The British shocked the financial, political, and business establishments of the world by voting to leave the European Union (“EU”) in the referendum of 23rd June 2016. Analyzing the votes in the referendum, it was observed that while England and Wales opted to leave the EU, Scotland, Northern Ireland and the city of London were strongly in favour of the Great Britain remaining a part of the EU. Looking at the vote split (52 to 48), it can’t be said that either side won decisively. However, since the Britons have spoken, this democratic decision would have a huge impact on Britain, the EU, and the world as a whole.

The UK will now have to serve its notice to withdraw under Article 50 of the Treaty on European Union which envisages a two year negotiation of a withdrawal agreement. This two year period can be extended by mutual agreement, but in the case of no agreement and no extension, the UK will cease to become a member of the EU. This will be the first time that this article is invoked.

Impact on UK and EU Relations [1]:
This vote has started a long and complicated process which will result in a fundamental change in the relationship with the other members of the EU. To understand the consequences of Brexit (Britain leaving the EU), it is necessary to understand the UK’s current relationship with other members of the EU and the range of new relationships that are now potentially open to the UK. These relationships vary across sectors and hence the consequences will vary similarly. The EU is founded on laws and any new relationship will also be legally based.

The arrangements between the EU and its members are complex and far reaching. They cover the so-called ‘four freedoms’ of the internal market, namely- free of movement of goods (custom duties, internal taxation and free movement of imports and exports); free movement of persons (free movement of workers and citizens); free movement of services (freedom of establishments and to provide/receive services), and free movement of capital (movement of capital and payments). These arrangements also provide for custom unions and rules for dealing with agriculture, common external trade policy, common foreign and security policy, justice and home affairs, monetary union etc.

Post Brexit, the question for the UK is what elements of the current relationship with the EU it wishes to keep, and the question for the EU is what elements of this relationship it is prepared to allow the UK to keep without the UK subscribing to the full package. The UK will, ideally, aim to retain full or as much as possible, access to the EU’s internal market.

The future relationship between the EU and the UK can be predicted based on the following:

i. Access to the European Economic Area:
Post Brexit, the access of the UK to the European Economic Area (“EEA”) is not entirely clear. The UK is a member of the EEA as all members of the EU are members under the EEA Agreement. However, in the future, the access of the EEA to the UK seems highly unlikely. If granted access, the UK would have access to the EU’s internal market without being subject to any common trade policy of union. The price of access would be the need to comply with majority of the EU legislation but without the ability, which the UK currently has, to legally participate in the making of the legislation.
ii. Bilateral Agreements:
Any bilateral arrangements with the EU also seem unlikely as it too requires an acceptance of a raft of the EU legislation and a contribution to the EU’s social and economic cohesion funds in return for access to the EU’s internal market.
iii. Custom Unions:
Custom unions between the EU and the UK also seem unlikely as the UK would have to follow the EU’s overall trade policy. The EU would retain the ability to conclude trade agreements with third countries without the input of the UK. That would give those countries access to the UK market on terms negotiated by the EU. This arrangement will have an adverse impact on the UK economy.
iv. World Trade Organisation:
The UK is a member of the World Trade Organisation (“WTO”) in its own right. Since it has been a member of the EU, it is part of the EU’s common commercial policy, which sets a common external tariff with WTO members outside the EU. With Brexit, the UK will have to negotiate and agree through the WTO on its own schedules of concessions in relation to goods and services and other issues with the EU’s counterparties. Thus, the relation between the EU and the UK, through the WTO, relying solely on general international trading rules seems unlikely.
v. Free Trade Agreements:
A free trade agreement between the UK and the EU is likely, over a period of time. Such agreement would in all probability, offer the UK some access to the EU’s internal market. It will be lesser than the access if the UK remained a member of the EU itself or of the EEA. However, the greater the access to its internal market granted to the UK, the more likely the EU is to insist on compliance with its rules.

