Brexit is here: What does it mean for the rail industry?
After almost three and a half years of negotiation and renegotiation, the United Kingdom (“UK”), the European Atomic Energy Community, and the European Union (“EU”) finally agreed on a trade and cooperation agreement on 24 December 2020 (the “TCA”). The UK Parliament passed the TCA into law on 30 December 2020 as the European Union (Future Relationship) Act 2020, which came into effect on 1 January 2021.
Now that the practical implications of the UK’s trading relationship with the EU are becoming clearer, what does the post-Brexit landscape mean for your business and contractual arrangements?
This article seeks to answer 10 common legal questions that you may want to consider:
- Do I need to amend references to EU law in my contracts? How do I deal with this in new contracts?
- What happens in relation to jurisdiction and choice of law clauses?
- Can I use the change of law clause in my contract to deal with the implications of Brexit?
- Now that I know what Brexit means for my business, can I use a force majeure clause to terminate my contract or excuse poor performance?
- What tariff or other customs issues do I need to consider?
- Do I still have to comply with EU competition law?
- What is the position on State aid subsidies?
- What procurement laws apply if I am bidding for public contracts or letting contracts of my own?
- What are the changes to data protection obligations?
- What other issues should I consider?
Existing commercial contracts may include obligations for parties to comply with specific EU laws. From 1 January 2021, these obligations may be irrelevant given that EU laws are no longer directly applicable to the UK. In relation to existing contracts, the following practical steps should be considered:
- Check: Organisations should check their material existing contracts for references to EU law (search for specific terms such as “EU”, “EC”, “EEC”, “European”, “EEA” or “law”). Particular attention should also be paid to any commercial contracts which include references to consumer protection laws, regulatory standards, competition law and data protection law which will be key areas of law which may change under UK domestic law. At this stage, it is not certain what changes are likely but this should be kept under review as it will be important to ensure obligations in commercial contracts are relevant, accurate and up to date;
- Assess interpretation: Consider whether the specific EU law referenced in the contract should be interpreted as: (a) EU law which is retained in the UK from 1 January 2021; (b) EU law as it applies in the EU (and not in the UK); or (c) EU law as it applied in the EU at the date of the agreement. The outcome of the assessment will depend on the nature of the contract and the nature of the specific EU law which is being referred to.
- Amend: If amendments are required to update the reference so that it includes, for example, any modification, re-enactment or consolidation of that law, consider whether this should be done by way of individual amendments to each reference to EU law or whether it may be possible to include a provision in the interpretation cause of the contract.
Parties entering into new commercial contracts from 1 January 2021 should make it clear if references to “EU law” includes succeeding laws in the UK or if they remain fixed at the time of signing the contract.
Choice of law: English contract law will be largely unaffected by Brexit given that it mainly derives from common law and is subject to limited statutory intervention. The advantages of English law remain such as predictability, depth of judicial precedent and emphasis on upholding and respecting parties’ commercial bargains. The Rome regulations that determined governing law prior to 1 January 2021 will be implemented into the UK domestic law as “retained law”. Accordingly, EU Members State courts will continue to respect an express choice of English law, and equally English courts will continue to respect an express choice of the law of an EU Member State.
Jurisdiction: English court procedure will be largely unaffected by Brexit. The appeal of the English courts remains, including the independence and expertise of the judiciary, the speed and flexibility of proceedings and the range of powers of the court.
One issue which will require some caution is whether it may be more difficult to enforce an English judgment in some other EU member states. Organisations should consider this when entering into cross-border transactions. The Brussels I Recast Regulation (which governed the regulation and enforcement of civil judgments in the EU) now ceases to apply in the UK (subject to a few exceptions) and the UK is currently pursuing alternatives (such as the Lugano Convention or, as a back-up, the Hague Convention). The lack of the Brussels I Recast Regulation means that enforcement of a UK judgement in an EU Member State will be subject to national procedural laws and subsequently may afford less favourable treatment to English judgments. This may give rise to increased disputes around which country’s courts have jurisdiction. Some practical steps to take include:
- Local Advice: Seek local advice on enforcing a judgment in a particular EU Member State;
- Exclusive: “Exclusive” jurisdiction clauses are likely to be preferable in order to maximise the prospect of benefitting from the protections in the Hague Convention (which the UK is considering as a back-up option should they fail to sign up to the Lugano Convention);
- Arbitration: Consider whether arbitration is a suitable dispute resolution mechanism. Arbitration is unaffected by Brexit and may provide greater certainty.
