Brexit implications for US Businesses

05 April 2017

David Gent

On 29 March 2017, the UK government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties will cease to apply to the UK and the UK exit will take effect in March 2019 (subject to the unlikely possibility of the withdrawal agreement being concluded sooner and unless all Member States agree to extend the period). Negotiation of a new trade agreement with the EU could take several years beyond 2019 although the Prime Minister has declared the objective of achieving such an agreement within the two-year period.

Continuing uncertainty

There has been no change as yet to Britain's trading relationships with the EU and the rest of the World or to English law. However, the British exit (Brexit) vote has created a range of uncertainties, which include:

  • What will be Britain's future relationship with the EU?  Prime Minister Theresa May has recently outlined her objectives for Britain's negotiations with the EU, which include controlling immigration from the EU. This effectively rules out the possibility that the UK will become a permanent member of the European Economic Area as that requires an acceptance of free movement of people. Instead, the Prime Minister has indicated that she will pursue a bespoke free trade agreement seeking “the greatest possible access” to the single market on a tariff-free basis. The terms of any deal with the EU will need to be negotiated and then approved by the British Parliament, most other EU governments and the European Parliament and so Britain's future trading relationship with the EU will remain uncertain for some time.

  • What will be Britain's future relationship with non-EU countries?  When Britain leaves the EU it will lose the benefit of EU trade agreements with non-EU nations, although it would then have the freedom to negotiate new terms of trade. US President Donald Trump has promised the rapid conclusion of a trade agreement with the UK to help the UK Government make Brexit a “great success”. He told The Times newspaper “We’re going to work very hard to get it done quickly and done properly. Good for both sides”. However, the terms of any deal still need to be negotiated.

  • What will be the impact on the United Kingdom? A majority of voters in Scotland and Northern Ireland voted to remain in the EU. The Supreme Court has ruled that the UK Government is not legally compelled to consult or seek approval from the devolved Parliaments of Scotland, Wales or Northern Ireland in order to serve notice of its intention to leave the EU. The Scottish First Minister, Nicola Sturgeon, is pushing for a new vote on Scottish independence, to allow Scotland the opportunity to seek to remain in the EU, with speculation mounting of a referendum in the Autumn of 2018 and an uncertain result.

  • What will be the effect on English law?  In October 2016, the Prime Minister proposed a “Great Repeal Bill”. Following the UK's departure from the EU, this Bill would end the 1972 European Communities Act, which gives EU law primacy over UK law. All enactments previously in force in the UK under EU law would be given direct effect and Parliament would then go through each law, on a piecemeal basis, and amend or repeal them as necessary based upon national interests.    
Currency and trading implications

The Brexit vote has already caused a significant fall in the value of Sterling against certain key currencies, including the US dollar. Between the date of the referendum and early February 2017, Sterling had fallen by around 16% against the US dollar.

The fall in the value of Sterling against the US dollar is good news for US businesses importing from the UK, but not for US businesses exporting to the UK. It has also reduced the cost of UK business acquisitions for many overseas buyers, including US buyers. However, recent research by accounting firm Moore Stephens shows that despite a few large foreign acquisitions of UK groups, during the second half of 2016, the number of UK companies taken over by foreign buyers fell by 30 per cent compared with the same period in 2015.

The fall in the value of Sterling may also be impact on the numbers of UK visitors to the US, with trips becoming more expensive for them.

UK as a gateway to Europe?

At present, US businesses that wish to trade or invest in the EU often establish operations in the UK as a stepping stone to trading with other EU countries. Will they still do so if the UK’s trade agreements with the US and EU are less enabling or in a state of flux?

There is a real risk that the UK will be shut off from operating in the European Digital Single Market. The drive behind the Digital Single Market was to promote common data protection laws, provide better access to products and services at reduced costs, and generally increase adoption and acceptance of digital services. There are significant differences in the attitudes of different European countries towards the use of social and digital media marketing and, in the absence of the UK within the EU, these differences are now likely to widen and the influence of the UK will be minimal.

