BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU?
MARCH 2017 BREXIT Will the UK have to pay to leave the EU?
Who should pay what as a result of the UK’s withdrawal from the EU raises difficult questions that, unless resolved, have the potential to render the negotiations on the UK’s future relations with the EU substantially more complex.
Executive summary The figure of €60 billion as the sum that the UK must pay the EU on the UK’s withdrawal from the EU has gained currency, but the position is anything but clear. In particular: • The argument for payment by the UK of a sum as large as €60 billion rests on the UK having a continuing obligation to contribute to liabilities to which the EU committed itself prior to the UK’s departure even if payment does not fall due until after departure. The EU’s budgets include both payment appropriations for each year and (higher) commitment appropriations that include payments falling due in later years. • The argument for the UK not being obliged to pay a sum as large as €60 billion rests on the EU’s commitments being just that – obligations of the EU, a legal entity in its own right, not of its member states. Member states might have an obligation under the EU’s treaties to pay money into the EU’s budget generally, but article 50(3) of the TEU expressly provides that the EU’s treaties cease to apply to a former member state on its withdrawal from the EU. There is no commitment by member states, present or past, to fund specific projects. • The UK might also ask for a payment representing the share of the EU’s assets that the UK’s past contributions have financed. The EU’s balance sheet shows a negative balance of €72.5 billion, covered, amongst other entries, by €77.1 billion “to be called from Member States”. • The EU’s future comitments include its pension obligations (shown at €64 billion in the EU’s balance sheet) as well as payments under its social and regional initiatives aimed at generating growth in poorer areas of the EU. • The EU’s annual budgets must balance. The UK is a net contributor to the EU’s budget. If UK payments cease, the EU will face, probably in 2019, a shortfall in its budget, which will have to be met either by increased payments or by a reduction in spending. • The UK and the EU will hopefully reach an agreement on payments, even though the principles are far from easy and quantification even less so. A failure to agree could sour other negotations, including over future trading arrangements between the UK and the EU. • If the EU and the UK cannot agree, the dispute might need to be resolved by a tribunal. The CJEU might consider that it has jurisdiction, though that is unlikely to be acceptable to the UK. An ad hoc international tribunal might be best, if that is legally possible for the EU.
2 CLIFFORD CHANCE BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? Introduction In this briefing, we look at the arguments surrounding possible payments on the The primary focus of debate about Brexit UK’s departure from the EU. This must, has been on what arrangements the UK alas, begin with an outline of the EU’s might enter into with the EU for the period arcane system of financing before going after the UK’s withdrawal from the EU, on to the implications of Brexit. whether it be remaining within the internal market, effectively remaining within the customs union, establishing a wholly new The EU’s expenditure arrangement based on equivalence, or The starting point for EU expenditure is something else altogether (and that’s the multiannual financial framework (MFF) before transitional arrangements reach required by article 312 of the Treaty on the agenda). But before the discussion the Functioning of the European Union. can reach the post-Brexit deal (or, if the This must be agreed unanimously by the UK has its way, alongside that European Council (ie by all the member discussion), the UK and the EU must states) and approved by majority in the agree the terms for the UK’s withdrawal European Parliament. The MFF does not from the EU. A fundamental aspect of the set expenditure as such but provides the €29 withdrawal deal will be what, if anything, ceilings for expenditure with which the €69,584 the UK must pay the EU or the EU must EU’s annual budgets must then comply. €66,262 pay the UK as a result of withdrawal. This The ceilings come in two forms: a ceiling €17,725 seems likely to be a difficult negotiation – for “commitment appropriations”, ie financially, politically and legally – and one expenditure to which the EU commits that could colour all other negotiations. itself but which might actually lead to A failure to agree the finances of payments in subsequent years; and a €508,921 withdrawal may make it impossible to (lower) ceiling for “payment move forward to other matters. appropriations”, ie cash out of the door. €420,034
