Brexit – legal consequences for commercial parties

Potential mechanisms for a UK exit
from the European Union and
what follows next
May 2016

Issue in focus
The European Union is governed by two Treaties, the
Treaty on the Functioning of the European Union
(TFEU) and the Treaty of the European Union (TEU).
In this short specialist paper we analyse four aspects of
the Brexit debate which involve the EU's legal
foundations under these Treaties.
First, we consider possible mechanisms under the EU
Treaties for the UK to exit the EU. Notwithstanding the
EU Treaties anticipating "ever closer union" between
Members, they do expressly contemplate a Member
State leaving. Under the terms of the relevant Treaties,
the UK would have to give two years' notice of its
intention to exit, during which period the terms of its
departure would be worked out.
Secondly, we explore the possible shape of the UK's
relationships with the remaining Member States
following an exit from the EU. There is uncertainty as to
what regime a UK Government might ultimately be able
to put in place. In part, this is because those in the
"leave" camp advocate a variety of models. But it is also
because it is unclear whether the UK Government will
be able to reach agreement on its preferred model with

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the EU (and, potentially, others). If the UK wishes to
join another club, it will need the consent of that club's
members. Whether this will be achievable against the
backdrop of the political fallout that a vote to leave the
EU would create depends in large part on the political
will and negotiating power (or perceived negotiating
power) of the relevant parties.
The options would appear to include a "Norwegian
model", a "Swiss model", a customs union (along the
lines of the EU’s current relationship with Turkey), a
free trade agreement (eg of the type negotiated with
Canada), or simply remaining a member of the World
Trade Organisation (WTO). Given the uncertainty as to
which model will be adopted, we outline the key features
of each of the main options, rather than providing an indepth analysis of every possible arrangement.
Thirdly, we explore what the legal landscape may look
like following a UK exit from the EU. In doing so, we
seek to assess the extent to which a vast array of EU
legislation would be binding on the UK if it chooses to
leave the Union.
In the final section of this paper we briefly consider the
UK’s relationship with the EU should the UK vote to
remain in the Union.

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Brexit – legal consequences for commercial parties | Potential mechanisms for a UK exit from the European Union and what follows next |
Specialist paper | May 2016

Analysis
What do the EU Treaties say about
exit?
Although the Member States have expressly ceded
certain competences to the EU, the Treaties recognise
that those Member States must be free to "reclaim" those
competences and leave the Union.
Article 50 of TEU contains an express provision
allowing a Member State to exit from the EU. It
provides, in part, that: "Any Member State may decide
to withdraw from the Union in accordance with its own
constitutional requirements". Article 50 also sets out the
broad mechanism for withdrawal. In particular, it
provides that:
a)

within two years of a Member State notifying the
European Council (the Council) of its intention to
withdraw from the EU, the EU "must negotiate and
conclude an agreement with that Member State,
setting out the arrangements for its withdrawal and
taking account of the framework for its future
relationship with the EU" (Article 50(2)(b));

b) that withdrawal agreement is to be signed by the
Council, acting by a qualified majority, and after
obtaining the consent of the European Parliament,
acting on a majority vote basis (Article 50(2)(c));
and
c)

the Treaties would cease to apply to the
withdrawing State from the date of entry into force
of the withdrawal agreement or, failing that, two
years after the notification of the State's intention to
leave unless the Council, in agreement with the
withdrawing State, unanimously decides to extend
this period (Article 50(3)).

An exit from the EU under Article 50 would not
therefore necessarily require the consent of all Member
States, although in practice such consent might be
necessary if the withdrawal arrangements went further
than simply dealing with how the UK extracts itself from
EU membership and covered matters in relation to which
unanimity is necessary and which may potentially
require compliance with Member States' constitutional
rules (eg a new free trade agreement).
The effect of these provisions is that, if the UK notifies
the Council of an intention to withdraw and no

