Just when we thought we almost had it all…..

Is there a risk that BREXIT could threaten to steal the English Courts pre-eminent international jurisdiction for large scale commercial disputes?

After the UK’s withdrawal from the EU, whether on full exit or the EEA-type model, the Recast Brussels Regulation (“RBR”)[1] will no longer be directly applicable in the UK. If the UK becomes a remote outlier, which is not subject to the EU’s private international law rules, then we can expect more jurisdictional challenges and concurrent proceedings, increasing litigation cost and uncertainty. Importantly, the attractiveness of a UK judgment (despite its high quality) will be diminished if it cannot be easily recognised and enforced in 31 different countries across the EU and EEA.

It will therefore be imperative to have some jurisdictional arrangements in place.  Absent some agreement to observe the RBR provisions in the UK, the UK could ratify the 2009 Lugano Convention, either as an EFTA State or a third state, along with Iceland, Norway, Liechtenstein and Switzerland.  That would provide certainty with ongoing jurisdiction before the English Courts through the domicile of an anchor defendant with the ability to bring in related third parties. It would also provide for courts to stay proceedings or decline jurisdiction for lis alibi pendens and related proceedings as well as the recognition and enforcement of English judgments in 31 States.[2]

Failing that, the UK could have to reinvigorate its signature of the old Brussels Convention or resort to the Hague Convention on Choice of Court Agreements 2005 (akin to the position in the US and Singapore). Conceivably the UK could return to the heady days of the old common law of conflicts. Although esoteric, there could be advantages to that. Arguably, the old doctrine of ‘forum conveniens’ may provide a broader range of connecting factors justifying the assumption of jurisdiction by the English Courts and recourse to anti-suit injunctions could rise again. In the competition damages field, if the English Courts could circumvent the next five years of uncertainty and preliminary references regarding the interpretation and application of the Damages Directive, we would have the benefit not just of the ‘English torpedo’ but also the ‘English supersonic jet’, resulting in faster, procedurally efficient and pragmatic outcomes for litigants.

Once the transitional period expires, we may experience some turbulence in international litigation for some time with increased legal uncertainty, multiplicity of proceedings and jurisdictional challenges. The current surge in competition litigation and the fledgling development of collective consumer actions depends on the oxygen and momentum provided by litigation funders. Their commitment is reliant on legal certainty, procedural efficiency and volume of traffic.  That makes it all the more imperative for the UK to have a clear vision of procedural reforms and jurisdictional rules,  in place immediately on its departure from the EU, to secure the English Courts’ reputation as an international centre of judicial excellence.

This blog forms part of a wider discussion on the impact of Brexit for competition law damages in a recent article by Anneli Howard, published by Jordans in the Brexit edition of the Competition Law Journal, available here.

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[1] Regulation 1215/2012 of the European Parliament and the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (2012) OJ L 351/1.

[2] There would be some disadvantages as the new provisions in the RBR dealing with jurisdiction clauses, Italian torpedoes and related proceedings in third party States would not apply.

How should practitioners plan for the uncertain period ahead? What happens to the application of EU Law between now and the enactment of the act of Parliament that will be required to repeal the European Communities Act , as well as to implement into domestic law any successor deal with the EU?

Whatever the long term future relationship between the UK and the EU, there would be a transitional period before any final arrangements were entered into. The period of negotiation could be lengthy , but there are no precedents for what is about to happen. On the one hand, an EEA relationship with the EU would be easier to negotiate with the EU but the UK would still have to negotiate direct with the non-EU EEA states . Could that be achieved within two years, from a standing start? On the other hand, if the replacement relationship with the EU was a bespoke set of arrangements, it is inconceivable that the negotiations could be concluded within two years.

In the short term, it might not matter in the strict sense, since the existing rules of EU Law would continue to apply in such a period. The UK could not repeal the European Communities Act or domestic secondary legislation implementing EU obligations until its exit pursuant to Article 50 of the TEU had become legally effective, although the two acts are likely to be coterminous to avoid a legal vacuum . If the UK were to do otherwise, it would be in breach of EU Law and Public International Law.