The messages being fed to the media The most recent MFF is laid down in about the finances of withdrawal indicate Council Regulation 1311/2013 (EU, that there could be a chasm between Euratom) for the seven years from 2014 to Smart and Inclusive Growth the two sides’ opening positions, though 2020, ie ending some 21 months after the Sustainable Growth: Natural Resources no one can be sure how much is UK will leave the EU if the UK’s notice of Security and Citizenship pre‑negotiation positioning (an attempt intention to withdraw is, as the UK Global Europe at “anchoring”, in the language of Government wants, given in March 2017 psychologists like Daniel Kahneman) and (unless the two year period is extended by Administration how much is serious. Sources close to the unanimous agreement under article 50(3) of Compensation EU’s Brexit negotiators have suggested hte TEU). Over the entire seven-year period, EU commitment appropriations, that the EU could demand a payment of the MFF provides, in its original form, for 2014- 2020 (€ millions) up to €60 billion from the UK as the price commitment appropriations of €960 billion Source: European Commission, EU of withdrawal, or three times the UK’s and for payment appropriations of €908 Budget 2015 Financial Report, Annex 1, gross contribution to the EU in 2016 and billion (the figures are subject to subsequent MFF 2014-2020 adjusted Technical an even higher multiple of the UK’s net adjustment under article 6 for inflation and Adjustment for 2016 contribution. In contrast, sources close to other technical matters). This is some 1% of the UK Government have suggested that the aggregate gross national income (GNI) the UK is looking carefully at the EU’s of the EU’s member states; the member assets in order to demand on departure states themselves spend over 48% of the the UK’s fair share of their value. EU’s GNI. The MFF allocates the overall expenditure to each of the calendar years in The legal position regarding payments on the seven-year period on a slightly withdrawal is anything but clear. In the increasing basis, so, for example, the customary way of the EU, the amount of expenditure for 2014 was set at 13.99% of any payment, whether by the UK or by the seven-year total, and the expenditure the EU, on the UK’s departure is likely to for 2020 at 14.61%. be resolved in a late-night horse trade (though there are few obvious gift horses The three largest expenditure items in sight). Ultimately, if agreement cannot shown in the MFF are: “smart and be reached, the issue might have to be inclusive growth” (47%), which aims to decided by an international legal tribunal. help under-developed EU regions and disadvantaged sections of society;
CLIFFORD CHANCE 3 BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? “sustainable growth: natural resources” While the MFF operates at a very high (39%), the bulk of which relates to level (effectively one table, covering half a agriculture; and “administration” (6%). page at the end of the Regulation), the EU’s annual budgets condescend to The MFF can be revised “in the event of every kind of detail. The budget for 2016 unforeseen circumstances” (article 17(1), runs to 2,283 pages in the EU’s Official but the revision must be in accordance Journal (2016, L48). with the EU’s “own resources” decision, discussed below). There is specific The EU’s income provision in the MFF Regulation (article The EU’s annual budget must balance 21) for revision of the MFF in the event of (article 310(1) of the TFEU). Unlike its enlargement of the EU, but the Regulation member states, the EU cannot run a does not contemplate shrinkage. budget deficit. The EU’s payments in each year must therefore be matched by its Having set the ceilings for the EU’s income, most of which is referred to as the expenditure in the MFF Regulation, the EU’s “own resources”. The revenue raised EU then adopts under article 314 of the by the EU is applied to all the EU’s TFEU annual budgets for each calendar expenditure; there is no hypothecation of year, again including payments and particular income to particular expenditure, commitments. This requires the whether on a national or any other basis Commission to submit a draft budget to (article 6 of Council Decision 2014/355). the Council and the Parliament by 1 September in the preceding year The EU has three main sources of income, (the Commission in fact approved its draft set out in Council Decision 2014/335, the budgets for 2015 and 2016 on 24 June amount of which must be estimated in the in each preceding year). The Council annual budget prepared by the must then adopt its position on the draft Commission in order to balance the budget, by qualified majority voting (not budget. These three sources are as follows: the unanimity required for the MFF), by 1 October. If the European Parliament • “traditional own resources”, namely approves the Council’s position, the customs duties levied on trade coming budget is adopted, but if the Parliament into the EU from third countries. declines to do so there is a complex Member states keep 20% (down from conciliation procedure aimed at securing 25%) of what they collect in customs agreement between the two institutions. If duties “by way of collection costs”, agreement is not reached by the start of though in practice this retention far the financial year, the old budget rolls exceeds actual collection costs; forward on a monthly (“twelfths”) basis • 0.3% of the each member state’s (article 315 of the TFEU). “harmonised VAT assessment basis”.
