The EU-UK Draft Withdrawal Agreement, 14 November 2018

An overview for Northern Ireland businesses

22 November 2018

Author: Stuart Anderson
Practice Area: Corporate - M&A
Sector: Brexit

S_anderson

A lengthy 585 page withdrawal deal was struck between EU negotiators and the UK government, on Wednesday 14 November 2018. The political hurdles before it can be agreed and implemented are considerable and as at the time of writing, it is very uncertain as to whether this deal will get the necessary approvals in the UK Parliament. Against that background, businesses would be best advised to continue to develop their contingency plans for a “No Deal” scenario.

However, the focus of this note is to summarise the key aspects of the draft withdrawal agreement from a Northern Ireland business perspective (the “DWA”).

The DWA can be broken down into a number of key areas, and we will look closely at those that affect doing business in or from Northern Ireland.

These include agreement on:

1. The Governance Structure – as regards how the DWA can be implemented and enforced;

2. Citizens’ Rights – in relation to the approach to UK nationals living and working in the EU and EU citizens living and working in the UK post Brexit;

3. Separation Issues – in managing separation issues to allow for an orderly wind down of current integrated arrangements and policies;

4. The Transition Period – often referred to by the UK government as the “implementation period” this is effectively a standstill period to allow more time to negotiate a long term trade deal; and

5. The Backstop – the much talked about approach to avoiding a hard border on the island of Ireland and preserving matters of mutual interest requiring North-South Co-Operation.

We will briefly comment on each of those areas below.

1. The Governance Structure

The DWA is built upon EU law with the Court of Justice of the European Union (“ECJ”) confirmed as the agreed ultimate arbiter of any matters related to EU law.

If there is a dispute on the interpretation of the DWA, it would first be referred to a joint EU-UK committee established under Article 164. This joint committee would be made up of representatives from both the UK and the EU and it can only adopt decisions or recommendations by way of mutual consent. If agreement cannot be reached by the joint committee within three months of an issue arising, either party may request the establishment of an arbitration panel to decide on the matters in dispute.

2. Citizens’ Rights

A key issue for many local businesses is the status and supply of EU migrant workers following Brexit, particularly in the manufacturing and agri-food sectors. With some 3 million EU nationals living and working within the UK and one million UK nationals living throughout the EU, this has been recognised as a critical issue for both parties, and as a result “citizens’ rights” forms a substantial standalone part of the DWA. Notably it includes:

2.1 Residency Rights - All UK nationals lawfully residing in an EU member state at the end of the Transition Period would be permitted to stay in the host state, as would all EU citizens lawfully residing in the UK (the “Protected Persons”).

2.2 Rights to take up Employment or be Self Employed - The Protected Persons would have the right to take up employment or to act as a self-employed person in the host state.

2.3 Workers’ Rights - They would also keep all their workers' rights derived from EU law. In essence, they have a right to not be discriminated against due to nationality, and the right to equal treatment with host state nationals.

Provided these decisions are made prior to the end of the Transition Period, such persons (and their families) will continue to benefit from these protections for the rest of their lives.

2.4 Mutual Recognition of Professional Qualifications: As regards the mutual recognition of professional qualifications, the DWA sets out that EU professionals resident or frontier working in the UK, or vice versa, will continue to have their qualifications recognised, provided they obtained or applied for a recognition decision before the end of the Transition Period.

3. Separation Issues

The DWA acknowledges that there are a number of policy areas that require some attention to ensure an orderly wind down. A number of provisions will be of particular interest to local businesses:

3.1 Movement of Goods - goods lawfully placed on the market in the EU or the UK before the end of the Transition Period can continue to freely circulate in and between the two markets as they do currently. This will apply to all goods within the scope of the freedom of movement of goods including agricultural products, consumer products (such as toys, textiles, cosmetics), health products (pharmaceuticals, medical devices), and industrial products such as motor vehicles, machinery, electrical equipment, construction products, and chemicals. However, live animals and animal products will be subject to regulatory checks, deemed necessary due to high sanitary risks associated with the products.

3.2 Customs, VAT and Excise - for customs, VAT and excise purposes, movements of goods which commence before the UK's withdrawal from the Customs Union would be allowed to complete their movement under EU rules.

3.3 Intellectual Property Rights - the protection afforded to existing EU registered intellectual property rights would be maintained in the UK on exit. To achieve this, the UK would be required to convert the existing EU rights into UK intellectual property rights. This conversion would be without any re-examination and at no cost to the holder or user of the protected rights.

What is more “geographical indications” and “designations” of origin protected in the EU at the end of the Transition Period would continue to have the same level of protection in the UK as under EU law. Geographical indications bearing a name of UK origin will also benefit from the continuation of the existing protection in the EU. This would be particularly welcome for local agri-food businesses using geographical indications such as “New Season Comber Potatoes/Comber Earlies” and “Armagh Bramley Apples”.