If your contract has a change of law clause, then this can provide parties with procedural certainty on how to handle and price any amendments necessitated by the new trading relationship with Europe. However, your ability to rely on it depends on the drafting.
Many change in law provisions specifically exclude changes in law that were reasonably foreseeable at the time the contract was signed, whether generally or by reference to the publishing of consultations or white papers. While the tight timeframe between agreement of the TCA and its coming into effect means that some of the precise legal implications were not known, there has still been considerable legislative activity during the last two years that may well have anticipated the new TCA provisions. Indeed, the UK Government ran an advertising campaign throughout 2020 warning businesses that there would be changes to how importing and exporting goods would work with Europe after 1 January 2021.
Additionally while change in law clauses typically capture changes to Acts of Parliament or statutory instruments, some exclude changes to guidance (whether governmental, regulatory or industry guidance) or other codes of practice, so to the extent that the same change due to the impact of the TCA and create additional cost, this may not be recoverable. Finally, some change of law provisions are only triggered where a change of law affects the specific industry/economic sector that the parties operate in and not general changes of law affecting the whole country, which could make it difficult for parties operating in, e.g. cross-border logistics to the extent that new legislation applies.
You will therefore need to both carefully review what your change of law provision covers and then assess it as against the new or amended legislation to see if the same is covered. However if it is not covered – or indeed, if your contract does not have a change in law clause in the first place – then this would not stop the parties from agreeing to change the contractual terms to reflect the same if that is what they want and they can come to a commercial agreement on the same.
Now that I know what Brexit means for my business, can I use a force majeure clause to terminate my contract or excuse poor performance?
Probably not, but it’s not impossible. Force majeure clauses cover unexpected events that the parties could not have foreseen at the time they signed the contract and which prevent one (or sometimes both) parties from performing their obligations. If force majeure is defined by reference to a set of specific events (e.g. war, blockades, riots, adverse weather, blockades or strikes) but Brexit (including its consequences) are not expressly included in that list, then you will not be able to rely on the force majeure provisions.
Some contracts contain general force majeure clauses, which typically define force majeure as something that could not have been reasonably foreseen by the parties. Brexit as an event has been foreseeable ever since the referendum on 23 June 2016. However, you could try to argue that the consequences were unforeseeable if you can demonstrate that the post TCA framework actually prevents you from performing your obligations rather than merely making it more expensive, time consuming, labour intensive or otherwise difficult. The English courts have generally taken the view that if you can still do what you are supposed to do, then it is not a force majeure event and you are still liable to perform. For example, if you have a supply of goods contract with set delivery dates that you miss due to queues at the border, then there is a slim possibility of bringing this within a force majeure clause. However, the clause itself would need careful review and it should be stressed that it would only cover events beyond your control, e.g. a border IT system failure that prevents documents from being processed or insufficient customs personnel to check paperwork. Any delays due to events within your control (e.g. failing to complete the necessary paperwork properly) would not usually fall within the ambit of a force majeure clause.
Tariffs and Rule of Origin: There are no tariffs or other duties or quotas on imports of goods originating in the EU being brought into the UK or goods originating in the UK and being sent into the EU. The words “originating in” are critical here. There are complicated provisions within the TCA that relate to how you determine the origin of a product, calculated by reference to it meeting certain thresholds of where its constituent components were made or assembled.
Product components manufactured or assembled within the EU and included within UK-made goods will be deemed to be UK goods and reciprocity is given to UK-manufactured/assembled components within EU goods. However this does not apply to components brought in from third countries (e.g. China) and given the complexities of modern supply chains, the cumulative effect of components manufactured/assembled outside the EU or UK (as the case may be) may take them outside the tariff-free regime. This is of particular relevance to train manufacturers with assembly plants within the UK and an audit should be undertaken to assess the origin of any components being brought into the country to check whether they fall foul of the tariff proportions.
