Brexit: what is it and should we panic?

Written on 16 Mar 2016

The first question is straight forward: it is the name that has been given to the UK’s possible exit from the European Union. The question will be put to the British people on June 23rd in the form of a Referendum which was promised by the current British Prime Minister, David Cameron in the lead up to his re-election campaign. The question has become increasingly emotional as migration has escalated into and around Europe – most recently as part of the Syrian crisis. Additionally the Eurozone (of which the UK is not part) crisis which has been reported over the last few years has highlighted the financial exposure to those countries within the zone…and neighbours to it.

Notwithstanding the political reasons for an exit, lawyers have long been impacted by EU legislation which is proposed and agreed centrally (by the European Commission in Brussels) and then implemented in all 28 member states. Whilst many US businesses would assume a similar impact as between US State and Federal law, the reality in the EU is that each of the member states are very different. Not only does each country already have its own laws (most of which are civil law based versus the common law which is adopted in the UK and US), but different languages, currencies and cultures make centralized law-making a challenge.

As a result, 2 types of European laws have been developed: Directives and Regulations. Directives require each country to implement the appropriate law into their own laws (which leads to different interpretation, timing and approach to enforcement) whilst Regulations automatically become part of National laws. The difficulty is that such laws need to sit alongside existing laws and sometimes that causes conflicts which may lead to national laws being replaced or materially eroded. The actual content of European laws can also be difficult to agree: imagine 28 lawyers (and there are many more than that in reality) in a room trying to agree the appropriate wording to a new law or changing a law! Since we are all so familiar with European data protection, it’s an easy example to point to: where the “General Data Protection Regulations” which expect to be implemented within the next few months, took years to agree and ultimately have needed to be based on the strictest of the national laws currently in place. This means that for most of the member states, businesses will need to make lots of changes to their business models (although in this particular case they will have 2 years to do so).

The positive aspects of having European legislation is that it moves towards a harmonization of laws creating a strong regional approach particularly for businesses outside of the EU (eg US) who seek to do business there – without needing to have a preference for any particular market. This is often the case when operating an e-commerce business where individual customers may be based in any number of locations and countries. Having a single approach to consumer protection and data protection may be helpful – albeit that the law may be materially more onerous than elsewhere in the world.

So, for the UK an exit from the EU would allow it to review and implement its own laws without the bureaucracy of a centralized system. However, it would no longer be an integral part of the decision making associated with a strong economic region. Whilst it is an island, it relies heavily on trade to and from Europe and notwithstanding its special relationship with the US, it is geographically closer to the EU members who often need to support each other politically, economically and as a free market. Practically, the free movement of goods and people around the EU has brought down barriers which would presumably be raised again if the UK were to exit. The impact would mean greater regulation and formality when selling through the UK to the rest of the EU and/or having a multi-country team.

The good news is that even if an exit happened, it would not be immediate and from a legal documentation perspective, there is no such thing as “European law” and so for the most-part, contracts would not need to be updated. Contracts should be checked on whether a Brexit would result in a “force majeur” event or a material adverse change occurring resulting in a right to terminate. For those who are cautious, the introduction of an explicit clause could be included in new contracts agreeing that no such right to termination would occur.

Medium term, things are more likely change and greater market analysis may be needed to consider whether governing law or jurisdiction laws need to be changed from one country to another. That can definitely be a topic for a future post if a Brexit looks increasingly likely.

So, as is so often the advice to the British people, it continues to be the case that we should all “Keep Calm and Carry On”…