On November 14, 2018, almost a year and a half after the British public voted to exit the EU, the UK and EU reached agreement on the terms of separation manifested in a draft Withdrawal Agreement.  This draft text updates an earlier version published in March 2018. Subsequently, on November 22, the EU and UK published the accompanying draft Political Declaration that sets out key principles of the future relationship.  On November 25, the European Council endorsed these two texts.  This post summarizes the key outcomes with respect to trade in goods, the continued applicability of EU law and European Court of Justice jurisdiction, and dispute settlement during the transition period, as well as the framework for the EU and UK’s future relationship.

1. What does the Withdrawal Agreement do?

Status quo for a transition period.  The Withdrawal Agreement sets out the framework and arrangements of the UK’s departure from the EU and the European Atomic Energy Community.  It provides for a defined transition period (also known as the “implementation period”) allowing both parties extra time to negotiate their future relationship, before full separation comes into force.  During this transition, EU law “shall be applicable to and in the United Kingdom” (Article 127), subject to certain exceptions.  References to EU law (except with respect to the transition (Part Four) and Financial Provisions (Part 5)) include amendments made until the last day of transition (Article 6(1).  The European Commission notes that these exceptions are “to avoid imposing additional obligations on the UK, and for the transition period, during which Union law will continue to apply dynamically to and in the UK.  They shall be understood also as including the acts supplementing or implementing referenced provisions”.

This is intended to facilitate the continuation of trade activities and to minimize disruption in disentangling legal and administrative ties between the two parties.  (See “Sequencing: The Exit Agreement versus the Trade Agreement” in our previous post).

The transition period will end on December 31, 2020 (Article 126) – this means that any trade deal setting out the future relationship between the EU and the UK should be completed before this date, unless the deadline is extended.  (Article 132 provides for a single extension of this deadline to an undetermined date, by mutual agreement, and the UK would be required to continue contributing to the EU budget accordingly.  The decision to extend must be adopted by the Joint Committee (discussed below) before July 1, 2020).

What has been agreed?

i. Trade in the Single Market. As EU law continues to apply in the UK, the status quo regarding participation in the EU Customs Union and Single Market remains for the duration of transition.  This means that businesses in the UK and the EU can continue to trade (goods, services, capital) according to existing EU rules until December 31, 2020.[1]  The Withdrawal Agreement also makes explicit provision for the continued circulation of goods placed on the market before the end of transition, until it reaches the consumer (Article 41).  As explained by the European Commission, such goods “may continue to freely circulate in and between these two markets, until they reach their end-users, without any need for product modifications or re-labelling.  This means that goods that will still be in the distribution chain at the end of the transition period can reach their end-users in the EU or the UK without having to comply with any additional product requirements”.  Notably, this does not apply to trade in live animals and animal products, which will be subject to the Parties’ respective rules.

Trade “Backstop”.  In recognition of the unique political circumstances in Northern Ireland, the EU and UK agreed on an insurance policy to maintain an open Irish border in the event a future deal cannot be reached.  This consists of a two-level “swimming pool” approach, with Great Britain in the shallow end of trade commitments and Northern Ireland in the deeper end, as explained below.

Post-transition, the UK will stay in a temporary customs union if no final deal reached

If no alternative arrangement is finalized by the end of the transition period, the UK has the option of requesting an extension of the transition period before July 1, 2020 (Article 3 and Annex 2, Protocol on Ireland).[2]  In the event no further deal is reached, the “backstop” takes effect, in the form of a temporary customs territory encompassing the EU and UK.  This allows the trade of goods free of tariffs, quotas or checks on rules of origin.[3] (Article 6 (1), and Annex 2, Protocol on Ireland).  In exchange, the UK will align with the EU’s Common Customs Tariff, rules on the origin of goods and valuation of goods.

Post-transition, Northern Ireland remains in parts of EU single market if no final deal reached

There are additional commitments for Northern Ireland.  In order to avoid a hard border with Ireland once the UK exits, Northern Ireland will be permitted to trade (more freely than Great Britain) on the EU’s internal market free of customs duties and other restrictions and will be part of a much broader set of EU trade laws, including the Union Customs Code (Article 6(2) and Annex 5, Protocol on Ireland).  Consequently, Northern Ireland will be required to abide by deeper commitments to EU rules on goods (including trade defence), veterinary controls (sanitary rules), agriculture production/marketing, VAT and excise and State aid (Articles 9‑12 and Annex 5, Protocol on Ireland).

During transition, the UK can enter into free trade agreements with third parties

During the transition period, the UK may negotiate and enter into international agreements, provided those agreements do not apply during the transition period unless the EU consents (Article 129 (4)).

ii. Other key provisions.