The doctrine of direct effect of directives would continue to apply, as would the direct applicability of EU regulations. The courts would also be obliged to continue to apply the ordinary rules of construction under which they are likely to strive to apply domestic rules consistently with EU Law. Cases before the courts in Luxembourg would continue to proceed. The courts’ rulings would continue to have effect . But, during the transitional period, while a full member of the EU, our political influence would lessen dramatically in respect of influencing the content of new legislation.

It is less clear what might happen in respect of legal relationships that are predicated on the applicability of EU Law where those relationships straddle the boundary between a pre-exit and post-exit world. An example might be consumer rights which derive from EU Law, such as those which arise from the Denied Boarding Regulation (Regulation (EC) 261/2004), which has direct applicability. The regulation provides airline passengers with rights to remedies for excessive delays to a flight and, in the short term , these consumer rights would be unaffected. But, while the EU legal framework would continue to have effect in a transitional phase, a significant problem for the consumer and the practitioner would be legal uncertainty for a post-Brexit future, not least in circumstances where the Regulation has hitherto generated considerable controversy.

How should lawyers assess future legal risk in an environment where no one knows what the long term UK settlement will involve? Is there a possibility that a lawyer’s understanding of rights, obligations , liabilities or expectations flowing from EU Law , which arise in a transitional period prior to exit but which are intended to outlast exit from the EU and to outlast repeal of the European Communities Act 1972 , might be undermined ?

In some cases, contractual arrangements or administrative arrangements with public bodies might be expressly agreed between relevant parties to clarify the understanding of both parties as to the possibility of different types of future longer term, post-Brexit relationships with the EU. In other cases, there are general provisions of section 16 of the Interpretation Act 1978 which might apply:

“General savings.

(1) Without prejudice to section 15, where an Act repeals an enactment, the repeal does not, unless the contrary intention appears…

(b) affect the previous operation of the enactment repealed or anything duly done or suffered under that enactment;

(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under that enactment…”

Much clearly depends on the outcome of the negotiations and of the content of the repealing legislation. But it would be wise to make sure that the Government’s policy makers understand the risks of legal uncertainty for businesses, individuals and their lawyers, so that express provision can be made in the repealing legislation, if only for clarity’s sake.

 

The EEA Agreement, often described as the ‘Norwegian model’ extends the Single Market to Norway, Liechtenstein and Iceland. This Monckton Brexit Blog post provides insights into the fundamental principles of EEA law and their role in achieving a level playing field across the Single Market.

To view the blog post written by Michael-James Clifton please click here.

In a blog on this site earlier this week, George Peretz QC discussed various possibilities for the State aid regime after Brexit. That piece, available here, has now been updated to include a discussion of the position of Switzerland.

IMPLICATIONS OF BREXIT FOR STATE AID: (1) THE “ICELAND TO TURKEY” OPTIONS

As an area that has been a key EU competence, Brexit can be expected to have a considerable impact on competition policy. That point applies in spades in the area of State aid, which is entirely based on the EU Treaties and which is centrally enforced by the European Commission. As a matter of law, as soon as the United Kingdom ceases to be party to the Treaty on the Functioning of the EU, State aid law simply vanishes.

Or does it?

Over the next couple of weeks, David Unterhalter SC and I will blog about State aid post-Brexit. In this piece, I will cover State aid control in Europe outside the EU – in what Michael Gove, during the referendum campaign, described as the “free trade zone stretching from Iceland to Turkey that all European nations have access to, regardless of whether they are in or out of the euro or EU” – a zone in which he promised the UK would stay. In a second piece, David will explain WTO anti-subsidisation rules.

The obvious unknown element in thinking about the post-Brexit future of the State aid rules in the United Kingdom is the attitude the UK Government will take to those rules. In general, the United Kingdom has been strongly supportive of the State aid rules: and no UK Government since that of Mrs Thatcher has been in favour of State support to business in the absence of a good case for market failure. The United Kingdom has an excellent record of compliance with the State aid rules. Further, the consensus of responses to the Coalition Government’s review of the balance of competence between the EU and UK was that: –

3.27 … there was broad agreement in principle on the current balance of competence on State aid, but some expressed concern about its limits, about real or apparent extension of EU competence into areas of domestic policy, and about the way State aid controls are exercised.

