Brexit musings: (1) The cost of withdrawal

Although I do not pretend to be an expert on EU law, I am writing this blog in an effort to explain in fairly simple terms some of the issues surrounding Brexit that are currently being canvassed by way of megaphone diplomacy.

By the referendum result we opted by a narrow majority for Brexit. The majority were seduced by a menu without prices – or, perhaps, by a menu with false prices.  Any siren voices that suggested that it might be rather expensive to leave were pilloried for proselytising for Project Fear.

Part of the current brouhaha relates to the payments, if any, the UK should make to the EU in addition to their regular subscriptions up to the date of leaving.

The usual rule, if nothing else is agreed, is that when what lawyers describe as a joint venture comes to an end the assets and liabilities will be valued, and the departing partner will pay, or receive, what is due after this account has been taken.

In contrast the rules of a members’ club very often provide by express agreement that a member may resign, and when his/her membership comes to an end he/she will no longer be entitled to any of the assets of the club or be liable for any of the club’s liabilities.

The rules form the basis of the membership agreement in such a case, and there is often an assumption that a retiring member will be replaced immediately, or fairly soon, by a replacement member who is willing to take over his/her responsibility for continuing liabilities.

Ideally, as in such a case, the joint venture agreement will provide for what is to happen, but it is usual to have a default arrangement in place (in the case of England and Wales, the Partnership Act) which provides in express terms what is to happen in default of any express agreement.

In the case of an international treaty, the default position is established by the Vienna Convention on the Law of Treaties which provides:[1]

Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention:

  1. Releases the parties from any obligation further to perform the treaty;

  2. Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination.

Although two of the members of the EU[2] have never ratified the Vienna Convention, the European Court of Justice, which resolves any ambiguities in the meaning of the EU treaties, has ruled that this does not matter, because the Convention reflects what was already binding as a matter of customary international law.[3]

This, then, was the position until the beginning of the recent ill-starred attempt to create a self-contained constitution for the EU, and when that effort was abandoned,[4] the member states agreed to adopt a newly drafted provision which provides for what is to happen if one or more of them decides to withdraw from the Union. This is Article 50 of the EU Treaty, inserted by the Lisbon Treaty less than ten years ago.

So far as is relevant, this provides:

  1. Any member state may decide to withdraw from the Union …

  2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal…

  3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement, or, failing that, two years after the notification referred to in paragraph 2 ….

When the European Union Committee of the House of Lords produced a report two months ago on “Brexit and the EU Budget”, it suggested that if a withdrawal agreement was not reached, there appeared to be a strong argument for concluding that all EU law would simply cease to apply when the UK ceased to be a member, and that the UK would be subject to no legally enforceable obligation to make any financial contribution at all.

This is the argument on which David Davis was relying in the discussion at the recent notorious dinner party at 10 Downing Street which led to a version of events being leaked to a reputable German newspaper three days later. The EU’s representatives not unnaturally riposted that if that were true the UK could not expect many favours when the time came to negotiate the terms of any future relationship.

The House of Lords included the legal advice it received as Appendix 3 to its report. This was to the effect that the provisions of Article 50 entirely replaced the provisions of Article 70 of the Vienna Convention which I have quoted above.

This would have the effect that any negotiation over the terms of withdrawal would be conducted in a complete vacuum, with no guiding principles of any kind.

More recently, Dr Michael Waibel, a Fellow of Jesus College Cambridge specialising in international law, has suggested that the House of Lords has got this wrong. He says that Article 50 is primarily concerned with procedure. For instance, the usual default rule (Article 56(2) of the Vienna Convention) provides for a 12 month notice period, and this is to be two years in the case of the EU. Both the Vienna Convention and the new EU provision expressly provide that a member state will be under no continuing obligation after it leaves. But, he says, there is nothing in Article 50 which nullifies the effect of Article 70(2) of the Vienna Convention, which provides that the termination of the treaty

“does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to this termination.”

This is the basis for the EU’s claim that the UK cannot simply walk away from the liabilities it incurred while it was still a member:

to contribute to the pensions of current or retired staff,

to pay its share of the cost of major capital projects (such as rail and road construction costs) with long lead times,

to contribute its share of the commitment it made towards European structural and investment funds,

to pay its share in honouring any guarantees which may be called upon in due course,

and so on.

The departure of a member state which was contributing about one eighth of the total budget will leave a massive hole in the EU’s finances, so that it is hardly surprising that the imaginations of the remaining 27 are working overtime to add more items to the EU’s Christmas tree of financial demands.

And into the mix are also being poured the unknown cost of moving two EU agencies from London to the Continent, and the UK’s counterclaim for its share of the value of the EU’s assets at the moment of its departure (a claim which the House of Lords Committee was unwilling to recognise).

A Brussels thinktank has recently assessed our potential net liabilities at between 25 billion and 65 billion euros, and some of the numbers have grown since then.  This has all the ingredients of an international dispute on a truly massive scale. The sums are colossal, the scope for arguments seemingly endless, and negotiations which call for extremely close attention to detail are being hampered by political name-calling, which do nothing to make any settlement easier to achieve.

The Government, who have been monotonously intoning that Brexit means Brexit, will have been receiving private advice as to the strength of its legal case in the negotiations, and I doubt if it makes very comfortable reading.

In practical terms (because time must be allowed for securing the agreement of the European Parliament and a qualified majority of the 27 member states) there were 18 months available for negotiating an agreement after the Government triggered Article 50 at the end of March. More than two of these months are now being consumed by our General Election campaign, and the remaining 16 include two summer holiday periods.