A self-certification mechanism is in place for businesses seeking to rely on the tariff-free provisions of the TCA but self-certification is a document-intensive process requiring:
- the exporter to make a statement of origin of the goods/components being exported; and
- the importer knowing and confirming that those goods originate within the UK or EU (as the case may).
Both importers and exporters should ensure that they keep all records relating to this as the relevant customs authorities can check these at any time.
Customs Requirements: Export and import declarations will need to be made for goods entering or leaving the UK for the EU (and vice versa), while UK exporters must have an Economic Operators Registration and Identification number and EU operators seeking to export to the UK must be registered for VAT within the UK regardless of the value of the goods sent into the UK. The UK government’s Brexit website provides further details on the steps that must be taken to import and export goods and given that lorries can and are being turned away at the border for incomplete or incorrect paperwork, it is vital that businesses have their paperwork in order. Note that there is specific additional paperwork and permits to be completed for the import/export of live animals, animal products, fish products, plants and restricted and controlled goods (including firearms, military equipment and goods being sent to countries that are subject to sanctions).
Other Things To Consider: If you are sending goods to or from the UK/EU via Dover (including via the Eurotunnel) then you need to check if either of the following is in effect:
- the Kent Access Permit (“KAP”) scheme. This is a traffic management scheme aimed at reducing road congestion in Kent and applies to haulage vehicles over 7.5 tonnes (which will capture most haulage companies) who must have both a KAP and all relevant customs forms and documents for the import/export of the relevant goods before they enter the county. The KAP can be applied for on-line and is valid for 24 hours from the time of issue. Lorry drivers who enter Kent without a KAP are liable for a £300 fine;
- Operation Brock. This is also a traffic management scheme that will be triggered if the KAP website has failed or if traffic is building up notwithstanding that the KAP scheme is in effect. Like KAP, it is also aimed at vehicles over 7.5 tonnes and limits them to the use of certain roads and again, hauliers must have all relevant customs forms and documents for the import/export of the relevant goods, which they must present to obtain a permit following a border readiness check at Ashford or Marston. Local hauliers who are not crossing the border are exempt from requiring an Operation Brock permit but only where they have a Local Haulier Permit. Hauliers carrying day old chicks or live and fresh fish products for human consumption can apply for a Priority Goods Permit to “fast track” through the Operation Brock restrictions. Hauliers travelling in Kent when Operation Brock has been activated who do not have a permit are liable for a £300 fine.
Businesses solely in the UK: If your business is active solely within the UK (i.e. you have no operations within and no trade with the EU or any Member States e.g. no commercial arrangements that have an effect on trade within the EU), then EU competition law will no longer apply to you. Most notably, because the UK has now left the EU and is no longer part of its competition regime. From 1 January 2021, the UK will have the right to set its own competition laws and policies - subject to the broad constraints of the TCA. Importantly, this includes a requirement for the UK to maintain high standards of competition law, enforce those laws and to apply its laws in a procedurally fair, transparent and non-discriminatory manner (the so-called “level playing field”).
EU/UK Businesses: The situation is more complicated for those businesses that operate within both the UK and the EU. Most seriously, any allegation of business activities infringing the competition rules which have an effect on trade within both the UK and the EU may be subject to investigation by the UK’s Competition and Markets Authority (“CMA”) and the European Commission (“EC”) (i.e. parallel investigations). For this reason, it is imperative that businesses ensure their conduct, activities and agreements in this context comply with both the EU and UK competition rules.
A few other key points for businesses to keep in mind under the UK’s new independent competition regime include:
- If your business is considering any M&A activity it is essential to be aware that the ‘One-Stop-Shop’ principle (under which all transactions that meet the EU merger control thresholds for notification to the EC, must be notified to the EC and not to the various EEA national competition authorities) no longer applies to the UK. Therefore, parties must consider whether a transaction will require a merger filing to the CMA as well as to the EC, or, other Member State authorities in the EU (i.e. parallel filings). It is advisable for parties to a deal to obtain legal advice early on regarding merger control and merger filing assessments;
- The CMA will no longer have the power to enforce the EU prohibitions on anti-competitive agreements and abuse of dominance in the UK (but see comments above on the potential for parallel investigations for a breach of these rules whereby the CMA will still have the power to enforce its UK competition laws);
- The EC will no longer have jurisdiction to conduct dawn raids in the UK for breaches of EU law (except in respect of existing investigations) and the EC will also not be able to ask the CMA to conduct a dawn raid on its behalf;
- Vertical agreements (e.g. cross border supply and distribution arrangements) which have an effect on trade in the UK and the EU will need to comply with both UK and EU competition rules; and the EU vertical block exemptions will remain part of UK competition law until their respective expiry dates; and
- Neither the CMA nor the UK courts will, going forward, be obliged to accept EU competition law infringement decisions or case law issued after the Transition Period (in particular in relation to new cases). Therefore, claimants will no longer be able to rely on those future EC decisions as a binding finding of an infringement.