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withdrawal agreement is reached within the two-year
period, nor an extension agreed, the UK would, in effect,
exit the EU unilaterally at the expiry of the period and
would cease to be bound by the Treaties.
The timing of the delivery of any withdrawal notice to
the Council will therefore be important if the UK wants
to avoid a unilateral exit, given the fact that the
negotiation of the withdrawal agreement is likely to be
complex and time consuming. The UK Government may
wish to lay the groundwork for these important
negotiations before delivering such a notice. Neither the
Treaties nor the UK legislation governing the
referendum specify the timing for its delivery (indeed,
the referendum is strictly advisory so there is no formal
requirement under the UK rules to deliver a withdrawal
notice following a "leave" vote). This would essentially
be a political decision.
Whenever a withdrawal notice is given, the UK would,
at least in theory, continue to be bound by EU law
during the period between delivery of the notice and
Brexit itself, unless a different arrangement was agreed.
The UK Government would be unlikely to be in a hurry
to implement new EU laws passed during this period,
however, and its ability to influence the negotiation of
legislation would be likely to be significantly
diminished.

What are the possible post-Brexit
models?
Significantly, the Treaties provide very little guidance
about the legal consequences of withdrawing from the
EU or what the post-exit world would look like for the
departing State (and remaining Members). Existing
models for the EU’s relations with non-Member States
suggest that there are a range of arrangements that could
be agreed if the UK decided to leave the EU, from the
"EU-lite" precedent set by Norway, with its EFTA and
EEA membership, through various levels of economic
integration and cooperation with the EU, to the UK
"going it alone" at the other end of the spectrum. The
principal options are discussed in further detail below.
There are a number of general points to note in relation
to what the existing models might be able to tell us about
the likely shape of the UK’s post-Brexit relationship
with the EU. In particular, these models show a clear
correlation between the level of access that non-Member
States have to the EU's single market and the extent to
which they are required to comply with EU law, agree to

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Brexit – legal consequences for commercial parties | Potential mechanisms for a UK exit from the European Union and what follows next |
Specialist paper | May 2016

free movement (of people, goods, capital and services)
and contribute financially to the EU budget.
There are various ways in which a post-Brexit model
could be documented. For example, the agreement as to
the UK’s withdrawal from its existing relationship with
the EU could be documented separately from any
agreement(s) as to its future relationship. Alternatively, a
single agreement could be put in place covering both the
withdrawal agreement and any further agreement as to
the new relationship.
The European Economic Area (EEA) brings together the
28 EU Member States plus Iceland, Norway and
Liechtenstein (ie all EFTA states minus Switzerland) in
a single market. The EEA Agreement provides for the
adoption of EU legislation covering the four freedoms –
the free movement of goods, services, persons and
capital – throughout the 31 EEA States. In addition, the
EEA Agreement covers cooperation in other important
areas such as research and development, education,
social policy, the environment, consumer protection,
tourism and culture, collectively known as "flanking and
horizontal" policies. Each EU Member State must be a
party to the EEA Agreement and EFTA members may
accede to it. For the UK to re-join the EEA post-Brexit,
all members would need to agree.
The European Free Trade Association (EFTA) has four
states as members – Switzerland, Iceland, Norway and
Liechtenstein. EFTA is an intergovernmental
organisation set up for the promotion of free trade and
economic integration, originally intended as a way to
achieve the benefits of trade with the (then) EEC without
full membership. EFTA manages a network of
worldwide free trade agreements and is governed by the
Convention Establishing the European Free Trade
Association. Any state can accede to the EFTA
Convention upon approval of the EFTA Council and
with the consent of all EFTA Member States.

1. EEA: The Norwegian model
Assuming the necessary agreement/approvals could be
obtained (and the UK becomes an EFTA member as
required under the EEA Agreement), the UK could leave
the EU but join the EEA as a non-EU Member State
member, like Norway.