On the other hand, during the referendum campaign the Leave campaign argued, in relation to the problems affecting Tata Steel, that out of the EU the United Kingdom would have a free hand to grant subsidies on energy costs to support the steel industry. It may perhaps be pointed out that some of those making that argument were not generally known for their support for interference with the free market: but it should also be noted that the current leader of the Labour Party (though in favour of remaining in the EU) stated that “There are certainly problems about EU state aid rules, which need reform.” And the present author is aware that a number of Ministers in the present Government have seen the application of the State aid rules as an obstacle to projects that they wish to promote. And, finally, the comment at the end of the paragraph quoted above refers to business concerns that the State aid rules can be taken too far, particularly in the area of taxation (with, perhaps, the current tax ruling cases such as Starbucks and Fiat in mind).

So it cannot be certain that the new Prime Minister – who it now seems certain will be Mrs Theresa May – would necessarily want to accept continuation of the State aid rules. However, although this risks straying into political matters, the present writer considers that the new Prime Minister – given that she will be from a party that generally believes in the free market – is likely to regard accepting control on State aid as a relatively easy “give” in negotiations with the EU. A further point is support of the “give” is that the State aid rules serve the useful purpose, within the United Kingdom, of controlling the ability of the devolved Governments – and in future, city regions exercising devolved powers – to grant State aid and of preventing ultimately futile “subsidy races” between different parts of the United Kingdom seeking to attract investment.

Moreover, a quick glance at the various arrangements between non-EU European states (from Iceland to Turkey) and the EU shows that State aid control is likely to be a sine qua non of any agreement that can be described as providing access to the single market.

To start with Iceland. Iceland, along with Norway and Liechtenstein, is party, as an EFTA State, to the EEA Agreement with the EU. Article 61 of the EEA Agreement provides that: –

61. Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.

2. The following shall be compatible with the functioning of this Agreement:

(a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

(b) aid to make good the damage caused by natural disasters or exceptional occurrences;

(c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division.

3. The following may be considered to be compatible with the functioning of this Agreement:

(a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment;

(b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of an EC Member State or an EFTA State;

(c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

(d) such other categories of aid as may be specified by the EEA Joint Committee in accordance with Part VII.

Resemblances between that provision and Article 107 TFEU – the TFEU provision on State aid – are entirely intentional: the provisions are more or less mirror images of each other. The only difference that cannot be described as “mutatis mutandis” is the absence, in Article 61(3) EEA of an equivalent to Article 107(3)(d) TFEU, dealing with culture and heritage conservations (which was originally inserted into the EU State aid rules by the Treaty of Maastricht in 1993). However, even there, the EFTA Surveillance Authority (“ESA”) has stated that it “acknowledges that state aid measures may be approved on cultural grounds on the basis of Article 61(3)(c) of the EEA Agreement“¹.

Moreover, it is clear from the decisional practice of the ESA and the jurisprudence of the EFTA Court that Article 61 EEA is to be read in precisely the same way as Article 107 TFEU: and the EFTA Court will have regard to the jurisprudence of the CJEU in relation to such questions as what is an “undertaking”² and as to selectivity in tax measures³.

In fact, the only real difference is that, in the EEA/EFTA States, State aid to the fisheries sector is dealt with in a separate regime (in Article 4 of Protocol 9 to the EEA) which requires the abolition of State aid to the fisheries sector but which is not subject to the enforcement powers of the ESA.

Subject to that fishy caveat, the enforcement powers of the ESA in the EEA State aid system are effectively the same as those of the Commission in the EU system. The mechanism is, however, a bit more complex. So, Article 62 EEA requires “constant review” of existing and planned measures in the EEA to ensure compatibility with Article 61, a task which in the EEA/EFTA States is allocated to the ESA. The ESA then has, under Article 5 of the Surveillance and Court Agreement (“SCA”), the general duty to ensure the compliance of the EEA/EFTA States with their duties under the EEA Agreement, and Article 24 SCA then enumerates compliance with the State aid rules as an aspect of that duty and points to Protocol 3 SCA. That Protocol effectively incorporates the equivalent provisions to Article 108 TFEU: it provides for the duty to notify new aid (Article 2), and an obligation not to put that aid into effect before clearance by the ESA (Article 3). Other provisions of Protocol 3 SCA reproduce the main provisions of Council Regulation 659/1999 (the EU procedural regulation) as originally enacted providing, in particular, for recovery orders, suspension injunctions, limitation periods and information-gathering powers. It is not yet clear whether the amendments to that Regulation (now consolidated into Council Regulation 1589/2015) will be adopted.