Impact on UK and Non-EU Member Relations [2]:

Around fifty-three trade agreements have been concluded between the EU, with the UK as a member, and third countries. There are negotiations in progress with the USA, Japan and India among others. In case of existing trade agreements, there will be uncertainty whether these agreements would continue between the UK and non-EU contracting parties. The UK and the counterparty could agree that the agreements should continue on the same terms or subject to certain modifications. Failing this, the UK would either have to negotiate fresh bilateral agreements with each of these countries or fall back on its limited WTO rights, which would also have to be re-established for the UK as a non-EU member.

Institutionally, the UK will have to rebuild its expertise in this area as well as its capacity to carry on a large number of simultaneous negotiations with partners who might feel less inclined to give to the UK as generous a market access and national treatment as they did to the EU, given UK’s smaller bargaining power. The process could be a lengthy one. For example, the EU began free trade negotiations with India in 2007, and the negotiations are yet to be concluded.

Legal Impact [3]:
Post Brexit, there are various laws and regulations in the UK which will have to be amended. There are certain key mechanisms which require to be reworked in light of UK’s exit. The following cover the main legislations which will be affected by Brexit:
i. Commercial Contracts:
Brexit is likely to have practical implications for relations under commercial contracts, though it is likely to be at least two years after the referendum before Brexit occurs, which will give parties sometime to reach a consensus. While most potential implications under commercial contracts are likely to turn heavily on the specific drafting of the contracts in question, there are certain standard terms such as illegality, market disruption, and material adverse change clauses which could be triggered for certain classes of contractual parties following Brexit (e.g. where a party’s obligation becomes unlawful due to loss of an EU based status or authorization). In addition, clauses dealing with choice of law and jurisdiction assume a common EU law-based regime which would cease to apply to English courts after Brexit and the effects of such clauses could therefore become less certain.
Further, recognition of arbitration agreements and the enforcement of arbitral awards would be unaffected by Brexit as both these matters depend upon the New York Convention, which is not an EU treaty.
ii. Migration Laws:
Currently, there are a large number of EU nationals working in the UK and vice versa in a range of sectors including financial services. A priority of any withdrawal agreement between the UK and the EU would be to address the rights of these workers to continue in their present jobs. Ideally, a ‘grandfathering’ system for current workers seems the most likely solution but a new arrangement would be required to facilitate Brexit.
iii. Employment Laws:
A significant portion of the UK Employment laws are derived from the EU laws, including legislations that govern maternity and paternity leave, agency workers’ rights, and paid holidays. However, these legislations do not depend mainly upon the UK’s continuing membership of the EU. They will continue in place until the UK chooses to change it. These changes will be based on the extent of departure from its employment requirements as permitted by the EU. Further, these will be subject to the UK’s post Brexit relationship with the EU.
iv. Taxation Laws:
The power to levy direct taxes is generally a matter for the EU’s member states, with only limited EU competence in the area. The new right to taxation must be consistent with the EU’s treaties. The UK also has a number of double tax treaties with EU member states which will continue in place post Brexit. Depending on the agreement between the EU and the UK, the UK will be able to shape its own tax laws but will lose the coordination between the EU member states. Both the UK and the EU will be free to implement discriminatory tax legislations against each other, subject to limited WTO restrictions.
v. Competition Laws:
The UK’s domestic legislation, principally the Competition Act 1998 largely mirrors the EU legislation for competition issues within the UK, and is likely to remain in force post Brexit. However, there is a possibility that the UK may enforce practices in relation to mergers that may diverge from those of the EU. This could add an extra element of risk to mergers of businesses that operate in the UK and in the EU, given the requirement for approval in an extra jurisdiction.
vi. Intellectual Property:
Various intellectual property rights cover the whole EU through a single unitary, for example the European Union Trade Markets (“EUTM”) and EU designs. These rights co-exist with nationally granted rights in individual EU member states. Currently, there is no precedent for what happens when an EU member state leaves. The UK is likely to be removed from the protection given by the EUTM and other unitary rights. The various brand owners around the world who protect their rights in Europe via the EUTM and other unitary rights are at a risk of being deprived of protection in the UK if they do not have equivalent national rights in the UK.
vii. Environmental Laws:
A great deal of the current UK environmental laws is derived from the EU legislations covering such areas as water and air quality, waste policy, environmental impact assessment and emissions trading etc. The UK could decide to keep all of these legislations in place. But following Brexit, compliance with at least some EU legislation would be required to maintain the UK’s trading relationship with the EU. Further, if the UK decides to change any particular environmental standard or regulatory practice, it is likely to be a gradual process.