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This option would be closest to the UK's current
relationship with the other EU Member States and would
retain the UK's place within the single market.
Therefore, it would minimise the practical consequences
of Brexit to the greatest extent. However, it may be the
least politically appealing option as it would not allow
the UK to disengage itself from some aspects of the EU
legal regime that are unpopular among many in the
Brexit camp (eg it would require the UK to permit free
movement of people). It would also require a significant
financial contribution from the UK.
If this approach was followed, the UK would be bound
to apply a significant volume of EU law in a range of
fields including in relation to financial services,
employment and certain consumer protections. While
remaining bound by EU law, however, the UK would
not have a formal seat at the table when EU law is drawn
up.
There would be some EU legislation that the UK would
no longer be required to apply if it followed this model,
which may mean that the UK would have to enact
domestic legislation in its place. Notably, as an EEA
member, the UK could set its own rules in areas such as
agriculture and fisheries, transport and energy.
2. The Swiss model
If it exited the EU, the UK might seek to adopt a model
along the lines of the current Swiss model (albeit that
this model was initially intended as a transition to full
EU membership), with its many bilateral agreements
with the Member States and limited access to the single
market in specifically defined areas. The UK may also
seek to become an EFTA member, like Switzerland.
This model would require more detailed negotiation than
the Norwegian model as bespoke terms for access to the
single market would have to be agreed. It may well also
require the UK to accept at least some of the EU’s rules
on freedom of movement and to comply with EU rules
when trading within the market, again without a formal
seat at the table when those laws are drafted. Also, if the
Swiss model was adopted literally, freedom of
movement of services would be limited. This model
would also require a financial contribution from the UK.
It is understood that the Swiss arrangement is not a
popular model in Brussels due to its complexity and so
there may be limited enthusiasm for agreeing to a similar
arrangement for the UK.

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Specialist paper | May 2016

3. Customs union: The Turkish model
If the UK leaves the EU, it may have little appetite for
joining any new "club" along the lines described above.
However, it is unlikely that the UK would not try to
retain at least some form of arrangement with the EU.

would not be required to make any financial contribution
to the EU, however, nor would it be bound by EU laws.

The UK's legal landscape on Brexit
The UK's domestic affairs

One such arrangement currently in existence is the
customs union between the EU and Turkey. Under this
model, which applies only to trade in goods and not
services, no internal tariffs are applied to trade between
Turkey and the EU and there are common external
tariffs for trade with third states.

Whichever model is adopted, the legal landscape postBrexit would change. As noted above, this change would
be most stark if a WTO model was followed, but even
adopting the Norwegian model would mean significant
areas previously occupied by EU law (such as
agriculture) would need to be addressed.

If the UK adopted this model for trading with the EU, it
would not have to make a financial contribution to the
EU budget and would not be bound by the majority of
EU law and would therefore have to legislate to fill the
significant gaps in its national legislation that would be
left upon exit. Nor would it have access to the market in
services via such an arrangement. However, a formal
customs union would not, in practice, be likely to
achieve a total break from the EU legal regime. The EU
and the UK would have to agree rules on trade which
would in reality be highly likely to require the UK to
adopt the relevant EU rules (eg on the standards
applicable to goods entering the single market) without
any ability to influence the setting of those rules or their
interpretation by the EU courts.

As well as being dependent on the model that is adopted,
the extent of the change in the legal landscape on Brexit
(and the mechanism by which it will be achieved) will
depend in part on the way in which particular EU laws
have been implemented in the UK. For example, where
EU laws (broadly, European Directives) have been
implemented via primary legislation in the UK, that
legislation will remain part of English law on Brexit,
unless it is amended or repealed. Conversely, EU laws
that have direct effect in the UK without the need for
implementing legislation (broadly, European
Regulations) would fall away on Brexit unless
legislation was passed transposing those laws into UK
law. There have also been over 5,000 statutory
instruments (SIs) made pursuant to the European
Communities Act 1972 (the Act). If the Act is repealed
upon Brexit then, without more, those SIs would also
fall away (although in practice the UK Government may
seek to legislate to retain any SIs it considers beneficial
to the UK).

4. Deep free trade agreement: The Canadian model
Alternatively, the UK may seek to negotiate an extensive
free trade agreement and may look to the EU/Canadian
free trade agreement, which has been agreed but is not
yet in force. The Canadian deal (which took over seven
years to negotiate) allows tariff free trade in goods
(subject to complex country of origin rules) and provides
for the removal of certain non-tariff barriers in relation
to both goods and services, including financial services.
Under such a model the UK would retain control over
tariff arrangements with other (non-EU) countries.
5. WTO membership: UK alone
This model, which would simply lead to: (i) the
application of caps on tariffs applicable to goods traded
between the UK and the EU; and (ii) limits on certain
non-tariff barriers in relation to goods and services,
would represent the greatest change from the status quo.
It would not apply to services and may well require
substantial amounts of new legislation to replicate EU
legislation that would fall away on Brexit. The UK