If the UK joined EFTA and successfully applied to become party to the EEA, therefore, little would change in the United Kingdom in relation to State aid apart from some re-labelling and the replacement of the Commission and ECJ by the ESA and EFTA Court. There might even be some advantage in terms of speed, given that the EFTA Court is able at the moment to hear appeals much more quickly than the General Court (and to the relief of monolingual Brits, operates in English – one reason for its relative speed).

However, for various reasons the Government may decide that the EEA is not an option for the United Kingdom. What is the position in relation to other agreements entered into between the EU and other European countries?

Mr Gove’s speech also referred to Turkey, at the opposite end of Europe to Iceland. The key point to make about Turkey, in the current context, is that the 2007 Accession Partnership agreement between the EU and Turkey requires Turkey to adopt State aid rules and to set up an internal enforcement mechanism for them. Indeed, that obligation dates back to the 1995 Customs Union agreement with Turkey. Turkey’s compliance with those requirements has, to date, been less than entirely satisfactory4. But the obligation is clear. Similar obligations are included in accession partnership agreements with Macedonia, Albania, Montenegro, Serbia, and Bosnia and Herzegovina.

Finally, there is the position of Switzerland. Switzerland is not party to the EEA Agreement, but has a series of bilateral agreements with the EU. Of those, the ones that mention State aid are, the 1972 Free Trade Agreement and the 1999 Agreement on Air Transport. The 1972 FTA contains, at Article 23(1)(iii), a general prohibition on “any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods.” The present writer understands that this provision has not been applied in Switzerland and that as a matter of Swiss law it is of limited application. The 1999 Air Transport Agreement is more thorough in its reference to familiar concepts of EU State aid law, containing at Article 13 a provision that closely reflects Article 107 TFEU: however, although specific provision is made in relation to enforcement of the Articles reflecting Articles 101 and 102 TFEU (the general prohibitions on anti-competitive agreements and abuse of dominant position) by the European Commission and the Swiss authorities, no enforcement mechanism for Article 13 is provided other than, at Article 14, a general requirement to keep measures falling within Article 13 under review. The present writer also understands that Swiss law contains general prohibitions on public subsidies that fail to meet conditions of economic efficiency and a general requirement that Swiss government bodies respect competitive neutrality: but he also understands that these are not often invoked before the Swiss courts.

In the present writer’s view, the 1999 Agreement with Switzerland, and the agreements with accession states, are a more reliable guide to the EU’s likely position on State aid than the 1972 Agreement. So it is likely that any preferential trade agreement with the EU would involve the UK’s acceptance of at least an internal mechanism for controlling State aid – and the EU is likely to insist on some form of enforcement mechanism. There would, however, be a number of practical and constitutional issues to be resolved in setting up such a mechanism. It would be possible to have an Act of Parliament binding all devolved administrations and public bodies not to grant State aid, and providing for enforcement by, say the Competition and Markets Authority. But serious issues would arise where State aid arose as the result of primary UK legislation, particularly in the field of tax: the idea that the CMA could hold that UK tax legislation was invalid to the extent that it granted State aid and that it could order recovery against taxpayers benefiting from a tax break granted by statute would be, to put it mildly, a constitutional innovation. Moreover, there might well be some resistance to the idea that the CMA should apply ECJ/EFTA Court jurisprudence into which the United Kingdom would have no continuing input: it is one thing for States on their way in to the EU, or EFTA States, to accept such a condition, but quite another for the condition to be accepted by a former EU/EEA Member State on the way out.

Nonetheless, as argued above, the United Kingdom is likely to find that the EU insists on a State aid provision in any agreement going beyond the WTO framework and that this is a relatively easy “give”. The likelihood of the “give” is reinforced by the point that, as David will explain in his forthcoming piece, even the “WTO option” also contains obligations that bear some resemblance to State aid rules.

