No Simple Solution: A Brexit Update

By Graham Reynolds 

 

As EU officials arrive to this weekend’s Council Summit, the central challenges posed by Northern Ireland still loom. Even before the dust had settled from the impact of Brexit, it was clear that the border was set to be one of the most divisive issues. Set against a deep history of political mistrust, all readily accessible solutions continue to be either impracticable or one-sided, providing no simple solution to the problem Brexit now presents.

Political considerations aside, the results of the border negotiations could have a serious commercial impact with complex legal ramifications. Were negotiations on a transition agreement to fall through, the UK would have to leave the EU without any facilitating mechanism in place for the transition. This in effect would mean that the EU’s laws would no longer be applicable and Northern Ireland would no longer maintain untethered access to the Republic of Ireland.

 

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With no guarantee on such a transition mechanism, companies would be prudent to assess their exposure to a potential “hard” Brexit. From a legal standpoint, this should begin by identifying any legal arrangements that are predicated on the UK’s relationship to the EU. In particular, where a contract makes reference to an EU regulation or its jurisdiction, a company must determine what the appropriate response should be. Such a decision will depend on a number of factors. Most importantly, a firm should be able to clearly identify what its desired end result is and how it should approach its repapering exercise. This will involve weighing both legal and commercial considerations against the potential for a “hard” Brexit. For example, companies may no longer be able to provide services between the UK and other EU Member States by relying upon the current financial services passporting rights. In the absence of agreement on the grandfathering of legacy contracts, companies may need to undertake a factual and legal analysis to determine whether continued performance under the contract would constitute a permitted activity under the regulatory regime of the Member States where services are being provided. Companies may seek new authorizations or move businesses to a locally-authorized legal entity. Furthermore, companies would also need to consider how to deal with existing cross-border contracts and transactions that extend beyond the transitional period and eagerly await updates on this front.

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Once a firm has identified its preferred objective, it should devise a repapering framework that can inform when and where the different repapering options are appropriate, whether this is by “replicating and amending” or simply agreeing on a completely new form of documentation. Such a decision will typically be guided by the substance of agreement against the desire to get the appropriate documentation in place.

While “replicating and amending” has the advantage of being the commercially efficient option (by simply reflecting what was already agreed), it might not always be the appropriate course of action. Where documentation facilitates a complex arrangement that might be sensitive to its regulatory environment, renegotiating the contract might be the more suitable avenue. This has the advantage of ensuring that the more nuanced elements of a regulatory regime would be taken into consideration. Accordingly, firms should view any Brexit assessment as a three-pronged exercise: identify, assess, and repaper. This should minimize any unwarranted exposure to the potential of a “hard” Brexit.

As it stands, the Irish border dispute remains the central obstacle to the Brexit transition deal. As noted recently in the FT, the border dispute remains the only resolution where the Commission has indicated that little to no progress has been made. While an agreed timetable of seven UK-EU meetings has been outlined, without a clear agreement to the transition period in place, companies should be prepared for the possibility that no deal will materialize. With that in mind, preparing a repapering contingency plan should be an essential task for all of the relevant legal departments in the upcoming weeks.

 

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