80 70 60 50 40 30 20 10 0 2000 2007 2015
VAT-based GNI-based TOR
EU “own resources” Source: European Commission, EU Budget 2015 Financial Report, Annex 2b
4 CLIFFORD CHANCE BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? Each member state’s VAT assessment to a more redistributive approach to EU basis is capped at 50% of its GNI, but funding – from the richer member states to “(2) A Member State the assessment basis is only distantly the poorer – which neither of the other which decides to related to a member state’s actual VAT funding sources can achieve. The withdraw shall notify the receipts. Indeed, the EU’s Court of adjustments to the member states’ Auditors has described the system as payments do, however, generally have European Council of its “complex to the point of the effect of reducing the payments by intention. In the light of incomprehensibility”; those members that are net contributors to the guidelines provided the EU’s budget. • A balancing payment decided in the by the European Council, annual budgetary process by reference Overall, the UK is a net contributor to the the Union shall negotiate to each member state’s gross national EU’s budget. The Institute for Fiscal Studies and conclude an income, or GNI. put the UK’s gross contribution in 2014 at agreement with that £14.4 billion (£12.9 billion for 2015), its net There are then adjustments to the State, setting out the contribution after deducting EU payments payments that the uniform application of received by the UK public sector at £9.8 arrangements for its the own resources rules would otherwise billion (£8.5 billion for 2015), and its net withdrawal, taking require from particular member states. contribution after deducting EU payments So, for example, Germany, the account of the framework received by the UK public sector and EU Netherlands and Sweden pay the for its future relationship payments received by other organisations VAT‑based own resource at 0.15% and businesses in the UK at £5.7 billion. with the Union... rather than 0.3%, and Denmark, the The House of Commons Library has Netherlands and Sweden receive estimated the UK’s average net contribution (3) The Treaties shall reductions on their GNI contributions. between 2010 and 2014 at £7.1 billion per cease to apply to the year. The loss of this net income to the EU The largest adjustment is the “correction State in question from as a result of the UK’s withdrawal will mechanism” in favour of the UK, now in require the EU to finesse its budget carefully the date of entry into article 4 of the Council’s own resources in order to achieve the required balance. force of the withdrawal decision. This reduces the UK’s net payments to the EU, and was originally agreement or, failing that, set at 66% of the difference between the Withdrawal and the two years after the UK’s harmonised VAT base (then the EU’s EU’s treaties notification referred to in main source of income) and the UK’s Article 50(2) of the Treaty on European paragraph 2...” receipts from the EU’s budget. The exact Union requires the EU to negotiate manner of calculation of the correction and conclude an agreement with the (Article 50 of the Treaty on has been adjusted since (eg to take into departing state “setting out the European Union) account the subsequent joiners to the EU arrangements for its withdrawal”, but gives and the changing nature of EU funding) no hint as to what those arrangements but the basic approach remains similar. should be, the basis upon which they should be approached or, indeed, what The reduction in the EU’s income as a result happens should nothing be agreed. of the UK’s rebate is, in the main, met by the other member states rather than by The only word about the consequences lowering EU expenditure. However, to add of withdrawal, whether for the departing to the complexity, some member states member state or for those that remain, (eg Germany, the Netherlands, Austria and is in article 50(3) of the TEU. This merely Sweden) receive rebates on the payments provides that the EU’s treaties cease to otherwise due from them to compensate apply to the withdrawing state on entry the EU for the UK’s rebate. into force of a withdrawal agreement or, failing that, two years after the The proportion of its revenue that the withdrawing state has given notice of its EU receives from its three main sources of intention to withdraw. Article 50(3) might income has varied over time. For example, therefore suggest that departure leads to in 1988 around 60% of the EU’s income a dropping of hands, a cliff edge: prior came from VAT-based own resources and to the departure day, the withdrawing 28% from traditional own resources. Now member remains a full participant in the traditional own resources represent some EU, with all the rights and obligations 13% of the EU’s income, VAT-based own (including as to payments and receipts) of resources 12% and the GNI-based own a member state; on the departure date, resources about 70%. This reflects a move it ceases to have any rights or obligations
