The Internal Market Bill, the EU Withdrawal Agreement and the risk of no deal on the EU-UK future relationship

White & Case LLPThe Government's proposed Internal Market Bill has prompted much debate regarding the UK's approach to international law, as well as the internal constitutional architecture of the UK. The EU has raised the prospect of a legal challenge against the UK under the EU-UK Withdrawal Agreement (the "Agreement"). The prospect of a challenge results from provisions in the UK's Internal Market Bill (the "Bill") that the EU considers to be in violation of the Agreement. The challenge would be under the dispute settlement provisions set out in the Agreement.

A challenge could result in financial penalties against the UK or even entitle the EU to withdraw benefits to the UK under the agreements in place between them. Perhaps more importantly, the threat of legal action could derail negotiations towards a future relationship agreement between the UK and the EU, although a key element of the EU's approach is that any challenge to the Bill is separate from these negotiations, which it states it is committed to continuing. These negotiations are continuing for now.

The Withdrawal Agreement and the Northern Ireland Protocol

The EU-UK Withdrawal Agreement entered into force on 1 February 2020. The Northern Ireland Protocol (the "Protocol") formed part of the Agreement. The Protocol provides for the application of a lengthy list of specified EU laws, including customs and state aid or subsidy laws, to the trade and regulatory regime for goods in Northern Ireland, with a view to maintaining frictionless trade between Northern Ireland and the Republic of Ireland with no customs infrastructure between the two. A major element underlying the Protocol was the wish to avoid creating an effective border in Ireland, and jeopardising the results of the Belfast/Good Friday Agreement.

The Protocol comes fully into force from 31 December 2020 (the end of the "transitional period"), subject to any changes made in an agreement on the future relationship between the EU and the UK.

UK Internal Market Bill provisions at issue

Following the conclusion of the Agreement, the question of whether customs checks were required on goods going from Northern Ireland into Great Britain under the Protocol was a particularly controversial issue. Section 41 of the Bill provides for "[u]nfettered access to [the] UK internal market for Northern Ireland goods". That section prohibits any additional checks on goods between Northern Ireland and Great Britain.1  Section 42 provides Ministers with the power to "disapply or modify" exit procedures, including those set out in the Protocol for goods moving between Northern Ireland and Great Britain,2  especially where it is considered necessary to ensure that Northern Ireland goods benefit from unfettered access to the rest of the UK internal market.3

Subsidies rules have also become a contentious element of the negotiations between the UK and the EU, with the UK rejecting the application of EU "State aid" rules to government subsidies in the UK. Section 43 of the Bill, if enacted, would permit the Secretary of State to make regulations including disapplying or modifying the effect of Article 10 of the Protocol.4  Under Article 10, the UK agreed to make EU State aid law applicable to "measures" or subsidies "which affect that trade between Northern Ireland and the Union which is subject to this Protocol".5 This may limit UK subsidy programs that include support for Northern Ireland business, even where that is not the main intention of the subsidy.

Section 43 of the Bill would also allow the Secretary of State to make regulations on the interpretation of Article 10, including that it not be interpreted in accordance with EU law.6  Yet, Article 13(2) of the Protocol explicitly provides that any provisions referring to Union law must be interpreted in conformity with the case law of the Court of Justice of the European Union ("CJEU").7

Section 45 of the Bill provides that sections 42 and 43 would have effect "notwithstanding any relevant international or domestic law with which they may be incompatible or inconsistent"8 and that regulations enacted pursuant to sections 42(1) and 43(1) are not to be regarded as unlawful because of incompatibility or inconsistency with relevant international or domestic law.9

Article 4 of the Withdrawal Agreement secured the "direct effect" of the Agreement, ensuring that the rights and obligations set out in the Agreement and the Protocol could be enforced in UK domestic courts.10  The UK Government had given effect to this provision in Section 7 of the European Union (Withdrawal) Act 2018.11  The UK Attorney General confirmed the Government's view that Article 45 of the Bill would have the effect of partially disapplying Article 4 of the Agreement by removing the possibility of a domestic challenge in the UK Courts to enforce the provisions of the Withdrawal Agreement inconsistent with the Bill. As such, it would be intended to disapply "the EU law concept" of direct effect for the covered provisions.12

Further, the Agreement provides in Article 5 that the EU and the UK "shall, in full mutual respect and good faith" work together to fulfil the obligations in the Agreement and refrain from any measures that "could jeopardise the attainment of the objectives of this Agreement."13 The EU considers that the passage of the Internal Market Bill would violate this basic principle of the Agreement.14

Other provisions in the UK Internal Market Bill

It is important to appreciate that there are many other provisions in the Bill that are not being challenged by the EU, including the proposed establishment of principles of mutual recognition and non-discrimination within the UK for goods and services and specific provisions on professional qualifications. These, as well as provisions on financial assistance powers that are contentious between the Government of the UK and the devolved administrations, are not at issue in the EU statements on a potential challenge to the Bill.