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There would be a number of difficult issues that the UK
Government would have to grapple with when
legislating for Brexit, including:
a)

Transitional arrangements: Although there will be
a two-year (or longer) transitional period between
any vote to leave the EU and Brexit itself, unless the
post-Brexit model is agreed far enough ahead of
Brexit to allow the UK Government to make all
necessary legislative changes, it is likely that the
UK Government will need to put in place additional
transitional arrangements in the run-off period
immediately post-Brexit, for example allowing EU
law to continue to apply for a limited period while
the UK Government takes steps to fill the legislative
gaps. (Greenland and the (then) EC had such a
transitional period when Greenland exited in 1985).
However, while a seemingly neat solution in theory,

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Brexit – legal consequences for commercial parties | Potential mechanisms for a UK exit from the European Union and what follows next |
Specialist paper | May 2016

it does raise questions regarding how these
obligations would be policed during the run-off
period (and, indeed, as to who would police the law
as it applied pre-Brexit).
b) Filling the legislative gaps: The UK Government
would need to legislate to fill the gaps in the legal
regime created by Brexit, either by adopting preexisting EU measures into domestic law (and
amending them where necessary) or by introducing
wholly new measures (the latter option in itself may
be considered to be a further source of uncertainty).
c)

Managing logistics: If the UK wished to ensure that
some but not all existing EU legislation forms part
of UK domestic law on Brexit, it might carry out a
pruning exercise, considering each piece of EU
legislation separately to decide whether it should
continue to apply and, if so, whether any
amendments should be made. This would inevitably
be a complex and time consuming exercise.
Alternatively, the Government may decide to
legislate in bulk, for example, by introducing a
single statute which would incorporate all EU
Regulations into primary UK law. But even this
approach would not be straightforward. For
example, consideration would need to be given to
how references to European institutions and courts
should be construed and how to deal with
instruments that cannot be adopted unilaterally
(eg those predicated on reciprocity).

d) Vested rights: It may be that some parties will seek
to argue that certain EU-law derived rights have
vested in them as a matter of national or
international law, such that those rights cannot fall
away on Brexit. Conceivably, reliance may also be
placed on arguments under investment treaties
between the UK and other Member States or on
human rights legislation.
On any assumption, it is clear that significant transitional
measures and domestic legislation will be required to
clarify the position post-Brexit. However, while the UK
Government is in a position unilaterally to decide upon
the UK's domestic law, the impact of Brexit upon the
UK's external relations with other Member States will be
more complex to address.
The other important point to bear in mind is that if an
exit is agreed between the Member States, it may be that
supplementary EU law is passed dictating the approach

© Allen & Overy LLP 2016

that Member State courts should take to the UK postBrexit.
The Charter of Fundamental Rights forms part of the
EU Treaties and would cease to apply to the UK upon
exit from the EU. It applies to Member States when
implementing EU law and is enforced by the EU courts
in Luxembourg.
Separately, the European Convention on Human
Rights is an international treaty which the UK signed up
to as a member of the Council of Europe. It is not an EU
instrument and is enforced by the European Court of
Human Rights in Strasbourg. It was incorporated into
domestic law by the Human Rights Act 1998 and will
not be affected by the UK exiting the EU.

The UK's non-EU external relations
The UK is currently bound by a number of international
agreements concluded on its behalf by the EU. What
would happen to those agreements post-Brexit?
Since the Lisbon Treaty (Article 216(2) TFEU), the EU
has had express competence to enter into, and has in fact
entered into, a number of agreements with non-EU states
on behalf of Member States. Whether the UK will
remain bound by international agreements with nonMember States is likely to depend on how the agreement
was signed (ie whether it was signed by the EU or the
UK or both) and whether the subject matter was within
the EU’s exclusive competence. If the agreement covers
a matter which is within the exclusive competence of the
EU (either expressly or impliedly – see Article 3(1) and
3(2) TFEU) and was signed solely by the EU, then the
UK would no longer be bound on Brexit. If the UK
wanted to be a party in its own right it would have to
sign itself or alternatively make its own arrangements.
The EU’s exclusive competence covers substantial areas
such as the common commercial policy, ie trade with
third states, and competition law.
The UK Government would need to assess which
international obligations have been assumed by the EU,
identify the gaps that would arise post-Brexit and then
take steps, where appropriate, to negotiate replacement
agreements. This is likely to be a complex exercise.
Moreover, it will not be a purely legal exercise –
international instruments cannot be negotiated in a
vacuum. To replace existing free trade agreements that
the UK may not benefit from upon any Brexit, the UK