One of the key changes for EU and UK competition law is the new ‘subsidy control’ regime which will replace the former EU State aid regime.
A key negotiating red line for the UK government was the ability to diverge from the EU’s State aid regime which it has now achieved – albeit subject to some restrictions under the TCA. The UK is now free to set up its own subsidy control regime and new independent authority to assess compliance with State aid controls. The requirement for aid to be notified to the EC prior to being granted will no longer apply to the UK. However:
- The UK does have to abide by a set of agreed ‘principles’ prescribed under the TCA in order to ensure that any subsidy granted does not have a ‘material effect on trade or investment as between the UK and the EU’. In particular, subsidies should pursue an identified public policy objective or remedy an identified market failure, be proportionate and limited to what is necessary, and there must be no other obvious alternative to a subsidy to achieve the desired policy goal. In any event, it will be up to the UK to determine how these principles will be implemented within UK law. Therefore, it will be useful to keep an eye on developments within this area as implementation of the TCA proceeds; and
- Not dissimilarly to the former State aid regime, the TCA also prescribes a number of prohibited subsidies and subsidies that are subject to specific conditions (e.g. a prohibition on unlimited State guarantees and restrictions and conditions placed on subsidies to banks, credit institutions and insurance companies).
There are two categories of subsidies that may be permitted - subject to specific conditions - which may be of interest to the rail industry. The first allows for subsidies for large cross border or international cooperation projects relating to transport. These subsidies may be allowed provided that the benefits of such projects are not limited to those economic actors, States or sectors participating in the project. Instead, these projects must have wider benefits and spill over effects that do not exclusively accrue to the State granting the subsidy, the relevant sector and beneficiary. This may be of interest to international operators such as Eurostar. The second allows for subsidies aimed at fighting climate change and promoting secure, affordable and sustainable energy systems and environmental sustainability provided that such subsidies do not relieve the recipient from liabilities arising from its responsibilities as a polluter under UK law. This may be of interest to rolling stock manufacturers or network infrastructure providers seeking to develop “green” alternatives to traditional diesel-powered units such as hydrogen powered trains or sustainable electric units.
Note though that any party whose interests may be affected by the granting of a subsidy can apply for review of the same by a court or tribunal, and domestic courts will also have the power to order a recovery if such subsidy is found to have been granted illegally. Additionally, if the subsidy has, or could have, a negative effect on trade or investment between the UK and EU then the parties may enter into consultation with each other. Finally, where a subsidy is causing, or, where there is a serious risk that a subsidy will cause, significant harm to any industry/ies then the TCA allows the parties to take rapid action with the ability for these measures to be challenged using an accelerated arbitration procedure.
UK Procurement: All EU procurement law that was in effect in the UK as at 1 January 2021 remains UK law, but for public sector procurements after 1 January 2021, procurement notices will be placed on the UK’s e-notification service ‘Find A Tender’ and not in the Official Journal of the European Union (“OJEU”). The EU prescribed standard forms for procurement notices will not apply to the UK’s e-notification service, but the prescription on type and content remains the same. Any public procurements commenced in the UK before 1 January 2021 must be completed in accordance with EU law. Similarly, where a framework agreement is in place, any call off procedures launched before 1 January 2021 must be completed in accordance with EU law until that framework agreement expires or terminates.
EU-based companies: can continue to bid for public sector procurements in the UK and UK public sector bodies (which will include publicly owned train operating companies and those acting under the Emergency Measures arrangements) cannot discriminate against them. However, where a public sector contract is for less than the prescribed thresholds, the UK Government issued Public Procurement Note 11/12: Reserving Below Contract Thresholds, does allow contracting authorities to restrict bidders to a specific geographical location or to small and medium enterprises and voluntary, community and social enterprises only.