3.4 Data Protection - the EU would not treat data and information obtained from the UK before the end of the Transition Period, or obtained after the end of the Transition Period any differently from any other member state, on the basis that the UK has withdrawn from the EU. After the end of the Transition Period, the UK would be required to continue applying the EU rules on personal data, until the EU has established, by way of a formal adequacy decision, that the regime of the UK provides sufficient data protection safeguards to the extent that they are “equivalent” to those in the EU.

3.5 Ongoing matters in judicial co-operation in civil and commercial matters – there are a number of key issues to note here as regards the continuity of cross-border disputes:

(a) Applicable Law – Contracts - EU rules on applicable law will continue to apply to contracts entered into before the end of the Transition Period;

(b) Applicable Law – Non-Contractual Disputes - EU rules on applicable law will continue to apply to non-contractual disputes if the event giving rise to damage occurred before the end of the Transition Period;

(c) Jurisdiction - EU rules on jurisdiction will apply to cases commenced before the end of the Transition Period; and

(d) Enforcement of Judgements - EU rules on recognition and enforcement of judgments will apply to cross border civil and commercial cases that are commenced before the end of the Transition Period.

In practice, the continuity of existing rules at least as regards matters arising before the end Transition Period, should give some comfort to local businesses that happen to be engaged in cross border disputes within the EU. For example, the draft text would allow a Northern Irish company that has had a successful judgement before a German court to benefit from the recognition and enforcement, in Northern Ireland, of the judgement rendered by the German court.

4. The Transition Period

As expected, the DWA includes a “Transition Period” which will run from the UK’s exit in March 2019 until the 31 December 2020. The purpose of the Transition Period is twofold to provide time (i) to prepare for an orderly separation on both sides; and (ii) to negotiate a new relationship.

During this period, the UK would continue to participate in the EU Customs Union and the Single Market (including free movement of goods, services, people and capital). All existing EU regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures would apply, including the jurisdiction of the ECJ.

In terms of trade the UK must continue to apply the EU trade policy and it cannot be bound by any new trading relationships with any third countries (unless permitted to do so by the EU). The key distinction between the Transition Period and current membership is that the UK will no longer participate in any EU decision making.

The DWA includes the possibility for the joint committee to extend the Transition Period, for an undefined period. Notably, this possibility can only be used once and must be decided by the Joint Committee before 1 July 2020.

The extension can only be achieved by mutual agreement between the EU and the UK and would require a “fair” financial contribution from the UK to the EU budget, which will have to be decided by the joint committee.

5. The Backstop

The “Backstop” is set out in a “Protocol” to the DWA, in essence it includes all the provisions the parties agree would be needed (1) to avoid a hard border between Ireland and Northern Ireland; and (2) to maintain North-South Co-operation on the island of Ireland on matters of mutual interest . Both parties acknowledge that it is an insurance policy to achieve that aim in the event that the UK and EU fail to conclude and ratify a subsequent agreement by 1 July 2020.

The DWA sets out the position that both the EU and the UK will “use best endeavours” to have a future trade agreement concluded in July 2020, but if that is not achievable the joint committee could agree to either (1) extend the Transition Period as discussed above (for a period that as yet is undefined in the draft); or (2) enter into this much talked about backstop arrangement, first mooted in the joint report of December 2017.

The heavily negotiated Protocol sets out how the backstop would operate in practice to avoid a hard border, and includes:

5.1 A UK Wide Customs Territory with the EU - a single EU-UK customs territory to avoid the need for tariffs, quotas or checks on rules of origin between the EU and the UK. Notably, the UK, including Northern Ireland, would represent itself at the WTO. The UK would be required to harmonise its commercial policy with the EU's common commercial policy as would be considered necessary for the functioning of the single customs territory. Therefore the UK would not be permitted to apply a lower customs tariff to its customs territory than the EU Customs tariff in relation to goods from any third country;

5.2 A Level Playing Field - the parties have agreed on a set of measures to ensure that there is a “level playing field” between them at the behest of the EU. These were included to ensure that the UK could not “undercut” the single market through de-regulation. These include non-regression commitments on “fair taxation”, environmental and worker protections. As regards State Aid, for aid granted by the UK that affects trade between Northern Ireland and the EU, the European Commission will continue to enforce EU rules directly and the ECJ retains jurisdiction in relation to the application and enforcement of those rules. As regards the rest of the UK, the UK have agreed to harmonise with EU State Aid rules and the parties have committed to close co-operation on State Aid matters;

5.3 EU Customs Code (UCC) - this would continue to apply to Northern Ireland ensure that Northern Irish businesses will not face restrictions when placing products on the EU's Single Market; and

5.4 Partial Alignment with the EU Single Market - Northern Ireland would remain aligned to a limited set of rules that are related to the EU's Single Market: principally legislation on goods, sanitary rules for veterinary controls rules on agricultural production/marketing, and VAT and excise in respect of goods. As regards VAT, Northern Ireland would remain part of the UK VAT area but would be required to be aligned on EU VAT rules in respect of goods in order to benefit from the EU’s “VAT Information Sharing Exchange” and to share data with Ireland.