CLIFFORD CHANCE 5 BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? under the EU’s treaties. The UK’s that extends past Brexit day, the EU’s “(1) Unless the treaty obligation to pay into the EU’s coffers argument, based on article 70 of the VCLT, otherwise provides or the arises under the Council’s own resources must be that this creates a matching parties otherwise agree, decision, made under the treaties, and obligation on the UK accruing prior to that obligation will therefore cease on the departure to provide the EU with the the termination of a treaty UK’s withdrawal from the EU. necessary funds after departure. Departure under its provisions..: is therefore necessarily a gradual process. This does not, however, necessarily mean The inverse of this argument is that if the (a) Releases the parties that withdrawal will relieve the UK of all UK has a continuinng obligation to provide from any obligation further future payment obligations. Article 70 of funding to the EU, the UK presumably has the Vienna Convention on the Law of a corresponding right to the benefit of EU to perform the treaty; Treaties could be relevant as representing payments – if the funding involves an customary public international law in the accrued obligation on the UK, the payment (b) Does not affect any area. Article 70 states that, unless a treaty presumably also involves an accrued right, obligation or legal provides otherwise, withdrawal from a obligation on the EU. But if the commitment situation of the parties treaty under its provisions “releases the is, for example, to the building of a road in parties from any obligation further to created through the an under-developed part of the EU, funding perform the treaty” but does “not affect could be a one‑way street so far as the UK execution of the treaty any right, obligation or legal situation of is concerned. prior to its termination. the parties created through the execution of the treaty prior to its termination”. The UK’s counter-argument is likely to be (2) If a State denounces that any commitment to future funding is Article 50(3) of the TEU reflects the first or withdraws from a made by the EU, which has its own legal aspect of article 70 of the VCLT (no future personality distinct from that of its multilateral treaty, obligations), but does not expressly member states (article 47 of the TEU, paragraph 1 applies in exclude the second aspect of article 70 inserted by the Lisbon treaty of 2007). the relations between the (continuation of accrued rights and The EU’s member states are not liable for obligations) – it would only do so if article State and each of the the EU’s obligations. Article 311 of the 50(3)’s silence is treated as “providing TFEU requires the EU to “provide itself other parties to the treaty otherwise”. If the UK were to fail to make a with the means necessary to attain its from the date when such payment that fell due prior to Brexit day, it objectives”, which the EU has done denunciation or seems likely that the UK would continue to through the Council’s own resources be obliged to make that payment despite withdrawal takes effect.” decision. That decision requires payments departure. Departure would not generally to the EU by its member states, not by absolve a party retrospectively from its former member states that have ceased (Article 70 of the Vienna Convention prior obligations. But what if the payment, to be bound by the EU’s treaties. on the Law of Treaties) though due prior to departure, was calculated by reference to a period that But this, like many other questions straddled the departure date? Presumably, surrounding Brexit, is territory that has not the pro-rating of payments is possible. previously been traversed and for which there are no direct precedents. There is The position becomes more difficult when inevitably uncertainty. trying to assess what, if any, EU payment obligations on the UK have accrued The fact and amount of any post-Brexit within the meaning of the VCLT prior to payments by the UK to the EU will cause the UK’s withdrawal from the EU but political controversy in the UK, and could which only fall due for payment also raise issues within the EU. If the UK afterwards and, if there are any, whether refuses or is not obliged to fund EU the UK will be obliged to meet them commitments after departure, the EU will despite its withdrawal from the EU. either have to raise additional revenue from the continuing member states, The EU’s expenditure for any particular year which will not be popular with the net is split between payments and contributors, or the EU will have to cut commitments. The commitments made by back its expenditure, which will not be the EU typically run for up to three years popular with the net recipients. into the future, but can be longer term. Politics within the continuing EU could Where the EU has made a commitment affect the tone and potential outcome