 

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1 See §87 of its Decision on the financing of the Harpa concert hall in Reykjavik.

2 See, e.g., Case E-5/07 Private Barnehagers v ESA (which referred, inter alia, to CJEU case-law on what is a “service” under free movement of services provisions).

3 See e.g. Joined Cases E-17/10 and 6/11 Liechtenstein and VTM Fund Management v ESA, at §§74-75.

4 Turkey 2015 report accompanying the EU Enlargement Strategy Communication, SWD(2015) 216 final, bottom of page 33.

The EEA Agreement, often described as the ‘Norwegian model’ extends the Single Market to Norway, Liechtenstein and Iceland. This Monckton Brexit Blog post describes the roles and functions of the EFTA Surveillance Authority and the EFTA Court.

To view the blog post written by Michael-James Clifton please click here.

In the light of Brexit, World Trade Organisation (WTO) law has attracted considerable attention. It has been viewed as a possible model governing the future relationship between the UK and the EU (should other options fail), as well as the future trade links between the UK and non-EU states (in the absence of specific trade agreements).

The question that Brexit raises is whether the application of WTO rules to the relations between the UK and the rest of the world would be automatic. Put differently, how does Brexit affect the WTO status of the UK?

The UK is currently a member of the WTO along with the EU. This is because, when the relevant agreements were concluded back in 1994, the UK had competence over parts of these agreements, while the EU had exclusive competence to conclude other parts, including the General Agreement on Tariffs and Trade 1994 (GATT 1994). Over the years, the scope of the exclusive competence of the EU within the WTO framework expanded to cover, amongst others, services (a move signalled by the Lisbon Treaty).

In the light of its co-existence with the EU in the WTO, the rights, commitments and concessions of the UK under WTO rules are currently tied in with those of the EU. Following Brexit, the UK will no longer be covered by the common schedules which the EU submitted for all its Member States. The application, therefore, of WTO law on the UK following Brexit will depend on resetting the terms of the British membership in the Organisation. This would be the case across a wide range of economic activities covered by the WTO agreements. The schedules of concessions and commitments on market access, for instance, as well as the UK’s list of exemptions from the MFN treatment obligation would have to be reset and resubmitted. They would also have to be accepted by the other WTO parties.

In the light of the above, a process of negotiation would ensue between the UK and the WTO parties. Given that the existing arrangements constitute part of a package deal, resetting their terms would not be a straightforward exercise: it would entail a complex process which could take time and the successful outcome of which would depend on the political will of the other WTO parties. This point has been made by the WTO Director-General Roberto Azevêdo on a number of occasions (for instance, in his interview in the Financial Times on 26 May 2016).

The WTO rules have been viewed as a safe fall back option for the trade relations between the UK and the rest of the world following Brexit. The application of these rules, however, would not be automatic. The process of resetting and negotiating the terms of British membership in the WTO would require considerable work.

Amid concerns that the referendum was conducted without the public having full knowledge of the facts, there have been increasing clamours for a second referendum. Last week, Sir Richard Branson reportedly had discussions with Theresa May to request a second poll – see here.

In yesterday’s press, lawyers have requested the Government to carry out a legislative process informed by an “objective understanding as to the benefits, costs and risks of triggering Article 50”.

According to Mrs May “Brexit means Brexit”.

But what does Brexit mean?

The problem with the referendum questions was that, whilst the Remain option was clearly framed in favour of the status quo, the Leave option was left open-ended without any discussion of the various exit models that might apply. Nor has there been any real assessment of how the various options marry with the economic risks inherent in the UK’s departure.

As a matter of common law, a public body is under a duty to take reasonable steps to obtain relevant information to enable it to carry out its public functions so that decisions are taken on the best available evidence at the time. That Tameside duty applies unless it is overridden by statute and is subject to judicial review on rationality. Regardless of whether Article 50 is triggered by prerogative or parliament vote, it would be sensible for the Government to carry out a prior assessment of the impact of Brexit and various options available that might minimise any collateral damage.

