Brexit update: ECJ, trade deals & data protection

Here is a selection of subjects that have arisen in recent days in the quest for a new post-Brexit relationship between the UK and the EU:

The role of the European Court of Justice (ECJ)

One of the most controversial aspects of the current negotiations between the UK and the EU for a new post-Brexit relationship is the role of the ECJ in interpreting the proposed Agreement(s) for the new relationship.

The non-binding Political Declaration by the UK and the EU in January 2020 appears to state clearly in Article 139 that questions of  “interpretation of provisions or concepts” of European Union law should be referred to the ECJ as the “sole arbiter” of such law “for a binding ruling as regards the interpretation“ of such law.  The draft Agreement published by the EU on the new Partnership with the UK reflects this in specific terms but not so the corresponding draft Agreements published by the UK. Both sets of draft Agreement(s) do, however, refer to those Agreements being interpreted in accordance with “customary rules of interpretation of public international law”, including those codified in the 1969 Vienna Convention on the Law of Treaties.

Interestingly, Article 139 of the Political Declaration does also state that ”conversely, there should be no reference to the [ECJ] where a dispute does not raise such a question [ie of interpretation of European Union law]”.

Each set of draft Agreement(s) does contain termination provisions, usually of six to twelve months’ duration, whereby one side or the other can terminate the proposed Agreement(s).

The EU is concerned that the quality of European Union law will be degraded if rulings as to the interpretation of such law are not dealt with by its ultimate judicial body, the ECJ. The UK is concerned that, having left the European Union, its sovereignty will be compromised by any judicial role that the ECJ might have in relation to the agreement(s) between the UK and EU for their new post-Brexit relationship.

A possible way forward is to accept that the general references to governing law and the role of the ECJ in the Political Declaration and in the draft Agreement(s) are imprecise and that an element of constructive ambiguity along the lines of Article 139 of the Political Declaration should,therefore, be left in the final Agreement(s) with the recognition that either side can withdraw from those Agreement(s) on fairly short notice if irreconcilable differences on the ECJ issue emerge in practice.

Would that life were so simple!

Negotiating Trade Deals with the US and the EU

The UK has set itself an ambitious target by seeking to negotiate in parallel new trade deals with both the US and the EU. There has been speculation that the UK is hoping to leverage success in one set of negotiations by importing that success into the other set of negotiations. That, of course, assumes that there are successful breakthroughs which can be leveraged. The evidence so far suggests, however, that both negotiations are tough and may only get tougher.

One area of concern is the level of tariffs on food, drink and agricultural products. The Times of 25th May 2020 reports that the UK Cabinet is split over whether the UK should offer to lower tariffs on agricultural imports from the US. The UK Environment Secretary, George Eustice, is reported to be opposed to generally lowering such tariffs because of the potential adverse impact on the British farming industry. He appears at least for now to have the ear of the UK Prime Minister, Boris Johnson, on this, but who knows whether Mr Johnson may yet modify his position? Though the UK Government’s International Trade Secretary, Liz Truss, is reported as saying that she will not do a trade deal with the US if it “does not benefit every sector of UK agriculture”, this is not the same as saying that import tariffs on some US agricultural products coming into the UK will not be reduced.

The Times article goes on to suggest that under the UK’s newly proposed Global Tariff on imports of goods some products which may be imported from the EU would be subject to high tariffs for the purposes of the UK’s negotiations with the EU –  this opening position, when coupled with a more generous opening position towards the US, would be designed to put pressure on the EU to lower its expectations of what the EU can achieve in its such negotiations and to take a more amenable approach as a result.

It is impossible at this stage for an outsider to judge whether this kind of negotiation arbitrage on the part of the UK in the ongoing discussions with the US and the EU will be successful from the UK’s point of view or not or whether the UK will find itself caught between a rock and a hard place.

We live in unpredictable times!

Data Protection

On 14th May 2020, the ECJ announced that it would give its decision on 16th July 2020 in the case of Data Protection Commissioner v Facebook Ireland Limited and Another  (Case C-311/18) EU:C:2019:1145 on certain issues relating to the transfer of personal data outside the European Economic Area (EEA).

The case concerns the technical topic of controller to processor standard contractual clauses (SCCs), which is a method apparently allowed by EU Commission Decision 2010/87/EU for the transfer of personal data from the EEA to third countries under the EU’s General Data Protection Regulation (EU 2016/679)(GDPR). In this case, there is already a favourable Opinion of an EU Advocate General (AG) that the above-mentioned EU Commission Decision is valid and that, therefore, the SCCs are a way to transfer personal data outside the EEA with the permitted safeguards in place. Though such an Opinion is not legally binding on the ECJ as such, it is often the case that the ECJ follows the opinions of the AGs in its decision-making.

The relevance of all this to Brexit is that the UK is now outside the EU and that following the end of the transition period (currently due to occur on 31st December 2020) it would not be possible under EU law to transfer personal data from EEA countries to the UK except through one or other of the gateways authorised by the GDPR or related legislation.

Whilst data protection is one of the subjects for discussion between the UK and the EU in their current negotiations for a new post-Brexit relationship, it would be important to know what transfers of personal data outside the EEA are permissible anyway under general EU law.

Brexit and Private Equity

On 26th May 2020, The Times published an article showing how UK private equity–controlled trading companies are losing out in the funding stakes as a result of EU state aid rules.

Typically, UK private equity companies make their investments into UK trading companies through a mixture of debt and equity – according to The Times article, the debt element can show up as generating losses within the UK trading companies concerned, which may be advantageous to those companies for UK tax purposes (subject to the so-called” thin capitalisation” tax rules) but can mean that, under EU state aid rules, the UK trading companies are denied from receiving state aid. This is because they may be classified as “undertakings in difficulty”, if they have accumulated losses that are equal to or greater than 50% of their subscribed capital.  As such, they could be barred from receiving state aid under the EU rules which, according to The Times, are “aimed at stopping businesses that are unviable from being propped up artificially”.