It is hardly surprising that the Prime Minister is saying that no deal would be better than a bad deal, if she recognises that the EU may hold out for the payment of sums of the magnitude that are being suggested. On the other hand, a recent speech by the last Permanent Secretary at the Foreign & Commonwealth Office[5] provides a vivid reminder of what the uncomfortable consequences of “no deal” would be.  And Mr Waibel has also suggested that the Court of Justice of the EU might still have a continuing jurisdiction to decide issues relating to the UK’s liabilities under the Treaties, even though its jurisdiction was otherwise ended by the UK’s withdrawal.

In short, we seem to be between the devil and the deep blue sea, whatever the apparent insouciance of our current political leaders.

 

[1] In Article 70.

[2] France and Romania.

[3] Case C -162/96 Racke, para 42.

[4] Following the outcomes of the referendums in France and the Netherlands in 2005.

[5] Sir Simon Fraser, the Deputy |Chairman of Chatham House, in a speech in February 2017.

8 thoughts on “Brexit musings: (1) The cost of withdrawal

  1. Moor Larkin

    Depressing how what should be a principled debate about democratic, civic freedom and the validity of the nation-state concept has been corrupted into just being another dispute about the great god called Mammon.

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  2. In 1940 we decided to fight on in defence of democracy, civic freedom and the validity of our nation-state, but nobody suggested that we should not incur financial liability in doing so. The attitude of some of those Brexiteers who regularly appear in the media reminds me of that episode long ago in Hamelin when citizens of a municipality were unwilling to pay for a liability they had agreed to incur. “A thousand guilders!” The Mayor turned blue. “So did the Corporation too.”

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  3. And in the mix are thousands of families who have made their homes here, work here, pay taxes here, educate their children here, and now are in limbo. When I read of Ian Duncan Smith’s ‘low grade’ people who came over here from the EU, …I think we are not just going back to the sunny uplands of our colonial past, but to the barbed-wire of Nazi Germany and National Socialism

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  4. Many thanks for bringing clarity to an area where so many commentators succeed only in muddying the waters.
    If you to be were asked to mediate this dispute, I would be very interested to know how you would approach that mammoth task?

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    1. It would be impossible to conduct a successful mediation when one party still seems to be so far from understanding the potential weaknesses of its case. If it is really true that at the notorious Downing Street dinner the Prime Minister showed herself confused about the distinction between one of the UK’s existing treaty rights (to opt back into selected criminal justice items after opting out of the whole lot) and the fact that we would have no such similar right following Brexit (unless a new right is agreed by the 27 through the negotiation process), she, at any rate, has miles to travel before she begins to understand the legal complexities of the current situation. And without a willingness on both sides to understand the issues, a mediator could get nowhere.

      This is one of the reasons why some commentators are deploring the fact that the whole of April, the whole of May, and the first week in June are being lost to an already short negotiation process. Perhaps an early pre-mediation meeting would enable the mediator to set a logical framework for future discussions which seems a bit lacking at present in the current climate of puerile high level in personam accusations being advanced by the Government against some of those with whom it will have to negotiate.

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  5. Nile

    I have little reason to envy the legal professions: much of what you do is numbingly dull, and the remainder requires a remarkably skilled communicator to engage the public’s interest, even in a matter of vital public interest.

    I therefore take great pleasure in reading blog posts which bring both clarity and interesting reading; and it occurs to me that there may be useful insights on Brexit from solicitors and barristers with long experience of representing unpleasant, deluded, and oafish clients in matrimonial cases.

    I worry that those professionals’ particular skills and qualities of character – not least, extraordinary patience in explaining matters that the client does not wish to hear – are not so well-developed in those rare and technically-minded individuals who have mastered the intricacies of trade negotiations.

    In short: someone has a very delicate and complicated job to do, and is obliged to do it under the direction of an aggressively-ignorant simpleton.

    I’m not sure whether I should envy the lawyers’ effortless professional skill in expressing yourselves with impeccable courtesy in such disagreeable circumstances, as much as you might envy my layman’s freedom to be as forthright as I damn’ well please.

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  6. Nile

    The dispute over our liabilities has one redeeming feature: there are only two parties, and there will only be one outcome.

    Consider this: each and every bank and broker departing for Frankfurt, Paris and Dublin will incur costs in the range of tens to a hundred or so million dollars.

    Those costs are tax-deductible: but where will they be deducted? Britain’s going for the low-tax business-friendly look, in contrast to the higher taxes levied on businesses in France and Germany. Logically, the banks’ accountants will place these costs and losses onto the subsidiary or legal entity domiciled in the higher-tax jurisdiction.

    Do you really think that the authorities in France and Germany will stand for that?

    Politically, it plays as ‘Our taxpayers are paying (indirectly) for the costs imposed by the deluded junta running Brexitstan’.

    Economically, any transfer tax dispute will be dwarfed by the UK’s share of EU Commission staff pension liabilities: but it’s big enough to hurt. Big enough, certainly, to be an acrimonious dispute in its own right; and we’ve got enough of those already.

    There will be a temptation to use a threat of putting that dispute on the table in the Article 50 negotiations; or later, in the formulation of our trade relationship with the EU.

    This isn’t a huge issue when considered in isolation; but there are quite a lot of companies – not just the bankers – moving operations over to the EU. You know how it is: a couple of billion here, a couple of billion there, and soon we’re talking serious money.

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  7. It is remarkable that a government pursuing a policy of austerity should have thought it reasonable to trigger such a costly process, even if the long-term outcome were considered clearly desirable. And then to call an election which adds yet more costs in time and money… We are watching the final collapse of the UK’s delusions of grandeur, I suspect – which might not be a bad thing for the world, but not much fun to live through!

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