Notably the Backstop does not include free movement of services, people or capital. Given that free movement of services will all but come to an end, our service industries such as legal, financial and accounting are very much left with a “wait and see” approach as to how extensive a free trade agreement might be. Nonetheless, the DWA refers to the EU and UK striving for an agreement on services which is "ambitious, comprehensive and balanced arrangements on trade in services and investment" that will go "well beyond the Parties' WTO commitments." As regards financial services in particular (worth around £119 billion to the UK economy) the parties have agreed on regulatory independence and equivalence. This is not the same as mutual recognition and would place the UK on a similar footing as financial services to and from jurisdictions such as the USA.

A number of EU single market regulations, such as the Common Agricultural Policy and Common Fisheries Policy, are also excluded. Arrangements on fisheries are noted to be negotiated as part of the overall future partnership.

As regards labelling of goods, a new labelling regime would be required for Northern Irish produce. Northern Ireland products can continue to be labelled or marketed as being from Northern Ireland or the UK when sold throughout the rest of the United Kingdom. However, Northern Irish products subject to EU law i.e. those being sold in Northern Ireland and/or the rest of the EU could only be labelled as being from Northern Ireland, and shall be indicated as "UK(NI)”.

In terms goods to be sold into the EU from Northern Ireland, Northern Irish businesses could seek approvals from an authority/body in another EU member state to issue product approvals/certificates. However, they can rely on authorisation via UK authorities in specific areas that require on-site inspections under EU law (veterinary certificates, official labels for plant reproductive material, production sites of pharmaceuticals, slaughterhouses). In doing so UK authorities would have authority to apply EU law in respect of Northern Ireland, and would have the discretion to make such certificates valid UK-wide.

No EU approval process would be required to place Northern Ireland goods onto the UK market, and in order to avoid duplication of approvals for NI products, both EU and UK approvals will be recognised for goods to be sold throughout the UK.

In addition to the Backstop mechanisms aimed at avoiding a hard border on the island of Ireland, the Protocol includes a number of other agreed mechanisms to reflect the unique nature of political and civic life in Northern Ireland, and its relationship with the rest of the UK and with Ireland these include:

(a) Common Travel Area - the maintenance of the Common Travel Area between the UK and Ireland;

(b) Good Friday Agreement - the UK committing specifically to no diminution of rights, safeguards and equality of opportunity as set out in the Good Friday (Belfast) Agreement 1998 (“GFA”);

(c) North-South Co-Operation – North-South Co-Operation is a principle of the GFA which recognises and commits the Irish government and the Northern Ireland Executive to work together on areas of common interest, including in the environment, health, agriculture, transport, education and tourism, as well as in the areas of energy, telecommunications, broadcasting, inland fisheries, justice and security, higher education and sport. In the Protocol, the UK affirms its commitment to North South Co-operation and makes provision for the UK and Ireland to continue to make new arrangements in this area;

(d) The Single Electricity Market – the “Single Electricity Market”, a key area of North South co-operation, will be maintained on the island of Ireland and will require the UK in respect of Northern Ireland to align with EU law insofar as it applies to the generation, transmission, distribution and supply of electricity; and

(e) Access to the Rest of the UK – the Protocol outlines that nothing within it prevents unfettered access for goods from Northern Ireland into the UK market. However, in order to protect the EU single market regarding goods, it was agreed that there would be a need for checks on goods travelling from the rest of the UK into Northern Ireland. The EU and the UK have agreed to carry out these checks in the least intrusive way possible.

In the areas where the Protocol would apply EU law in Northern Ireland, the EU bodies and agencies would continue to exercise the same functions as they do now. As a result, the EU Commission will continue to supervise the application of EU law and the ECJ will be the ultimate arbiter for all matters of EU law.

If following the expiry of the Transition Period, either party determines that the Protocol on Northern Ireland and Ireland (or any part of it) should no longer apply, it would be required to notify the other party it may notify the other party, setting out its reasons. Following discussions in the joint committee, the EU and the UK would then be required to make a mutual decision on any move away from the provisions within the Protocol.

What next?

The European Commission is holding the line that the DWA is not open to any further negotiation, however, the detail remains subject to the approval of the European Parliament and the Council of Europe. The biggest hurdle to its approval and implementation is the consent of the UK Parliament. If the UK Prime Minister is unsuccessful when she presents it to the House of Commons for approval, she would be required, within 21 days of the vote, to make a statement setting out how the UK government intends to proceed in relation to the Brexit withdrawal process.

Regrettably, given the political uncertainty our advice remains that all businesses should be preparing for all possible outcomes including a “no deal” withdrawal scenario.

Stuart Anderson

21 November 2018

*This note is intended to provide an overview of the DWA, it is not intended to be a substitute for detailed legal advice which may be required in particular circumstances.

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