This means that such UK private equity-controlled trading companies may not be able to access the UK Government financial assistance programmes (such as CBILS – the Coronavirus Business Interruption Loan Scheme) which have been set up to deal with the adverse financial consequences of the Coronavirus pandemic and which are effectively classified as permitted state aid under EU state aid rules.

The Times article is headed: – “Private equity firms fear a day of reckoning”, which gives some idea of the strength of feeling that private equity houses and their investee companies may feel on this issue. Whether things will change following the end of the current post-Brexit transition period ( presently due to occur on 31st December 2020) may depend on whatever agreements (if any) are reached between the UK and the EU on “level playing field” issues such as state aid rules. If no such agreements are reached, the UK Government may feel more inclined to extend its financial assistance packages to UK private-equity controlled trading companies. On the other hand, this may lead to trade conflicts with the EU, which it would be better to avoid.

An EU Pandemic Recovery Plan

On 27th May 2020,the EU Commission, under its President, Ursula Von der Leyen, put forward a €750 billion recovery plan to enable the economic recovery of the EU (and in particular its worst-hit regions) from the adverse effects of the Covid-19 pandemic. The plan appears to bring together in a modified form a number of proposals and suggestions from various EU member states (either individually or in alliances) as to how the recovery should be financed.

According to The Times in its report on 28th May 2020, the €750 billion recovery plan would be financed through a mixture of borrowings on the international finance markets and new taxes on multinational company groups, maritime emissions, air travel, digital services and imports into the EU. This might impact on the UK as a non-EU country seeking to negotiate a new trade deal with the EU. It does raise the question as to whether a post- Brexit deal with the UK  will continue to hold the attention of the EU going forward as a major negotiating priority or whether, if a deal is not reached with the UK in the current transition period (due to end on 31st December 2020), Brexit will inevitably slip down the EU’s agenda.

Under the proposed recovery plan, it appears that €500 billion will be given as grants to the EU countries most adversely effected by the pandemic such as Italy, Spain and France with countries less badly affected such as Germany, the Netherlands, Austria, Denmark and Sweden having to fund a major slice of the contributions. Central and Eastern European countries, which have also suffered less than others from the pandemic, also appear not to gain much individually in direct terms from the recovery plan proposals.

Whilst Ursula Von der Leyen is quoted in The Times’ report as saying, in reference to the recovery plan, that “This is Europe’s moment” and “Let us put aside the old prejudices”, opponents are reported to be worried that the plan will lead to “debt mutualisation” and “significant increases in the EU budget”. Germany paradoxically stands out as one EU country which appears to support the recovery plan, even though as the EU’s largest economy it would be bearing a huge proportion (said to be €135 billion) of the cost of financing the plan – however, there has been a recent court ruling in Germany which may make it difficult for Germany to participate in this EU bail-out scheme.

It is the apparent fear of the UK Government that the UK risks being sucked into endless  EU budget discussions over pandemic recovery without being able to influence those discussions (with the UK, however, being asked to contribute financially if the transition period is extended), which is said to be driving the UK Government to try and agree the new relationship deal with the EU before the end of the current transition period.

What happens within the EU may well impact on what the EU and the UK can agree with each other and this is the UK Government’s major concern, according to some reports.

A House of Commons Library research report on the  UK-EU negotiations for a new post- Brexit relationship

On 27th May 2020 the UK House of Commons Library published a report under the sober title – “The UK-EU future relationship: the March 2020 EU draft treaty and negotiations update” which provides a useful chronology of the UK—EU post-Brexit negotiations so far plus more of an in-depth analysis of the draft comprehensive treaty published by the EU side on 18th March 2020. The Library has indicated that it will be producing in due course an analysis of the UK side’s draft legal texts for separate agreements to implement the new post-Brexit UK-EU relationship.

Whilst nothing very new may have come out of the House of Commons report, its succinctness and telescopic format do concentrate minds on the differences between the two sides and on the various milestones and time-lines that need to be achieved if agreement between them is to be reached on substantive matters before the end of the transition period on 31st December 2020.

The EU side argues that it is sticking closely to the format of the non-binding Political Declaration finally agreed between the parties in January 2020 prior to Brexit on 31st January 2020. The UK side is arguing that it is sticking to precedents for international trade agreements that the UK and the EU have accepted in the past whilst accepting the broad principles of the Political Declaration.

There is many a slip between cup and lip at the moment!

Agenda for the fourth round of UK-EU negotiations

On 28th May 2020 the UK and EU published their agreed agenda for the fourth round of talks between them about their new relationship following the transition period (which is currently due to expire on 31st December 2020).

The fourth round of talks will take place from 2nd to 5th June 2020 and it seems clear that fisheries will be high up the agenda. This is a red line area, certainly from the EU standpoint, and it may be that if progress can be made on this subject, the EU side will feel more able to make concessions on subjects (such as  the “level playing field”) which touch particular nerves on the UK side (mainly because of sovereignty concerns).

This will be the last scheduled round of negotiations prior to 1st July 2020, by which a decision has to be made by the Joint Committee of the UK and the EU under the Withdrawal Agreement on whether or not to extend the transition period beyond 31st December 2020.

For political observers as well as for anthropologists, it will be interesting to see whether political grandstanding or political realism has the upper hand.

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David Glass

Specialist in Business & Corporate, Commercial Contracts
& Insolvency & Corporate Recovery

E: [email protected]
T: +44 (0)845 257 9449