Under s.7(1) of the Enterprise Act 2002 (EA02), with its area of competence, the Competition and Markets Authority (CMA) is charged with advising and/or providing information to any Minister(s) in relation to any aspect of the law or any proposed change in the law. It can also make recommendations about the effect of a legislative proposal on competition within a market(s) in the UK for particular goods and services. Similarly, under s7(2) a Minister of the Crown can request the CMA to make proposals or provide information and the CMA has to comply with that request.

The CMA has issued guidelines (the CMA50 guidelines – issued with input from the OECD) about the considerations it will consider as part of impact assessments and its assessment of alternative proposals in order to select the most appropriate regulatory measure in a particular case. Those guidelines are designed to achieve the Government’s principles of better regulation, to ensure that decision-making is transparent, accountable and proportionate. They also ensure that policy makers select the most appropriate solution to achieve their objectives whilst, at the same time, mitigate any adverse effects so far as possible. Although those guidelines apply to specific regulatory interventions that affect businesses within a particular market, they serve as a useful analogy for wider legislative change that has similar disruptive effects.

The UK’s withdrawal from the EU will undoubtedly affect competition in numerous markets for goods and services, including but not limited to financial services, legal services, scientific and academic research and online services that have a cross-border dimension. Oliver Letwin has recognised the need for the Article 50 trigger to be delayed so that the Cabinet Office can prepare a “multi-dimensional” bottom-up review of the options.  Perhaps he should “Phone a Friend” and call on the CMA’s independent expertise for input?

As an area that has been a key EU competence, Brexit can be expected to have a considerable impact on competition policy.  That point applies in spades in the area of State aid, which is entirely based on the EU Treaties and which is centrally enforced by the European Commission.  As a matter of law, as soon as the United Kingdom ceases to be party to the Treaty on the Functioning of the EU, State aid law simply vanishes.

Or does it?

Over the next couple of weeks, David Unterhalter SC and I will blog about State aid post-Brexit.  In this piece, I will cover State aid control in Europe outside the EU – in what Michael Gove, during the referendum campaign, described as the “free trade zone stretching from Iceland to Turkey that all European nations have access to, regardless of whether they are in or out of the euro or EU” – a zone in which he promised the UK would stay. In a second piece, David will explain WTO anti-subsidisation rules.

The obvious unknown element in thinking about the post-Brexit future of the State aid rules in the United Kingdom is the attitude the UK Government will take to those rules.  In general, the United Kingdom has been strongly supportive of the State aid rules: and no UK Government since that of Mrs Thatcher has been in favour of State support to business in the absence of a good case for market failure.  The United Kingdom has an excellent record of compliance with the State aid rules.  Further, the consensus of responses to the Coalition Government’s review of the balance of competence between the EU and UK was that:

3.27 … there was broad agreement in principle on the current balance of competence on State aid, but some expressed concern about its limits, about real or apparent extension of EU competence into areas of domestic policy, and about the way State aid controls are exercised.

On the other hand, during the referendum campaign the Leave campaign argued, in relation to the problems affecting Tata Steel, that out of the EU the United Kingdom would have a free hand to grant subsidies on energy costs to support the steel industry.  It may perhaps be pointed out that some of those making that argument were not generally known for their support for interference with the free market: but it should also be noted that the current leader of the Labour Party (though in favour of remaining in the EU) stated that “There are certainly problems about EU state aid rules, which need reform.”  And the present author is aware that a number of Ministers in the present Government have seen the application of the State aid rules as an obstacle to projects that they wish to promote.  And, finally, the comment at the end of the paragraph quoted above refers to business concerns that the State aid rules can be taken too far, particularly in the area of taxation (with, perhaps, the current tax ruling cases such as Starbucks and Fiat in mind).

So it cannot be certain that the new Prime Minister – who it now seems certain will be Mrs Theresa May – would necessarily want to accept continuation of the State aid rules.  However, although this risks straying into political matters, the present writer considers that the new Prime Minister – given that she will be from a party that generally believes in the free market – is likely to regard accepting control on State aid as a relatively easy “give” in negotiations with the EU.  A further point is support of the “give” is that the State aid rules serve the useful purpose, within the United Kingdom, of controlling the ability of the devolved Governments – and in future, city regions exercising devolved powers – to grant State aid and of preventing ultimately futile “subsidy races” between different parts of the United Kingdom seeking to attract investment.