UK reaction to EU claims over violation of the Agreement

The UK Attorney General set out the Government's position on the Bill, noting that the Bill provides for how aspects of the Protocol apply in the UK's domestic law.15  The purpose of the Bill is to promote the continued functioning of the UK internal market at the end of the transition period, and to ensure that the Government will be able to deliver on its commitments to protect peace in Northern Ireland and the Belfast/Good Friday Agreement. The Attorney General accepts that a State is obliged to discharge its treaty obligations in good faith, but notes that Parliament is sovereign as a matter of domestic law and can enact laws that breach the UK's treaty obligations.

The UK Justice Secretary described the Bill as an "insurance policy" or a "break the glass in an emergency" provision. The Justice Secretary stated that the UK Government would only invoke the powers provided in the Bill if the EU and UK failed to reach agreement and if the EU acted in an "unreasonable" manner.16  It is, therefore, unclear precisely what might trigger the UK to use the powers granted by the Bill. It is also unclear how the Safeguard provisions in Article 16 of the Protocol might apply, since they provide for unilateral action by either the UK or the EU if application of the Protocol "leads to serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade".17

Since the Bill was published, there has been much criticism of the proposed changes to the implementation of the Protocol, as provided for in sections 41 to 45 of the Bill.18

Dispute Settlement in the EU-UK Withdrawal Agreement

The EU Commission stated that it would "not be shy" in invoking legal remedies against the UK to address violations of the Agreement.19

Title III of the Agreement contains its dispute settlement mechanism, including providing for recourse to arbitration for any potential disputes.20

Once the parties have fulfilled the consultation requirement under the Agreement, they may request the establishment of an arbitration panel, made up of panellists chosen from a list of 25 arbitrators to be established by the UK/EU Joint Committee created under the Agreement.21

Proceedings before a Panel may well take longer than it would take to enact the Bill and conclude a UK-EU deal on their future relationship.

In the event of non-compliance by a party with any ruling issued by the Panel, the Agreement provides for certain "temporary remedies", including the imposition of financial sanctions or the suspension of concessions from any provision of the Agreement or parts of any other agreement between the EU and UK.22  If there were to be a deal on the EU-UK future relationship in place at that time, the EU, if it is successful, could be allowed to suspend elements of any deal that would otherwise benefit the UK, such as lower tariffs granted to UK goods.

Conclusion

The provisions of the Internal Market Bill as currently formulated expressly allow for the UK to violate provisions of the Withdrawal Agreement and Northern Ireland Protocol that were agreed and ratified by the UK and the EU a year ago. The EU is claiming that the mere passage of the Bill would be a violation of at least the good faith obligations included in the Withdrawal Agreement.

The UK has taken the position that it cannot now accept the implications of certain provisions of the Withdrawal Agreement as they apply to Northern Ireland. At the same time, the Internal Market Bill expressly recognises the legal validity of the Northern Ireland Protocol and includes some exceptions to the operation of the UK internal market to allow for the operation of the Protocol.

If the Bill passes in its current form, there is a real prospect of dispute proceedings between the EU and UK, not least because the EU will be under pressure to back up its claims of violation. However, of potentially greater significance in the short term is what impact enactment of the Bill in its current form would have on the ongoing EU-UK negotiations over their future relationship.

1 United Kingdom Internal Market Bill, s 41(1).
2 United Kingdom Internal Market Bill, s 42.
3 United Kingdom Internal Market Bill, s 42(3).
4 United Kingdom Internal Market Bill, s 43(1), 43(2).
5 Northern Ireland Protocol, Article 10(1).
6 United Kingdom Internal Market Bill, s 43(3)(d).
7 Northern Ireland Protocol, Article 13(2).
8 United Kingdom Internal Market Bill, s 45(1).
9 United Kingdom Internal Market Bill, s 45(2)(a).
10 EU-UK Withdrawal Agreement, Article 4.
11 European Union (Withdrawal) Act 2018, s7.
12 HMG Legal Position: UKIM Bill and Northern Ireland Protocol, (10 September 2020)
13 EU-UK Withdrawal Agreement, Article 5.
14 European Commission, "Statement by the European Commission following the extraordinary meeting of the EU-UK Joint Committee" (10 September 2020)
15 HMG Legal Position: UKIM Bill and Northern Ireland Protocol, (10 September 2020)
16 BBC, "Brexit: Buckland says power to override Withdrawal Agreement is 'insurance policy'", (13 September 2020)
17 Northern Ireland Protocol, Article 16(1).
18 See: UK Law Society and Bar Council Parliamentary Briefing, "Internal Market Bill Second Reading Debate – House of Commons" (14 September 2020)
19 European Commission, "Statement by the European Commission following the extraordinary meeting of the EU-UK Joint Committee" (10 September 2020)
20 EU-UK Withdrawal Agreement, Article 170.
21 EU-UK Withdrawal Agreement, Article 171(1).
22 EU-UK Withdrawal Agreement, Article 178.
 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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