Counting down to Brexit
Ever since news broke in the early hours of Friday 23 June 2016 of the result in the UK referendum on leaving the EU, Brexit has maintained a constant presence in the news cycle to varying degrees of prominence. Yet now, approximately one year before the current deadline for the UK’s departure from the European Union, many businesses have yet to engage in any degree of preparation or planning for the substantial and permanent structural change that Brexit will bring to the Irish economy.
Why might this be? With the to and fro of the Article 50 negotiations, the publication of position papers that are high on sentiment but lacking in detail, there is still a great deal of uncertainty as to the final outcome of the Article 50 negotiation process and what the ultimate impact of Brexit may be. Furthermore, the transition period contemplated by the draft withdrawal agreement will ensure a certain degree of business as usual until 31 December 2020. In those circumstances, it is easy to understand why businesses might not have paid much attention to Brexit to date. However, at Ronan Daly Jermyn, we believe that there are four key messages that businesses should heed as they consider their approach to managing the impact of Brexit on their businesses.
1. NOW IS THE TIME TO ACT
The first of these is to act now. For many companies and sectors, Brexit has already happened (or at least the impact of the UK’s vote to leave the EU in June of last year is being felt). Take for example the mushroom production sector, which has seen firms exit the market and consolidation owing to the impact of currency volatility on what is an already tight margin business. While you may not need (or indeed be able) to take specific action right now, our advice would be nonetheless to start thinking about Brexit, its impact on your business and what steps from a legal perspective you may need to take in due course.
2. BREXIT MEANS BREXIT
The second message is that Brexit means Brexit. Notwithstanding the criticism that was levelled at this circuitous statement from Theresa May’s Lancaster House speech, there is a certain simplicity to it. Much of the discussion has focussed on possible models for the future relationship between the EU and the UK. There has been much discussion of the features of the Norwegian Model, the Swiss Model, Turkish Customs Union and CETA, the possibility of a Hard Brexit or Soft Brexit. However, regardless of the type of Brexit and no matter how close in substance the post-Brexit relationship is to the UK’s current EU membership, the fact remains that the UK will leave the European Union and cease to be a member of the European Economic Area (“EEA”).
This very simple fact in and of itself carries immense legal significance as much of the laws that underpin and facilitate commercial transactions between Ireland and the UK (be they tax, company law, competition or data protection) are predicated to the UK being an EEA member state. Business post Brexit will not be the same as before. Companies and organisations will therefore need to adjust to a new regulatory and legal landscape when carrying on business in or with the UK.
3. FOCUS ON WHAT MATTERS
The third message is not to get lost in detail. The legal implications of Brexit are numerous – from commercial contracts to trade to food regulations, data protection, dispute resolution, open skies, R&D, pharmaceutical regulation, but to name a few. So our message is to keep it simple and focus on what matters to your business. For the majority of businesses, that will be:
- your people;
- your data;
- your trading relationship with the UK;
- securing your presence in the UK,
in a sense drawing on three of the four fundamental freedoms of the internal market: free movement of people, free movement of goods and freedom to provide services.
Somewhat ironically for a referendum debate that very much focussed on immigration, the people piece could prove less complicated than previously thought. The common travel area – an arrangement that pre-dates Ireland’s membership of the EU by half a century and effectively creates mutual recognition of citizenship between Ireland and the UK – will be maintained and this of itself will lessen the impact of Brexit on the free movement of Irish and UK citizens. Furthermore, the draft withdrawal agreement contemplates continued rights of residence and protections of EU law for EU nationals from other member states residing in the UK prior to the expiry of the transition period and their family members.
However, employers should not forget the thousands of other EU nationals working in Ireland and how Brexit might affect their ability to work across the UK and Irish operations of their employers. A practical step that employers can take is to conduct an analysis of those persons in its workforce that might be affected and also take steps to re-assure staff and maintain good communications.
With data being the new currency, Brexit threatens to potentially disrupt the free flow of personal data between the UK and the rest of the EU. Over the past number of years there has been a marked growth in the use of cloud-based storage and software applications with companies moving away from the traditional in-house server model. Many of these software providers and the data centres on which company information is stored are located in the UK.