Contracts

Existing commercial contracts with UK parties may be affected by the terms of future trade agreements (including any new trade barriers or tariffs), continuing currency fluctuations and the ability of UK nationals to work in the EU and of other EU nationals to work in the UK (see Employment implications below).  

Whether Brexit provides grounds for termination of an existing contract will depend very much on the particular terms and specific facts. Parties could seek to rely on material adverse change or force majeure clauses as grounds for termination following Brexit but their success will come down to the interpretation of the particular clause and the particular facts of the case. Changes in a party's economic circumstances have generally not been held to qualify as force majeure events under English law. It is also possible that parties could seek to argue that a contract has become frustrated as a result of Brexit but again, such an argument will depend on the facts of the particular case.

Brexit may affect disputes over contracts between a party based in the UK, such as a subsidiary of a US company, and a party in another EU Member State or where the subject matter of the contract has some connection to a Member State. EU regulations impact on the choice of forum, recognition and enforcement of judgments, service of legal process and the choice of governing law of contracts. Britain's participation in these arrangements is likely to be affected by Brexit.
Existing disputes with UK/EU elements are unlikely to be affected in the short to medium term as existing EU laws will continue to apply. In the longer term, Brexit may affect claims based on EU laws and impact on the rules on service of legal process and the rights of enforcement of judgments between the UK and other EU Member States.

For new contracts, parties are focusing more on governing law and dispute resolution mechanisms and some parties are opting for arbitration clauses on the basis that enforcement is through the New York Convention of 1958 rather than EU regulations.

The drafting of new contracts is also likely to be affected by potential new terms of trade – for example, to confirm which party will be responsible for the payment of any additional duties or tariffs.

Employment implications

For US companies with nationals from other EU Member States working in the UK, the rights of those individuals to continue to live and work in the UK following Brexit are unclear. The Prime Minister has said that she would like to guarantee the rights of the 3 million EU citizens settled in the UK before the referendum, including their right to remain in the UK. However, she says that this is dependent on other EU nations agreeing an equivalent deal for British nationals living in other EU Member States. As a result, the position remains one for negotiation, albeit as an “important priority” for the UK.

The end to the free movement of EU nationals to the UK, given as an objective in negotiations by the Prime Minister, may also make it more difficult for US companies with operations throughout the EU to relocate employees from other EU Member States to the UK and vice versa.

An audit of the workforce will help to identify individuals who may be affected, including those who may be able to apply for citizenship or permanent residence and to target communications to employees who may be most affected. Plans for recruitment and secondment of staff may also be impacted.

Intellectual property implications

The effects of a Brexit on intellectual property law are likely to be significant as many EU regulations have been transposed into domestic law. The UK would no longer be a member of the EU, which would affect the unitary character afforded to some IP rights (notably EU trade marks and designs).

Furthermore, the UK has announced that it will ratify the Agreement on a Unified Patent Court, which means that the UPC system will go ahead but with a delayed start date of December 2017. Whether the UK will remain within the UPC post-Brexit is a matter of debate, since although it is not an EU institution, certain EU principles and structures are embedded within the UP system. Most importantly, enforcement rights may be an issue as the Prime Minister has said that one of her objectives is to bring an end to the jurisdiction of the European Court of Justice in Britain.

US companies or groups of companies with community intellectual property rights (such as the EU Trade Mark) will need to be ready to respond if, as seems likely, those rights cease to have effect in the UK. IP owners should identify which of their rights are likely to be affected and may need further application or registration to be protected.

Other implications

Other implications for US businesses will depend on the sector in which they operate and will remain uncertain until the UK's trade negotiations with the EU and US are finally concluded.

This is an amended and updated version of articles previously published in the California Daily Journal and insidecounsel.com.

Authors

Gent-David

David Gent

Legal Director

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