ECJ and Court Process: After 1 January 2021 the UK courts will not be bound by any decisions made by the European Court of Justice (“ECJ”) in relation to procurement cases (although they are free to follow ECJ decisions where they consider the same to be relevant). Whilst the UK may make changes to its procurement regime, such changes must be consistent with the principles agreed within the TCA (much of which appears to reflect existing EU public procurement legislation) and also with the World Trade Organisation’s Agreement on Government Procurement (“AGP”), which the UK is now a signatory to. The UK government is currently consulting on a Green Paper regarding changes to its public procurement regime, which is due to end on 10 March 2021). This Green Paper focuses on a number of areas including:
- permitting contracting authorities to move away from “most economic advantageous tenders” to tenders aligned to social or strategic benefits, e.g. improving diversity and local employment, or promoting environmental solutions;
- procedural reform; and
- restricting the ability of failed bidders to challenge award decisions.
- The Green Paper was issued before the TCA was agreed and some of the proposals – most notably the ability to challenge award decisions – look incompatible with the principles agreed within the TCA. Businesses engaged within the public contract sector should therefore continue to monitor the sector for future governmental change.
EU Procurement: UK companies wishing to bid for EU public sector contracts may continue to do so and EU procurement law will continue to apply. EU public sector bodies are not permitted to discriminate against UK-based bidders.
GDPR forms part of UK domestic law: post-transition, the GDPR continues to apply in the UK, as the "UK GDPR". The key GDPR obligations continue to apply to UK organisations as normal. The UK GDPR will also apply to EEA-established organisations that sell to, or monitor, UK individuals. Data protection contracts and privacy notices may need updating, to reflect the UK's third country status and the move to the UK GDPR.
Personal data transfers to UK: The Brexit trade deal allows for an interim period of at least four and up to six months from 1 January 2021, during which personal data flows can continue to the UK from the EU Member States, Iceland, Liechtenstein and Norway without any additional safeguards being required. The interim period is subject to the condition that the UK government will not: (i) change its data protection laws from their form as at 31 December 2020; or (ii) exercise certain “designated powers” relating to international transfers of personal data from the UK without the EU’s agreement.
Adequacy: The interim period afforded in the trade deal is intended to allow time for the EU and the UK to each adopt an adequacy decision, recognising the other jurisdiction as offering adequate protection for transferred personal data. An adequacy decision for the UK would permit transfers of personal data from the EEA to the UK to continue without further safeguards, such as standard contractual clauses, being required. For transfers from the UK to the EEA, the UK has already announced that it will treat EEA countries as adequate, meaning no extra safeguards would be needed here either.
This means that for the moment there is no immediate need to take extra steps in relation to data transfers. However, the ICO has advised that "as a sensible precaution" during the interim period, UK businesses that "work with EU and EEA organisations who transfer personal data to them … [should] put in place alternative transfer mechanisms, to safeguard against any interruption to the free flow of EU to UK personal data" in the event that the UK is not granted an adequacy decision in the next four to six months.
For more information on Brexit and data protection, please see Brexit trade deal: what does it mean for data protection law?
There are many other issues that you may have to consider and some of them may be specific to your industry, however, here are a sample of a few points that we think you should be particularly aware of:
Appointment of EU/UK representatives under GDPR: Organisations who previously relied on an entity in the UK as their EU representative should have already appointed a replacement. In addition, organisations not established in the UK but who are: (i) offering goods or services to, or (ii) monitoring the behaviour of, individuals in the UK will be required to appoint a UK representative, in order to comply with UK data protection law.
EU employees: EU, EEA and Swiss nationals living in the UK from 1 January 2021 must apply to the EU Settlement Scheme for immigration status that permits them to continue living and working in the UK.
Travel to the EU: check the expiry of your passport (you must have at least 6 months left) and ensure you have travel insurance which covers your healthcare. There may be additional requirements (such as work permits or other documentation) if you are travelling to stay for longer than 90 days in a 180 day period or if you are carrying out specific business activities.
If you have any questions or require any further advice, please contact your usual Stephenson Harwood contact.