6 CLIFFORD CHANCE BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? of negotiations with the UK – indeed, Authority, both of which are based at whether a deal is possible at all. Canary Wharf in London. Should the UK pay its share of the future rent Timing because the EU is legally obliged to pay it, even though the UK will not gain The process for setting the EU’s budget further direct benefit from the future for 2018 is due to start formally by work done at the properties (even 1 September 2017. Brexit should not in assuming that the properties are principle affect this annual cycle because retained)? What if the EU is able to the UK will probably remain a full member realise or surrender a leasehold interest of the EU throughout 2018 (though the at a profit and to move into smaller UK will be cautious about commitments premises that reflect the fact that the stretching beyond March 2019). EU will, on the UK’s withdrawal, have lost some 13% of its population and The 2019 budgetary round should start 16% of its income? by 1 September 2018 (though in practice it usually does so well before the • If the EU or an EU agency is legally deadline), when the UK will still be a obliged to provide funding to a member of the EU but the budget will be UK-based entity (eg a university or for a period largely after the UK’s likely other research organisation) for a departure date. If agreement on the UK’s period that extends beyond Brexit day, financial obligations on withdrawal has the entity may be able to enforce that not been reached by that time, the obligation against the EU despite Commission will have to crystallise its Brexit, unless the terms of the EU’s position at that stage because the annual obligation provides otherwise. The fact budget must include an estimate of the that the obligation is owed to a UK EU’s revenue for 2019, including from the entity should not make any difference if UK, and the EU’s budget must balance. the entity has a legal right to payment. The EU’s budget can be approved by Equally, if this EU obligation generates a qualified majority voting in the Council – corresponding obligation on the UK to so the UK cannot block it – but the mere fund the EU that accrued prior to inclusion in the budget of a payment from Brexit, the UK must pay, regardless of the UK as a result of withdrawal does not whether the research project is in the mean that the UK will in fact pay it or be UK or elsewhere within the EU, obliged to do so. because there is no allocation of UK payments into the EU’s budget to Particular payment payments by the EU to UK persons. problems But if there is no accrued funding obligation, the UK need not pay Even if it were possible for the UK and wherever the project is taking place. the EU to agree general principles, the application of those principles to the huge Whatever the legal logic, forensically number of factual scenarios underlying and politically it may be difficult to the EU’s complex financial arrangements argue that the UK-based entities can could cause considerable complications continue to enforce rights to payment and, with them, bring scope for from the EU’s budget but that the UK negotiating friction, even breakdown. need not contribute to the budget that provides those payments. There may To take a small number of further examples: be the potential for a deal to be done, but the details will be tricky. For • The EU and its institutions have example, research projects often interests in real property, some of which straddle borders, making allocation will be held on long-term leases between the EU’s member states more entailing legal commitments stretching an art than a science. over many years. Some of these leasehold properties are in the UK, The UK’s Government’s White Paper, such as the European Medicines The United Kingdom’s exit from and Agency and the European Banking new partnership with the European
CLIFFORD CHANCE 7 BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? € 20,000
€ 15,000
€ 10,000
€ 5,000
€ 0 DE UK FR NL IT SE DK AT FI CY MT IE HR EE LT SI LV PT LU BE BG SK ES HU EL RO CZ PL -€ 5,000
-€ 10,000
-€ 15,000
Net EU revenue and expenditure by member state in 2015 (€ millions) Source: European Commission, EU Budget 2015 Financial Report, Annex 2c
Union (February 2017), suggests a No 31 (EEC), dating from 1962). recognition of the need for a deal and The cost of the EU’s pension scheme as also perhaps hints at a national a whole is “charged to the budget of the approach. It says that all European Union. Member States shall jointly Structural and Investment Funds guarantee payment of such benefits in projects signed before the UK’s Autumn accordance with the scale laid down for Statement in November 2016 “will be the financing of such expenditure” fully funded even when these projects (article 83(1)). continue beyond the UK’s departure The EU therefore has an ongoing from the EU”. The White Paper goes on commitment to pay future pensions, and that UK institutions should continue to it might be argued that the UK should apply for EU funding and that the UK contribute its share for staff employed at “will work with the Commission to EU institutions while the UK was an EU ensure payment when funds are member state. Leaving aside the very awarded. HM Treasury will underwrite considerable difficulties in calculating the payment of such awards, even what the EU’s pension aggregate when the specific projects continue liabilities are and how the UK’s share beyond the UK’s departure from the should be assessed (the EU’s balance EU.” The implication may be that sheet for the end of 2015 shows a post‑Brexit funding will, if need be, non‑current pension liability of €64 billion), come from the UK. the UK has benefited from the work of • The EU and its institutions have the EU’s employees (eg in negotiating numerous employees who have accrued trade deals with third countries) and (and generous, by contemporary should arguably pay a price for that, standards) pension entitlements. including future