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Brexit – legal consequences for commercial parties | Potential mechanisms for a UK exit from the European Union and what follows next |
Specialist paper | May 2016

would have to persuade other governments that it is
worth the effort.

envisages the enactment of new EU measures and
contains rules on the interpretation of EU law.

Remaining in the EU – The alternative
to Brexit

The Decision does not purport to amend the Treaties.
It therefore relies on a combination of measures such as
the Member States’ commitment to the terms of the
Decision and the subsequent enactment of primary and
secondary EU legislation and Council Decisions
(promised by the Member States rather than the EU
institutions themselves) to bring the deal into effect.

If the UK votes to remain in the EU on 23 June, the
changes to the legal landscape will be much less
significant than if there was a vote in favour of Brexit.
However, some further legislative measures will be
required to give effect to the package of reforms
negotiated in Brussels earlier this year.
A Decision of the Heads of State or Government
meeting within the European Council concerning a New
Settlement for the United Kingdom within the European
Union was adopted on 19 February 2016 (the Decision).
This was the result of David Cameron's efforts to secure
his proposed package of reforms and contains a variety
of measures (some of which are dependent upon
implementation by the EU institutions) intended to
address concerns raised by the UK Government in the
areas of the Eurozone/economic governance,
competitiveness, sovereignty and EU free movement.
The Decision would become effective on the same date
as the UK Government informs the Secretary-General of
the Council that the UK has decided to remain a member
of the EU. The Decision has attracted quite significant
attention, and to a large degree, confusion in the UK
press as to whether and to what extent it is legally
binding.
Although all 28 Member States met to agree the
Decision, this is not a Council decision, but is a decision
of Member States expressing their national (not EU)
competences. The Decision therefore gives rise to
binding international law obligations on the Member
States, although there is a separate question regarding
whether further approval is required by some states at a
national level. The Decision is not an instrument of EU
law, although it clearly does impact on EU law as it

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What does this mean
for you?
This paper provides clients with a high level overview of
EU exit mechanisms and the range of potential postBrexit regimes, highlights the core areas of uncertainty
and flags some areas where there may be a post-Brexit
legislative overhaul. Understanding these issues will
assist commercial parties in their contingency planning,
both now and following any vote to leave the EU.
However, the fact that there are significant uncertainties
as to the post-Brexit regime emphasises the difficulties
of making any firm assumptions or taking concrete steps
at this stage. It also highlights the importance to
commercial parties of following developments closely if
there is a vote in favour of Brexit so that, as matters
begin to become clearer, appropriate steps can be taken
to mitigate any risks and take advantage of any
opportunities.
This article is one of a series of specialist Allen & Overy
papers on Brexit. For further guidance on Brexit
contingency planning and on the issues to consider in
specific areas if there is a vote to leave the EU on
23 June, please see our other Brexit papers, which are
available at: www.allenovery.com/brexit.

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Brexit – legal consequences for commercial parties | Potential mechanisms for a UK exit from the European Union and what follows next |
Specialist paper | May 2016

Your Allen & Overy contacts

Sarah Garvey

Karen Birch

Maeve Hanna

Counsel
Litigation – London

Counsel
Litigation – London

Associate
Litigation – London

Contact

Contact

Contact

Tel +44 20 3088 3710
sarah.garvey@allenovery.com

Tel +44 20 3088 3737
karen.birch@allenovery.com

Tel +44 20 3088 1844
maeve.hanna@allenovery.com

If you would like to discuss the issues raised in this
paper in more detail, please contact Sarah Garvey,
Karen Birch or Maeve Hanna, or your usual Allen &
Overy contact.

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