By Jacqueline Cook, Senior Knowledge Development Lawyer
In a flurry of last-minute negotiations, the EU and the UK agreed on the form of the Trade and Cooperation Agreement between the EU, European Atomic Energy Community and the UK on 24 December 2020 ("TCA") to bring about the "Brexit deal" on their future relationship. As timing was extremely tight, with the end of the Brexit transition period looming a week later1, ambassadors for each EU member state approved the TCA in principle, so it passed through EU Parliament unopposed. It was then signed by Ursula von der Leyen, President of the European Commission for the EU.
The UK Parliament was recalled on 30 December 2020, and, at breakneck speed, published, debated and passed the European Union (Future Relationship) Act 2020 ("UK Act") on the same day, so that Boris Johnson could sign the TCA bringing it into effect in the UK on 1 January 2021.
The Brexit deal covers not just a free trade agreement between the UK and the EU, but also sets up a framework for future cooperation in a variety of areas where the EU and UK are willing to hold further negotiations: areas on which they could not quite iron out their differences nor provide any detail in the TCA itself.
"TRADE" – What are the implications for trade and trade finance?
Goods – For trade in goods, we now have a 'zero tariff' and 'no quota' free trade agreement. Granted, we now have different customs formalities and checks in place with new rules on origin but the borders seem to be pretty much working, subject to a few hiccups. The first week of Brexit seemed smoother at the port of Dover than in the few days beforehand when the COVID -19 pandemic, rather than Brexit, closed the border with France. However, it could take some time until businesses and border officials are familiar with the new procedures and formalities.
Services – The TCA concentrates on goods, however, said little about trade in services. As highlighted by the press and the UK Parliamentary debates, this was a missed opportunity for the UK, given the UK’s huge service industry.
Law – English law is very much the law of international finance and business, and it will continue to be recognised as a valid choice of law. With its certainty, flexibility, precedent and jurisprudence, it has been used as the basis for other legal systems throughout the world. We expect English law will continue to be a key element of international business. The network of secondary legislation which was waiting in the wings to fall into place on 1 January 2021 was quite staggering, even from a lawyer’s perspective. The legislation gives effect to the TCA and amends primary and secondary legislation following on from the EU Withdrawal Acts.2
Courts – While the TCA covers cooperation between the police, courts and rules around international security for criminal cases, it, surprisingly, does not address cooperation in civil and commercial cases. Instead, we must look to international treaties and agreements to assist with civil and commercial cases on jurisdiction and judgments and some pre-existing English law statutes and common law, in some circumstances. However, as things could still change, it would be useful to consider questions of jurisdiction and enforcement of judgments at the negotiation stage of a transaction, rather than waiting until a dispute arises.
It is worth mentioning that the UK acceded (in its own right) to the Hague Convention on Choice of Courts Agreements 2005 on 1 January 2021. The treaty has been effective in the UK since October 2015 when the EU became a signatory. So, a chosen court in an exclusive jurisdiction clause, within the scope of the Hague Convention between contracting states (being EU member states, Singapore, Montenegro and Mexico), would be in a position to determine jurisdiction and any judgment would be recognised and enforceable in the other contracting states.
While this is not a copy of the EU Recast Brussels Regulation 2015/2012, it is a treaty of international law brought into the law of the UK dealing with a different group of states. All eyes will now be on the EU to consent to the UK's application to join the Lugano Convention3 which needs the support of all signatories (EU, Switzerland, Norway, Denmark and Iceland). The UK may also enter into further international agreements with other states on a reciprocal basis to recognise the jurisdiction and judgments of the courts in each state. If neither of these apply then pre-existing UK statutes and the principles of private international law will be used for cases with an international element.
Brexit has not changed the legal basis for arbitration, and it will be interesting to see if parties increasingly opt for arbitration.
Some uncertainty remains as to whether the familiar asymmetric jurisdiction clause used in Loan Market Association finance documents and other international finance documents will fall within the definition of an exclusive jurisdiction clause as set out in the Hague Convention. The Court of Appeal, in the recent case of Etihad v Flother4, which dealt with Article 31(2) of the Recast Brussels Regulation, stated that such a clause could be seen as exclusive in relation to the borrower, which was tied to the designated court, and non-exclusive in relation to the lender, which had flexibility to go to other courts. However, the court did not make any decision on the point in relation to the Hague Convention.