Impact on India:
With Britain cutting off ties with the EU, it will have to find new trading partners along with a source of capital and labour. Britain will still need a steady inflow of talented labour, and India fits the bill perfectly due to its English-speaking population. Britain is one of the most important destinations for Indians who want to study abroad. Presently, British universities are forced to offer subsidized rates for citizens of the UK and EU. With Brexit, however, the universities will no longer be obliged to provide scholarships to EU citizens which will result in the freeing up of funds for students from other countries and thus many more Indian students may be able to get scholarships for studying in the UK. [4]

India is currently the third biggest source of Foreign Direct Investment for Great Britain. One of the main reasons for this is the fact that the UK proved to be a gateway into the rest of Europe. Indian companies that have set up their factories in the UK could sell their products to the rest of Europe under the European free market system. With the exit of Britain from the EU, it is not as attractive a destination for Indian FDI as before. However, Britain would not want to lose out on capital coming in from India. Thus, one can expect Britain to lure Indian companies to invest there by providing much bigger incentives in terms of tax breaks, lesser regulation and other financial incentives. Further, with Britain leaving the EU due to the latter’s complex bureaucratic regulatory structure; Indian companies can expect a deregulated and freer market in Britain. [5]

However, India will lose its gateway to Europe. This will force India to forge ties with another country within the EU, which would be a good result in the long run. India is already trying to build trade negotiations with Netherlands, France and Germany. Thus, India will have to build a trading partnership with other EU nations in order to access the large EU market. [6] However, Brexit could in-turn strengthen the India-UK economic relationship as the UK would seek to compensate for loss of preferential access to EU markets

Finance Minister Arun Jaitley commented that India is well prepared to deal with short and medium-term consequences of Brexit. He also emphasized that India’s strong foreign exchange reserves position will offset short-term volatility in the currency markets. [7]

RBI Governor Raghuram Rajan stated that the Indian economy has good fundamentals, low short term external debt, and sizeable foreign exchange reserves which will help India face the impacts of Brexit. Further, he emphasized that the Reserve Bank of India is continuously maintaining a close vigil on the market developments, both domestically and internationally, including providing liquidity support, to ensure orderly conditions in financial markets. [8]

Brexit is a landmark event. Currently, the impact and consequences are itself unclear. Any and all changes will be subjective to the negotiations between the EU and the UK. One can expect gradual phased out implementation of changes when the negotiations are concluded. Such changes are likely to affect the economy and development of the UK, EU and other countries. However, in order to minimize the consequences, Indian as well as global businesses must keep their alternative strategy in places and be abreast of the latest developments.

Tushnika Dayal (V-V) and Deesha Kanabar (Batch of 2015)

[1] Article from Clifford Chance LLP, United Kingdom- “The Day After Brexit: What Will Happen if Britain Votes to Leave the EU?” dated April 24, 2016 Accessed on July 20, 2016.
[2] Ibid
[3] Ibid
[4] NDTV new article –“Brexit: Bad For Britain, But Potentially Good For India” – Accessed on July 20, 2016
[5] Ibid
[6] Ibid
[7] Online news article of Live Mint published on June 24, 2016- – Accessed on July 20, 2016.
[8] RBI Press Release dated June 24, 2016 – Accessed on July 20, 2016.