Brexit: Dicing with a No Deal

July 30, 2019

The new UK government is "absolutely committed" to leaving the EU on 31 October. It hopes to force the EU to renegotiate the proposed Withdrawal Agreement by threatening to leave without a deal if its demands are not met.

Although a majority in the UK Parliament have previously opposed such a "No Deal" Brexit, efforts to prevent it may test the limits of the UK’s unwritten constitution. In these extraordinary circumstances nothing is certain. But the UK government is preparing actively for No Deal, and businesses would be well advised to do the same.

The UK will leave the EU on 31 October, at the end of the notice period currently running under Article 50. That exit is automatic, regardless of whether a Withdrawal Agreement has by then been concluded, unless the notice period has by then been extended (or the withdrawal notice revoked). Any discussion of extension must start with a request from the UK, and the new government has indicated that it will not make any further such request.

It became apparent as the last such deadline approached (31 March) that neither side was in fact willing to contemplate a No Deal exit, despite earlier rhetoric (e.g., “no deal is better than a bad deal”). We commented back then that the prospects of a No Deal had receded, in the absence of a major shift in political sentiment. Has there been such a shift, or is it again rhetoric intended only to improve the government’s negotiating position? On any basis No Deal now looms again as a possibility that calls for focused management attention.
 

Three main scenarios for what may happen on 1 November

   

A "status quo" transition period under a (revised) Withdrawal Agreement

The proposed Withdrawal Agreement provides for a transition period after Brexit to allow time for a comprehensive agreement on the future UK-EU relationship to be negotiated (although there are concerns that the time available – to the end of 2020, extendable to the end of 2022 – will not be sufficient for such a complex negotiation).

The EU has consistently said it will not re-open the text of the Withdrawal Agreement. But since it has been rejected three times by Parliament, the UK government considers it has to be renegotiated. The government wants in particular to delete the "Irish backstop" – a mechanism to ensure that there will be no need for a hard border in Ireland, by keeping the whole UK in the EU Customs Union. The backstop would only come into effect if no agreement had been reached by the end of the transition period – but it could then apply, potentially indefinitely. The UK argues that a backstop is unnecessary, and that a hard border can be avoided by using new technology.

  

No Deal

The UK government has stated emphatically that if the EU is not prepared to revise the Withdrawal Agreement, the UK will allow its EU membership to lapse simply by the expiry of the Article 50 period, and so leave the EU on 31 October without a deal. The government has made preparations for No Deal its “top priority” and the minister responsible, Michael Gove, has said that he is "working on the assumption" of a No Deal Brexit. In this event there would be no transition period and on 1 November UK-EU trade and co-operation would immediately face regulatory barriers. Negotiations to re-establish free trade could then take years, if the pattern of other international negotiations applies. Likely there would be urgent attempts to devise an alternative or interim arrangement, but relations may be frayed in this scenario.

The European Union (Withdrawal) Act 2018 will transpose existing EU Regulations into UK law at the time of Brexit, ensuring the continuity in the UK of all EU regulations currently in force. Nonetheless, although the UK and the EU have taken some steps to mitigate the impact, leaving without a deal would mean that the UK would be treated as a "third country" from 1 November, subject to EU customs duties, inspections, Rules of Origin requirements and potential delays; to EU requirements for product conformity and certification; to loss of passporting arrangements for financial services and mutual recognition of professional services; to immigration controls on staff; to changes in the legal status of contracts and of intellectual property rights; to restrictions on personal data transfers from the EU; to loss of access to EU joint programmes, research and investment funding; and to the loss of the benefits of some 30 EU free trade agreements with other countries that have yet be rolled over e.g. with Japan, Korea and Mexico. Analysis of the potential impact of a No Deal Brexit was set out in our earlier briefing notes.

  

An extension of the Brexit deadline

While the UK government has firmly ruled out seeking an extension, it has a majority of only two in the UK Parliament and is likely to face serious efforts by MPs to prevent a No Deal Brexit. Whether such efforts would succeed is highly uncertain.

A Parliamentary Resolution opposing No Deal would have some force without being legally binding on the government, which argues that it has a democratic obligation to fulfil the mandate from the 2016 referendum to withdraw the UK from the EU.

If it could be adopted rapidly enough, an Act of Parliament could legally require the government to seek an extension. But a bid earlier this month to begin such a legislative process failed, and the time to re-start it is now very short: Parliament is in recess until 3 September, leaving only eight weeks after it resumes before Brexit is due. Were such legislation nonetheless to make progress, the Prime Minister has not ruled out the option of "proroguing" Parliament, in effect suspending all business until after Brexit. Alternatively – although he is currently ruling it out – the Prime Minister could call an early election to secure a mandate for his approach (assuming that he could get the support of the two-thirds of MPs required to call an election before the due date in 2022).

An early election might also be an option for the opponents of a No Deal Brexit, although again the timing would be very tight. If a majority of MPs supported a "No Confidence" motion against the government, it would have 14 days to try to persuade MPs to change their minds; its opponents could also try to form a new government. If both fail, Parliament would have to be dissolved and a general election held 25 days later. But delays by the government might push an election beyond the 31 October deadline.

   

Implications for businesses

Many companies have preferred not to expend resources on contingency planning for a No Deal on the grounds that it seemed unlikely; others had plans in place for the former 31 March deadline, but have not revisited them seriously since then. Given the UK government’s radical shift in approach, businesses would be well-advised to review their contingency planning.