcement of UK court judgments; the UK would prefer the pre-Brexit rules to apply to any judgments issued in proceedings initiated before Brexit – even if judgment is not given until after Brexit.
Continuity in the availability of goods
- Why it's important: UK-based manufacturers or distributors of goods with customers in the EU need to know whether they can continue to sell their goods in the EU after Brexit. Agreement will be needed, for example, on whether the safety documentation for a product approved for sale by a UK "notified body" will still be valid after Brexit. Without the correct documentation, the product could be refused entry to the EU.
- The EU's position: it might seem that the answer to this problem is obvious – surely if a product complies on the day before Brexit, it should continue to be regarded as compliant the day after (even if it is still in the manufacturer's warehouse)? However, the narrowness of the EU's current negotiating mandate means that its position paper proposes only that products already placed on the market before Brexit day (29 March 2019) may continue to be legally sold in the EU. According to the EU, "placed on the market" means that the goods must be in existence and available in the supply chain – so goods in a manufacturer's warehouse may not be covered unless they are already subject to an agreement for their onward supply, transfer of ownership or distribution. This in turn could mean that those goods could not be sold in the EU after Brexit - which, as an outcome, is a striking illustration of the EU's narrow approach to the negotiations at this stage. The EU's paper is also silent on the question of how far UK notified bodies will continue to be recognised after Brexit and other key issues concerning how far products entering the supply chain in the UK after Brexit could continue to be sold in the EU.
- The UK's position: although the UK agrees with the principle that products "placed on the market" at Brexit should be free to circulate thereafter, it seeks a wider arrangement in a number of key respects. For example, in relation to agri-food products, it wants all warehoused stock in existence at Brexit – even if unsold – to be regarded as "placed on the market." It also seeks continued recognition of prior compliance activities by UK businesses so that, for example, a product "type" already approved by a UK notified body at the time of Brexit could continue to be manufactured and sold in the EU after Brexit under that same approval. This would avoid UK businesses having to repeat the compliance process with a different notified body established in one of the remaining EU member states. The EU's response is likely to be that these are all issues for the second phase of talks on trade – because they involve a decision on whether the EU and the UK should agree mutual recognition of each other's product testing bodies on an ongoing basis after Brexit.
- Why it's important: at present, the EU subsidiary of a UK-based corporate is not prevented from transferring personal data (such as details of individual customers) to its parent in the UK, because the same rules on data protection apply throughout the EEA. After Brexit, unless agreement can be reached with the EU on this issue, such cross-border data transfers will face additional "red tape". For example, the EU subsidiary will have to demonstrate that it has implemented additional measures to protect the personal data of individuals in the EU. One approach would be to put in place "binding corporate rules" – but these would have to be approved first by a regulator. Another would be to enter into an intra-group agreement based on so-called "model clauses" – but that would involve additional administrative burdens (added to which, there are concerns that "model clauses" may be vulnerable to legal challenge).
- The UK's position: The UK is seeking a recognition from the EU that its data protection framework offers sufficient protection for EU data subjects that it should be regarded as broadly "equivalent" to the EU's framework, this removing the need for additional "red tape". As the UK is committed to updating its current data protection legislation in line with the latest EU legislation (see this briefing), it seems to us that in principle, such an arrangement should be acceptable to the EU (although some commentators have suggested that any deviation from the EU framework could delay or even prevent recognition of the adequacy of the UK's regime). Despite the obvious importance of ensuring that such data flows can continue after Brexit, the EU has yet to address the issue in its position papers. Its view may well be that this is an issue for later on in the talks because it all depends on the nature of the UK's future relationship with the EU; for example, if the UK were to adopt the EEA model, current EU data protection legislation would continue to apply, thus effectively preserving the free transfer of personal data.
How far apart are the two sides?
In some areas, such as the separation issues relating to civil judicial cooperation, the UK and EU appear to be in broad agreement on many points. In other areas, however, the position papers suggest that the EU and UK are still "talking past one another" to some extent.
Both sides also appear to have felt heavily constrained in what they can say. In the EU's case, the main constraint is the narrow scope of its initial negotiating mandate. In the UK's case, the main constraint would appear to be competing views within government and within the wider electorate of what Brexit should look like.
From a business perspective, the ideal start to the negotiations would have been some form of early agreement on the transitional arrangements (if only in broad outline), so as to provide comfort that both sides wished to avoid a "cliff edge" on Brexit day. However, as yet, there is no sign of such an outline agreement emerging from the discussions. As a result, our advice to clients remains that you should continue to hope for the best, but prepare for the worst – see our Brexit contingency planning checklist.
The next round of Brexit negotiations is due to start in the week commencing 18 September.
Senior Associate, Operational Risk & Environment
+44 (0)20 7295 3606