  • Participation in EU institutions. During the transition period, the UK will no longer officially be part of EU decision-making as it will not be represented in the EU institutions, agencies and bodies.  UK representatives may however attend certain committee meetings regarding UK-related matters, if invited (Articles 7 and 128).
  • Financial settlement. These provisions set out the elements of the settlement, methodology for calculating the UK’s portion and the payment schedule for the UK’s contribution to the EU’s budget (Articles 133 to 157).  Although the total amount is not yet definitive, the UK Government has estimated this to be in the range of £35 – 39 billion.[4]
  • Separation Provisions. In order to wind down current arrangements, these include provisions to allow:  goods placed on the market before the end of transition to continue to their destination (Article 40); temporary carry-on of VAT and excise duty rules to goods (Articles 51 and 52); and continued protection of IP rights (Article 54).
  • Competition law and State aid law. EU competition law will continue to apply in the UK, ending on the last day of the transition period.  On State aid, for up to four years from the end of the transition period, the European Commission can bring a case against the UK on matters arising before the end of the transition period, but which may be discovered after the end of the transition period (Articles 92 and 93).  This is less than the ten-year statute of limitations provided for under the EU State aid procedural regulation (Article 17).
  • Citizens’ rights. The Withdrawal Agreement preserves the rights of residence for EU citizens in the UK, and UK nationals in the EU who are already exercising those rights (See Part Two for the full set of rights and obligations).

3. Will the CJEU continue to have jurisdiction in the UK – and what will this cover?

Jurisdiction on EU law.  For the duration of transition, Article 131 provides that the CJEU “shall have jurisdiction as provided for in the Treaties”.  Interestingly, although the CJEU’s jurisdiction to give preliminary rulings over pending and new cases (within four years after the end of transition) is maintained, the Withdrawal Agreement does not explicitly require the UK’s Supreme Court to refer questions to the CJEU (this referral obligation is set out for national supreme courts in Article 267 TFEU).  Arguably, Article 127(1), which provides for the continuation of EU law during the standstill period, may implicitly require such a referral, but there is a lack of clarity on this point.

Jurisdiction on the Withdrawal Agreement.  Beyond that, Article 131 also sets out CJEU’s jurisdiction “as regards the interpretation and application of [the Withdrawal] Agreement” for the transition period.  There is a potential tension between the Agreement’s dispute settlement provisions which provide for dispute resolution via the Joint Committee and an arbitration procedure (Articles 169 and 170), and the CJEU’s power to review matters arising from the Withdrawal Agreement.  Notably, the Withdrawal Agreement provides for the arbitration panel (and not the parties) to refer: questions of EU law generally; questions of EU law referred to in the Withdrawal Agreement; or, issues of compliance with CJEU judgments, to the CJEU (Article 174).  However, there is no clear requirement for the panel to refer questions specific to the Withdrawal Agreement to the CJEU.

As it stands, it is uncertain which body will be the ultimate arbiter of disputes pertaining solely to the Withdrawal Agreement.  (See below for additional commentary on Dispute Settlement).  Finally, it is also unclear whether the arbitration panel may decide to retain a margin of discretion to decline referral of certain questions to the CJEU – for instance, if such questions have already been settled clearly, and do not need to be revisited (by analogy with the “acte clair” doctrine applied by certain Supreme Courts to decline referral of cases to the CJEU under Article 267 TFEU).

Comparing the March version of the Agreement with the current text, significant changes to the dispute resolution framework are observed, where the EU has since made several striking concessions.  In March, the dispute settlement provisions proposed by the EC anticipated a procedure where disputes could be resolved by the Joint Committee through a “recommendation”.  Notably, that version provided for overarching CJEU review of disputes by permitting the Joint Committee or any of the parties to submit “the dispute brought before it” (therefore, any disputes, not necessarily limited to questions of EU law) to the CJEU for a binding ruling (Article 162, March draft).  In addition, the March text did not contain any reference to arbitration proceedings, while this is now the primary procedure governing dispute settlement.  Finally, in the event of remedies taken by a party in response to non-compliance of a ruling by the other party, the March version subjected those remedies to judicial review by the CJEU, while the current draft has removed this requirement (Article 178 (current draft); and Article 163 (March draft)).

Jurisdiction post-Transition.  The Withdrawal Agreement singles out several additional areas where CJEU jurisdiction will apply, during and/or after the transition period.  These areas include:

  • “Backstop” rules. The CJEU will have jurisdiction over numerous aspects of the Protocol on Ireland/Northern Ireland, including: interpretation of EU customs laws, the single customs territory as set out in the Protocol, technical regulations, VAT and excise, the single electricity market and State aid (Articles 8 – 12, Protocol on Ireland/Northern Ireland).  
  • UK’s obligations. If the European Commission considers that the UK has failed to fulfil an obligation under the European Treaties, or breached a provision governing transition, set out in Part Four of the Withdrawal Agreement (Article 87), it may, within four years after the end of the transition period, refer the matter to the CJEU.
  • Citizens’ rights. With respect to citizens’ rights, the CJEU will retain jurisdiction on the interpretation of this part of the Withdrawal Agreement, up to eight years from exit day, or from the end of the transition period, depending on the issue (Article 158).