pensions (though these However, the EU has no pension fund could be very long term). The member into which pension contributions by states’ guarantee set out in the Staff employees are paid. Instead, Regulations is, in itself, irrelevant since employees’ pension contributions are there is no suggestion that the EU will treated as income in the EU’s budget default on its pension obligations, even to (€527 million in the 2016 budget) and UK nationals, but it might offer a basis for pension payments as expenditure assessing the UK’s accrued liability. (€1.647 billion in 2016). Employees’ An alternative approach would for the pension contributions should, actuarially, UK to take on the EU’s liability for the cover one-third of the pension cost, with pensions of UK-domiciled or the EU meeting the balance (article 83(2) UK-resident EU employees and former of the EU’s Staff Regulations, Regulation
8 CLIFFORD CHANCE BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? employees. This may have a pragmatic similar EU funds includes EU support for attraction (especially to the UK, since financial instruments and for repayments the number of UK employees at the EU to the EU. How should any liabilities be is disproportionately low), but perhaps assessed, or can it be left on a wait and less in legal logic. There is no national see basis? quota for EU officials, who are supposed to serve the EU and all its These are just some of the scenarios that member states equally. The idea of could arise. And even if it were to be national responsibility for EU employees agreed that the UK should make a may be difficult for the EU to accept. payment for some accrued liabilities, the basis upon which that payment should be • Many of the EU’s obligations are calculated is far from clear. It could, for contingent. For example, under the example, be calculated on the basis of European Financial Stability Mechanism past gross contributions, past net the EU borrowed in order to make loans contributions, GNI, population or some to Portugal and Ireland. The EU must other basis. repay its loans, but in practice there could only be a liability on member states to contribute if the EU’s borrowers The EU’s assets default. Similarly, the common provisions The EU and its agencies have many regulation (Regulation 1303/2013/EU) assets – from major items, like buildings covering the European Regional and debts, to more trivial or granular Development Fund, the European Social items, such as the EU’s wine cellar Fund, the Cohesion Fund and other (reported in the press some years ago
European Union Balance Sheet, 31 December 2015 (€ millions) Non-current assets Intangible assets 337 Property, plant and equipment 8,700 Investments accounted for using the equity method 497 Financial assets 56,965 Prefinancing 29,879 Exchange receivables and non-exchange recoverables 870 97,248 Current assets Financial assets 9,907 Pre-financing 15,277 Exchange receivables and non-exchange recoverables 9,454 Inventories 138 Cash and cash equivalents 21,671 55,448 Total assets 153,696 Non-current liabilities Pension and other employee benefits (63,814) Provisions (1,716) Financial liabilities (51,764) (117,293) Current liabilities Provisions (314) Financial liabilities (7,939) Payables (32,191) Accrued charges and deferred income (68,402) (108,486) Total liabilities (226,139) Net assets (72,442) Reserves 4,682 Amounts to be called from Member States (77,124) Net assets (72,442)
Source: Consolidated Financial Accounts of the European Union, Financial Year 2015
CLIFFORD CHANCE 9 BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? at 42,500 bottles, split between the and, as a result, ceasing to be a member European Council and the Parliament) – of the EIB. The statutes are silent as to all of which have been paid for by past what should happen to a former member contributions from member states. The state’s capital contribution on withdrawal. EU’s balance sheet as at the end of 2015 It seems unlikely that the UK’s capital (COM(2016) 475 final) includes assets of contribution could be forfeit, but it is a €154 billion, 83% of which comprise matter for negotiation as to how it can be loans, financial instruments, cash and returned and at what value (eg the pre‑financing. The balance sheet also amount paid or on the basis of the EIB’s shows liabilities of €226 billion, with current asset value). €77 billion of the shortfall to be called from member states in future annual budgets. Dispute resolution If the UK and the EU cannot reach If the EU were to be dissolved, the benefit agreement on who should pay what in of these assets, after meeting the EU’s respect of the UK’s withdrawal, a means liabilities, would be divided amongst the of dispute resolution will need to be member states. The EU will, however, found. The dispute should not be left to continue in existence after the UK’s fester, potentially souring relations on withdrawal, nor will that withdrawal affect other matters. What that means of the EU’s legal personality or its title to its dispute resolution should be is not easy assets. It is not obvious that withdrawal to identify. would necessarily entitle the UK to a share of the EU’s assets absent provision If, say, the EU or a member state decided for that in the EU’s treaties. On the other before the UK has left the EU to take