Moreover, a quick glance at the various arrangements between non-EU European states (from Iceland to Turkey) and the EU shows that State aid control is likely to be a  sine qua non of any agreement that can be described as providing access to the single market.

To start with Iceland.  Iceland, along with Norway and Liechtenstein, is party, as an EFTA State, to the EEA Agreement with the EU.  Article 61 of the EEA Agreement provides that:

61. Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.

2. The following shall be compatible with the functioning of this Agreement:

(a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

(b) aid to make good the damage caused by natural disasters or exceptional occurrences;

(c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division.

3. The following may be considered to be compatible with the functioning of this Agreement:

(a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment;

b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of an EC Member State or an EFTA State;

(c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

(d) such other categories of aid as may be specified by the EEA Joint Committee in accordance with Part VII.

Resemblances between that provision and Article 107 TFEU – the TFEU provision on State aid – are entirely intentional: the provisions are more or less mirror images of each other.  The only difference that cannot be described as “mutatis mutandis” is the absence, in Article 61(3) EEA of an equivalent to Article 107(3)(d) TFEU, dealing with culture and heritage conservations (which was originally inserted into the EU State aid rules by the Treaty of Maastricht in 1993).  However, even there, the EFTA Surveillance Authority (“ESA”) has stated that it “acknowledges that state aid measures may be approved on cultural grounds on the basis of Article 61(3)(c) of the EEA Agreement”¹ .

Moreover, it is clear from the decisional practice of the ESA and the jurisprudence of the EFTA Court that Article 61 EEA is to be read in precisely the same way as Article 107 TFEU: and the EFTA Court will have regard to the jurisprudence of the CJEU in relation to such questions as what is an “undertaking”²  and as to selectivity in tax measures³.

In fact, the only real difference is that, in the EEA/EFTA States, State aid to the fisheries sector is dealt with in a separate regime (in Article 4 of Protocol 9 to the EEA) which requires the abolition of State aid to the fisheries sector but which is not subject to the enforcement powers of the ESA.

Subject to that fishy caveat, the enforcement powers of the ESA in the EEA State aid system are effectively the same as those of the Commission in the EU system.  The mechanism is, however, a bit more complex.  So, Article 62 EEA requires “constant review” of existing and planned measures in the EEA to ensure compatibility with Article 61, a task which in the EEA/EFTA States is allocated to the ESA.  The ESA then has, under Article 5 of the Surveillance and Court Agreement (“SCA”), the general duty to ensure the compliance of the EEA/EFTA States with their duties under the EEA Agreement, and Article 24 SCA then enumerates compliance with the State aid rules as an aspect of that duty and points to Protocol 3 SCA.  That Protocol effectively incorporates the equivalent provisions to Article 108 TFEU: it provides for the duty to notify new aid (Article 2), and an obligation not to put that aid into effect before clearance by the ESA (Article 3).  Other provisions of Protocol 3 SCA reproduce the main provisions of Council Regulation 659/1999 (the EU procedural regulation) as originally enacted providing, in particular, for recovery orders, suspension injunctions, limitation periods and information-gathering powers.  It is not yet clear whether the amendments to that Regulation (now consolidated into Council Regulation 1589/2015) will be adopted.

If the UK joined EFTA and successfully applied to become party to the EEA, therefore, little would change in the United Kingdom in relation to State aid apart from some re-labelling and the replacement of the Commission and ECJ by the ESA and EFTA Court.  There might even be some advantage in terms of speed, given that the EFTA Court is able at the moment to hear appeals much more quickly than the General Court (and to the relief of monolingual Brits, operates in English – one reason for its relative speed).

However, for various reasons the Government may decide that the EEA is not an option for the United Kingdom.  What is the position in relation to other agreements entered into between the EU and other European countries?