Currently, UK data protection law is based on EU Directives and from 23 May 2018 the General Data Protection Regulation (“GDPR”) will apply in the UK as well. In fact, the extra-territorial effect of GDPR means that it will continue to apply to UK companies which offer goods or services to EU residents or which monitor EU residents even following Brexit. EU data protection law restricts the transfer of personal data outside of the EEA unless the European Commission (“Commission”) has determined that country to which data is exported ensures an adequate level of protection (also known as an adequacy decision). Following Brexit, these restrictions will apply to data transfers with the UK.
The UK has expressed a desire to be recognised as providing an adequate level of protection post-Brexit and it is possible that the Commission may make an adequacy decision in respect of the UK allowing for the free-flow of data between the UK and the rest of the EU. However, the UK cannot apply for such an adequacy decision until it formally leaves and the process can take many months. Importantly for those who process data on behalf of public bodies, public bodies will invariably restrict the transfer of data outside the EU (let alone to the EEA or a country ensuring adequate levels of protection). This will also be a standard restriction in most data processing contracts. Accordingly, it would be advisable to review existing data storage and processing arrangements to assess how these might be affected by Brexit and what contingency arrangements can be put in place. Consider incorporating this exercise as part of your preparations for GDPR. For further information please see our previous insight “Brexit – An End to the Free Movement of Personal Data”
Your trading relationship with the UK
The UK represents not only a vital export market but also an important import market for goods and services. The precise effect of Brexit on these trading relationship remains to be seen but it can be expected that Brexit will impact on the ability of parties to perform contracts or more importantly the cost of performing contracts. Who will bear customs duties or the cost of having to comply with different regulatory standards, how will customs checks and border controls impact on lead times for deliveries?
The fact that Britain will cease to be a member of the EU will impact the operation of contracts that operate by reference to a defined territory (for example distribution agreements or trademark licences). This will also impact on any data processing elements of a contract as noted above. When contracts become difficult or costly to perform, one or more the parties will invariably want to extricate themselves and so one can expect the focus to turn on termination clauses and the ability to exit a contract without penalty.
For anyone entering into a commercial arrangement or transaction with a UK counterparty that is likely to remain in place post Brexit, such contracts should be “Brexit proofed” to help mitigate the potential negative effects. Examples include something as simple as a review clause to more technical provisions dealing with current risk and dispute resolution clauses to ensure a contract can be enforced once the UK leaves the EU’s mutual recognition of judgments regime. Now is the time for businesses to review those business critical contracts to assess the possible impacts of Brexit and whether any steps can be taken to protect their interests.
Securing your presence in the UK
Lastly as regards the areas one should focus on, it is important to remember that many Irish business have operations in the UK. While much of the press-coverage is on the UK-based business that may need to re-locate to the EU, it will be equally important for EU businesses to consider what they may need to do to secure and maintain their existing operations in the UK. The UK will continue to remain an important trading partner for Ireland.
One issue to consider includes the need to set up a UK subsidiary – this will very much depend on the UK’s post-Brexit regulatory regime and is one to watch.
For Irish businesses with a European-wide brand, it may be necessary to review your trademark portfolio and consider a UK national trademark application or other UK specific IP registrations because the European Trademark will not grant protection in the UK post Brexit.
4. WATCH FOR THE RIPPLE EFFECT
The final message is that perhaps the potentially biggest impact of Brexit will be its collateral/consequential impact – the so-called ripple effect as opposed to the direct impact it will have on the free movement of goods, persons, services and capital. As mentioned above, contracts that become more costly or difficult to perform will invariably lead to a rise in disputes and, ultimately, litigation. We have already seen the impact of Brexit on mushroom production and the resulting consolidation in that sector. This is likely to follow in other sectors. Without a doubt access to the UK market is a big concern for Irish exporters but equally as EU markets are closed off to UK producers and the cost of purchasing from UK suppliers increases, there will be opportunities for Irish companies to replace UK producers or enter into new supply arrangements with other EU suppliers.