The new situation will make us focus on which states are involved in a transaction, when considering whether to stick with the asymmetric jurisdiction clause or whether to move to a stricter exclusive jurisdiction clause more readily recognised within the scope of the Hague Convention.
Sanctions – In 2018, the UK implemented primary legislation so it could impose its own sanctions under the Sanctions and Money Laundering Act 2018, rather than imposing them through derived powers from EU and UN legislation, and set up the Office of Financial Sanctions Implementation (regulated by HM Treasury).5 As a result, transactions can still include undertakings to comply with sanctions, typically those imposed by the UN, EU and US, as well as those imposed by the UK and any other relevant state or group of states, as appropriate for the transaction.
The EU Blocking Regulation is brought onshore to the UK as the intention of the UK Parliament is to continue the policy that where there is a conflict between US sanctions and UK sanctions, then compliance with the UK sanctions would not of itself be an offence. This carries on the position as it was applicable to the UK under the EU Blocking Regulation. The UK legislative package to deal with this is known as the UK’s Protection of Trading Interests Legislation.
"COOPERATION" – What areas of cooperation should the trade finance industry look out for beyond Brexit?
Financial services – We know that automatic passporting rights for financial institutions in the field of financial services came to an end on 31 December 2020. While financial institutions look to their home regulators, there seems to be enough political will for EU and UK regulators in this field to exchange ideas and information and identify equivalence in some areas. The EU and UK made a joint declaration in the TCA on cross-border trade in financial services and investment emphasising shared objectives on continued market access, ensuring financial stability, market integrity and the protection of investors and consumers.6 It has to be acknowledged though that this is a huge gap in the TCA. So, we are hoping for some separate UK-EU agreements, memoranda of understanding or cross-border working parties on aspects of financial services. Look out for the promised memorandum of understanding with a codified framework for regulatory cooperation on financial services.
Trade in services – More work on cooperation on trade in services is still needed and nothing in the TCA prevents further negotiation on in this area. Some areas have already been identified for cooperation and exchange of information, e.g. intellectual property, financial services and some professional services in relation to mutual recognition of professional qualifications.
Digital trade and digital signatures – Politicians and negotiators have opened their eyes to the digital age, perhaps as they too had to succumb to the wonders of e-meetings while COVID lockdowns were imposed around the world. The TCA aims to promote trade in digital services and new forms of trade in goods and services and this is where further cooperation is expected. Coupled with this is a commitment to protecting data and consumers as more trade moves into the digital arena. This should certainly help as more platforms are introduced for trade and trade finance and as services continue to move online.
Even digital documentation and electronic signatures were highlighted, with the intention to give protection to these forms of contracts and signatures in both EU and UK legal systems. It is encouraging to see that the TCA and English law are catching up with how businesses are already doing business and how they have had to react rapidly by participating in digital trade in the unusual circumstances of 2020.
Beyond Brexit – While the UK Parliament complained about lack of time for scrutiny of the UK Act, and criticised the extensive powers for ministers to pass implementing secondary legislation, it was clear that, with a sigh of relief, the UK Parliament would accept the Brexit deal. For businesses too, this must be a relief and once some of the new procedures are in place and the issues have been analysed and worked through a few times, hopefully minds can be refocussed on trade itself.
Where we still need more cooperation between the UK and the EU, especially for financial services, is for industry sectors, trade bodies and regulators to lobby the UK, EU and member state parliaments to push ahead with the promised cooperation.
1 11pm in the UK and midnight in Brussels on 31 December 2020
2 European Union (Withdrawal) Act 2018 and European Union (Withdrawal Agreement) Act 2020
3 Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, Lugano 2007
4 [2020] EWCA Civ1707
5 https://www.gov.uk/government/organisations/office-of-financial-sanctions-implementation
6 See UK-EU Trade and Cooperation Agreement Summary December 2020 from UK Government