Mr Gove’s speech also referred to Turkey, at the opposite end of Europe to Iceland.  The key point to make about Turkey, in the current context, is that the 2007 Accession Partnership agreement between the EU and Turkey requires Turkey to adopt State aid rules and to set up an internal enforcement mechanism for them.  Indeed, that obligation dates back to the 1995 Customs Union agreement with Turkey.  Turkey’s compliance with those requirements has, to date, been less than entirely satisfactory .  But the obligation is clear.  Similar obligations are included in accession partnership agreements with Macedonia, Albania, Montenegro, Serbia, and Bosnia and Herzegovina.

So it is likely that any preferential trade agreement with the EU would involve the UK’s acceptance of at least an internal mechanism for controlling State aid.  There would, however, be a number of practical and constitutional issues to be resolved in setting up such a mechanism.  It would be possible to have an Act of Parliament binding all devolved administrations and public bodies not to grant State aid, and providing for enforcement by, say the Competition and Markets Authority.  But serious issues would arise where State aid arose as the result of primary UK legislation, particularly in the field of tax: the idea that the CMA could hold that UK tax legislation was invalid to the extent that it granted State aid and that it could order recovery against taxpayers benefiting from a tax break granted by statute would be, to put it mildly, a constitutional innovation.  Moreover, there might well be some resistance to the idea that the CMA should apply ECJ/EFTA Court jurisprudence into which the United Kingdom would have no continuing input: it is one thing for States on their way in to the EU, or EFTA States, to accept such a condition, but quite another for the condition to be accepted by a former EU/EEA Member State on the way out.

Nonetheless, as argued above, the United Kingdom is likely to find that the EU insists on a State aid provision in any agreement going beyond the WTO framework and that this is a relatively easy “give”.   The likelihood of the “give” is reinforced by the point that, as David will explain in his forthcoming piece, even the “WTO option” also contains obligations that bear some resemblance to State aid rules.

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¹ See §87 of its Decision on the financing of the Harpa concert hall in Reykjavik.

² See, e.g., Case E-5/07 Private Barnehagers v ESA (which referred, inter alia, to CJEU case-law on what is a “service” under free movement of services provisions).

³ See e.g. Joined Cases E-17/10 and 6/11 Liechtenstein and VTM Fund Management v ESA, at §§74-75.

4 Turkey 2015 report accompanying the EU Enlargement Strategy Communication, SWD(2015) 216 final, bottom of page 33.

 

Today’s developments mean that Mrs Theresa May is likely to become Prime Minister on Wednesday 13 July.

In her speech delivered this morning (before the news that Mrs Leadsom had withdrawn her candidacy for leadership of the Conservative Party), Mrs May made three points likely to be of particular relevance to readers of this blog.

Two of those points related to competition policy.  Under the heading “Putting people back in control” Mrs May referred to Kraft’s acquisition of Cadbury and expressed concern that “transient shareholders – who are mostly companies investing other people’s money – are not the only people with an interest when firms are sold or close. Workers have a stake, local communities have a stake, and often the whole country has a stake.”  Referring to Pfizer’s bid for AstraZeneca, she then went on to say that “A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.”  Then, under the heading “Getting tough on corporate irresponsibility”, she promised “to use – and reform – competition law so that markets work better for people. If there is evidence that the big utility firms and the retail banks are abusing their roles in highly-consolidated markets, we shouldn’t just complain about it, we shouldn’t say it’s too difficult, we should do something about it.”

Under that last heading, she also said this about tax: “We need to talk about tax. Because we’re Conservatives, and of course we believe in a low-tax economy, in which British businesses are more competitive and families get to keep more of what they earn – but we also understand that tax is the price we pay for living in a civilised society. No individual and no business, however rich, has succeeded all on their own. Their goods are transported by road, their workers are educated in schools, their customers are part of sophisticated networks taking in the private sector, the public sector and charities. It doesn’t matter to me whether you’re Amazon, Google or Starbucks, you have a duty to put something back, you have a debt to your fellow citizens, you have a responsibility to pay your taxes. So as Prime Minister, I will crack down on individual and corporate tax avoidance and evasion.”

Those scanning her speech for further details as to Mrs May’s thinking on Brexit will not have found much: she repeated her commitment to take the United Kingdom out of the EU, but said nothing further as to the type of relationship with the EU she envisages in future.