the hand, if the EU were to demand that matter to court, that court would probably the UK continue with prior funding be the Court of Justice of the European commitments (including any that generate Union. The CJEU has jurisdiction over assets for the EU), it might be argued that disputes concerning the interpretation of the UK should be entitled to the benefit of the EU’s treaties (article 267 of the TFEU) – its past funding, though the manner of indeed, member states are not permitted calculation will be anything but easy. to submit a dispute concerning the interpretation or application of the treaties Certain EU-related assets may require to any method of settlement other than special consideration. For example, those provided by the treaties (article 344). the European Investment Bank was A dispute over the terms of withdrawal is a established under article 308 of the dispute over the interpretation of the EU’s TFEU, which provides that the “members treaties, even though it is largely a of the European Investment Bank shall be question of filling in the numerous gaps in the Member States”. When the UK article 50 of the TEU. leaves the EU, the UK will cease to be a member of the EIB. The EIB is not funded A reference to the CJEU before the UK’s from the EU’s general revenues but from departure from the EU might be open to its own capital provided by the member objections of prematurity or that it states. The EIB’s total “subscribed amounts to a request for legal advice capital” is €243.3 billion, of which rather than the resolution of a dispute. €21.7 billion has been called, according However, the CJEU has always jealously to the EIB’s balance sheet at the end of guarded its right to have the final say over 2015. The UK’s contribution to the EIB’s the interpretation of the EU’s treaties, called capital is €3.5 billion (or 16%). effectively rejecting the first EEA Agreement and the EU’s proposal to The EIB’s statutes do not contemplate a adhere to the European Convention on member state withdrawing from the EU Human Rights because those new
10 CLIFFORD CHANCE BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? treaties would have infringed the CJEU’s enforce payment, but the decision would prerogatives in that regard (Opinions 1/92 affect adversely future relations between and 2/13 respectively). The CJEU may the UK and EU. not lightly relinquish its jurisdiction. Ideally another dispute resolution Even if the CJEU were to become seised mechanism acceptable to both sides of a dispute before the UK left the EU, would be agreed (provided that the CJEU that begs the question of whether the UK does not bar this by concluding that would continue to consider itself bound article 344 of the TFEU prevents the EU to participate in, and by the result of, the or its member states from agreeing to any proceedings after the departure. The UK alternative to the CJEU). The International would no longer be a member state at Court of Justice at The Hague is not an that time and the EU’s treaties would no obvious option because only states can longer apply to the UK. be parties to cases before the Court (article 34(1) of the Statute of the ICJ), After the UK has left the EU, the CJEU though a dispute could in theory be may arguably continue to have jurisdiction manufactured between one or more of over the UK as regards the interpretation the EU’s member states on one side and of the EU’s treaties. In private law, the UK on the other. In general, the jurisdiction clauses in contracts continue jurisdiction of the ICJ depends upon the to apply notwithstanding the termination parties agreeing to refer a dispute to the of the contract. It would not be surprising ICJ, but the UK has made a declaration if the CJEU took that same view despite under article 36(2) of the ICJ’s Statute article 50(3) of the TEU providing that the that it will, on a reciprocal basis, generally treaties no longer apply to the UK. accept the jurisdiction of the ICJ. Certain other members of the EU (such as The CJEU will be regarded by the UK as Belgium and Germany, but not France) an uncongenial and, quite possibly, have made comparable declarations. unacceptable forum, especially as UK’s withdrawal from the EU will lead to the More realistically, perhaps, an ad hoc UK’s Advocate General and judge leaving tribunal might be required, but the nature their posts at the Court (perhaps a reason of that tribunal will depend upon the why the CJEU’s jurisdiction should be nature of the disputes between the UK treated as ceasing on withdrawal). The and the EU. If, for example, the dispute is UK Government’s White Paper pledges to as to whether one side or the other has “bring an end to the jurisdiction of the any liability, that will be a question for CJEU in the UK”; the same may apply to international lawyers. But if the dispute is the CJEU’s jurisdiction over the UK. In the as to the quantification of pension same paragraph of the White Paper, the liabilities, it may be that the tribunal should Government says that the UK “will of comprise, at least include, actuaries, course continue to honour our whether as judges or assessors. international commitments and follow international law”, though it is Conclusion questionable whether the UK would There is no precedent for what should necessarily accept a decision by the happen to payments to the EU and to the CJEU on its own competence as EU’s assets on a member state’s definitive of the UK’s obligations in departure from the EU. The UK and the international law. EU must, to some extent, make it up as they go along, which offers flexibility but If the UK does not accept the CJEU’s also considerable scope for jurisdiction, that would not stop the CJEU disagreement. Deciding on the relevant from deciding the case. If the CJEU were principles is anything but easy. Applying to decide that a sum was owed by the those principles is extraordinarily difficult. UK, there may be little the EU could do to
