UK: Investors Left Waiting As English Court Blocks Brexit

Background

On June 23, 2016, the United Kingdom voted 52% in favor of leaving the European Union (the Referendum).

Leaving the EU requires the U.K. to withdraw from the treaties forming the EU via a process set out in Article 50 of the Treaty of Lisbon (Article 50). In short, Article 50 requires an announcement of an intention to leave the EU by the U.K. which in turn starts the clock on a two-year period during which it is intended that any post-exit deals will be negotiated. Upon the expiry of the two-year period (unless unanimously extended by the European Council) the U.K. will no longer be subject to EU legislation or a member of the EU single market (Brexit). Prime Minister Theresa May has indicated that the government plans to trigger Article 50 in Q1 2017 without holding a vote in Parliament to approve that action.

Following Brexit, the U.K. will interact with the EU either on the basis of new trade deals or, in the event that new deals cannot be negotiated prior to the expiry of the two-year period, as a nonmember state. Interactions with the EU as a nonmember state without negotiated deals could include tariffs on the sale of goods and services, financial transactions taxes on movement of capital, and restrictions on free movement of people both from the U.K. into the EU and vice versa.

From the disquiet fueled by a slump in sterling and the absence of a clear plan and opening negotiating position from the government arose questions over the government's power to trigger an exit from the EU at all. It is on this basis that a legal challenge was brought against the U.K. government in the High Court of England and Wales, claiming that the government is not permitted to trigger Article 50 without first seeking a vote in Parliament authorizing it to do so (the Opposition). The Opposition centers on two central constitutional issues: the sovereignty of Parliament (i.e., laws can only be enacted by or repealed by Parliament as a whole) and the Royal Prerogative (i.e., the government's delegated powers from the crown allowing the government to conduct international affairs without the consent of Parliament). This challenge to the Royal Prerogative of the government is unprecedented and – given the precedent, principle and practice-based nature of the British constitution – is raising interesting constitutional questions in the court.

Following a hearing in October, on Nov. 3, the High Court found in favor of the Opposition, effectively blocking the government's right to invoke Article 50 at its whim and without the approval of Parliament. As expected, the government has appealed the ruling and a full hearing of the Supreme Court is scheduled for five days, beginning Dec. 5, 2016.

Summary of Submissions

In submissions, the government insists that the Royal Prerogative gives it the power to trigger Article 50 and begin the Brexit negotiation process, arguing that the triggering of Article 50 simply starts the negotiation of an international trade deal, something within the government's powers. In order to support the view that triggering Article 50 is tantamount to legislative change (thus not needing parliamentary approval), the government has indicated that any final deal negotiated by the government will be presented to Parliament to be ratified.

The Opposition has raised slightly more complex arguments to overcome the issue of Royal Prerogative, asserting that pursuant to the European Communities Act 1972 (the ECA), EU law is adopted into English law as a matter of course and, as a result, various EU laws confer rights on British citizens (such as the Charter of Fundamental Rights of the European Union). Taking this view, at the end of the two-year exit period, the Opposition argues that the triggering of Article 50 will have necessarily revoked the rights conferred on British citizens by European legislation (to the extent the ECA makes such legislation effective in the U.K.), directly changing a law enacted by Parliament. On this analysis, the triggering of Article 50 thus requires Parliament to authorize the government to trigger Article 50 as a matter of constitutional principle.

With respect to the government's assertion that Parliament will be consulted to ratify any final deal with the EU, the Opposition has highlighted that the mechanics of the Article 50 process are such that if Parliament were to reject any final deal, the U.K. would still leave the EU by default, and therefore Article 50 is in and of itself the mechanism for changing the ECA and should be subject to a vote in Parliament.

Decision by the Court

The constitutional question of Royal Prerogative and parliamentary sovereignty was central to the decision. The court reasoned that given the significance of the constitutional changes introduced by the ECA, it was unfathomable that Parliament, when enacting the ECA, had contemplated that the legislation would be open to repeal at the will of a future government without the need for a vote. The court held that when a constitutional issue is at hand, there is a presumption that silence will be interpreted as protecting constitutional principles rather than eroding them. Moreover, the more significant a constitutional principle, the greater the need for express, unambiguous statements permitting acts that may be viewed as contradictory to the constitutional backdrop. In the case of the sovereignty of Parliament, the court stated, there is no constitutional principle of greater significance and, therefore, where an act of government threatens to undermine parliamentary sovereignty, there must be unequivocal permission for the government to implement that act.

Consequences

Regardless of the outcome in the High Court, it was always expected that the case would be appealed to the Supreme Court due to the significance of the issues put before the court and lasting implications of Brexit. However, there was limited confidence regarding the government being blocked by the High Court before this case was heard and as such, the decision of the High Court has changed the playing field.

Although any conclusive outcome will not be confirmed until the Supreme Court has ruled on the case, the following issues may be worth considering at this time:

  • Until the Supreme Court finally rules on the case, it is unlikely that financial market participants will begin implementing Brexit contingencies.
  • It is not clear what will happen if the government is blocked by the Supreme Court from triggering Article 50 without a vote in Parliament. Indications are that Parliament will vote not to trigger Article 50 without some form of deal on the table, but when asked to vote, some MPs may reconsider the significance of the Referendum, particularly given the Eurosceptic conservative pressure and Labour's northern strongholds having voted largely to leave the EU. Any political negotiation to reach a majority vote in Parliament to trigger Article 50 would likely be long and difficult.
  • If Parliament does vote not to trigger Article 50, it is unclear what the government will do. From a political perspective, it is possible that the government could call a general election with the intention of gaining a clear mandate to trigger Article 50 and implement Brexit. However, it would take time to call a general election and, given the relatively even split in opinion nationally regarding Brexit, a general election does not present itself as a low-risk strategy.
  • The Brexit mechanism is, at a minimum, likely to take two years. In the event that the government is blocked from triggering Article 50 and has to explore alternatives, this time frame will slip further. It is not clear how markets will react to further uncertainty. In addition, it is also not clear whether the Supreme Court upholding the High Court ruling will cause financial institutions and other businesses to reconsider their Brexit contingency plans.

Ultimately, the takeaway message at this stage is that uncertainty is the only thing that is certain in the short term. A decision from the Supreme Court is not expected until January 2017, and in any event, if the Supreme Court upholds the High Court decision, that period of uncertainty will simply continue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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