iii. Implementation and Dispute Settlement

  • Joint Committee to implement provisions. Similar to the majority of recent trade and cooperation treaties, the implementation of the Withdrawal Agreement will be undertaken by a Joint Committee comprising EU and UK representatives (Article 164 and Annex VIII on Rules of Procedure of the Joint Committee).  The Joint Committee will meet at least once a year (as well as on request by either party), and take all required actions and decisions by mutual consent.  Its role includes: facilitating actions required for withdrawal; supervising specialized committees (g. on citizens’ rights and implementation of the Protocol on Ireland/Northern Ireland); and resolving disputes regarding the application of the Withdrawal Agreement.
  • Dispute Settlement Mechanism. As indicated above, the parties are required to commence dispute settlement by engaging in consultations aimed at achieving a mutually agreed solution (Article 169) – this is a common provision in most free trade agreements (“FTAs”).  In the event such negotiations are unsuccessful, the Parties may commence arbitration proceedings before the Permanent Court of Arbitration (Article 170 and Annex IX on the Rules of Procedure for Dispute Settlement).Hybrid approach similar to EU Association AgreementsThe rules in the Withdrawal Agreement set out a full arbitration process, and also provide for CJEU jurisdiction on questions of EU law (see (i), above) (Articles 170 and 174).  The approach translates into a sort of hybrid between modern FTAs with third parties, and the EEA Agreement, similar to that of dispute settlement mechanisms in recent EU Association Agreements with Ukraine, Moldova and Georgia.  Yet, the scope of market access provided for in those Association Agreements is much narrower than that of the EU Single Market – access to which the UK would continue to enjoy during the transition period.For instance, the Single Market provides unfettered access to markets for goods, finance, services and allows citizens to move unhindered across Member States.  This in turn allows goods and services to circulate freely without being subject to tariffs or regulatory obstacles, and there are no restrictions on investments or movements of capital between countries within the European Economic Area.

    In comparison, EU Association Agreements with third parties have typically been much narrower in scope.  To illustrate, in terms of goods, the Georgia and Moldova agreements provide for the elimination of some tariffs but not all, and maintain quotas for certain imports.  Although the agreements also anticipate regulatory harmonization, these are to be done in a “progressive” manner.  With respect to the freedom of trade in services, capital and persons, the Association Agreements provide only for limited liberalization.  They lift restrictions on certain services and investments, and contain only limited commitments, such as those setting out visa arrangements and best efforts to enhance citizen mobility.

    In terms of remedies, if a party fails to comply with a panel decision (and non‑compliance is confirmed by the original panel), the panel may impose fines on the party in breach (Article 178).  If non-compliance persists, the complainant may suspend any obligations derived from the Withdrawal Agreement (subject to certain exceptions) and any other agreement between the EU and the UK.  The panel’s decision is final and there is no right to appeal.

4. What happens next?

Despite ongoing turbulence within the UK government on the contents of the Withdrawal Agreement, the publication of this joint text marks a step forward in traversing the requisite legal phases towards full separation.  Assuming the EU and UK proceed with the current text, several major streams of action are anticipated in the coming months.

Barring any changes to the text, this draft agreement will need to be formally approved in both the EU and UK before it can officially enter into force (Article 185).  (See “Overview of Internal Processes” in our previous post).

Once the Withdrawal Agreement is finalized, the EU and UK will begin formal trade negotiations, building on the agreed principles and provisions.  Nevertheless, in light of considerable domestic concern in the UK and uncertainties in UK politics, the status of the Withdrawal Agreement as the blueprint governing the EU-UK relationship and future trading arrangements is still precarious.

Finally, the imminent CJEU decision on whether the UK has the right to unilaterally withdraw its notification of its intention to leave the EU under Article 50 TEU, (and the recent non-binding opinion issued by Advocate-General Campos Sánchez-Bordona, that the UK does have this right), will likely influence the future course of events.

[1] The European Commission explains that for customs, VAT and excise purposes, movement of goods which commence before the UK’s withdrawal would be allowed to complete their movement under the EU rules which were in place at the start of the movement.  (see also Article 47).

[2]The European Commission explains that where certification or product approvals are required for exporting goods, products from Northern Ireland destined for the UK can continue to be labelled as “UK products”; while, where EU law on goods applies, Northern Irish products should be marked “UK (NI)” (see also Article 8).

[3] Fishery and aquaculture products are carved out of this deal and will be negotiated subsequently.

[4] See, “Exiting the EU: The financial settlement”, National Audit Office (UK), April 20, 2018, at https://www.nao.org.uk/wp-content/uploads/2018/04/Exiting-the-EU-The-financial-settlement.pdf