CLIFFORD CHANCE 11 BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? Post script what the UK should pay the EU or the EU should pay the UK on the UK’s Since first publishing the above, the withdrawal from the EU, but some House of Lords Select Committee on the elements in the reasoning adopted by European Union has issued a report the Committee may be open to question, entitled Brexit and the EU Budget including in respect of the following (March 2017). The Report illustrates the three areas. complexity of the EU’s budgetary affairs and the huge difficulty in trying to fix upon First, the Committee notes that article 70 any particular sum that the UK might of the Vienna Convention sets out be required to contribute to the EU interpretative principles that apply on departure or vice versa. It also “[u]less the treaty otherwise provides”. acknowledges the importance of reaching The Committee concludes that because agreement as part of the process of article 50 of the TEU addresses establishing a satisfactory ongoing withdrawal from the EU, article 70 of the relationship between the EU and the UK. Vienna Convention has no application. This suggests that either the Vienna Regarding the principle of whether the Convention or article 50 applies, but that UK or the EU is obliged, legally, to pay there is no scope for both to do so. It is, anything to the other in the event that it however, arguable that it not necessarily proves impossible to reach a withdrawal one or the other. Where article 50 deals agreement, the Committee received with a particular issue expressly, it clearly conflicting evidence. The Committee ousts the Convention; but where article elected to follow the opinion of its legal 50 is silent or ambiguous, the Vienna adviser in concluding that, on balance: Convention may remain relevant. The EU • “No provision is made [in the TEU] for might be expected to follow general ensuring that EU obligations on the principles of international law or, where it withdrawing state persist after the does not wish to do so, to be clear that Treaties cease to apply” its intention is to depart from these • “Article 50 TEU allows the UK to leave norms. The Vienna Convention might only the EU without being liable for cease to be relevant to the extent that the outstanding financial obligations under TEU provides otherwise. Just because the EU budget and related financial article 50 of the TEU occupies some of instruments” the ground regarding withdrawal does not automatically oust article 70 of the • “Individual EU Member States may Convention in its entirety. seek to bring a case against the UK for the payments of outstanding liabilities Secondly, the Committee takes the view under the principles of public that the UK’s liability for sums unpaid international law, but international law and overdue at the date of the UK’s is slow to litigate and hard to enforce. withdrawal will be wiped from the books In addition, it is questionable whether as a result of withdrawal. The basis for an international court of tribunal would this view is that article 50(3) provides have jurisdiction” that the EU’s “Treaties shall cease to • “the UK will not be in a position, legally, apply” to a withdrawing state; the to claim a share of the EU’s assets treaties created the payment obligation, upon withdrawal” which therefore disappears along with the treaties themselves. This approach There are unquestionably difficult legal perhaps gives insufficient weight to the issues in determining whether and, if so, full wording of article 50(3), which is that
12 CLIFFORD CHANCE BREXIT: WILL THE UK HAVE TO PAY TO LEAVE THE EU? the “Treaties shall cease to apply to the in order to conclude with it that there State in question… from two years after are serious legal issues regarding the the notification referred to in paragraph payments, if any, due on the UK’s (2)”. The treaties could cease to apply departure from the EU. On the one hand, to the UK prospectively, but not the UK can argue that: the EU is a legal retrospectively. If a sum fell due while entity distinct from its member states; the treaties applied to the UK, it might any future payment commitments are the remain due even if new obligations EU’s, not its member states’; the member cannot be created. This would be states’ only obligation is to pay their consistent with article 70 of the Vienna annual dues under the treaties; and this Convention (and normal principles in payment obligation ends on withdrawal private law) rather than resulting in the from the EU when the treaties cease to possibly surprising conclusion that apply to the withdrawing state. On the departure enables the UK to escape other hand, the EU can argue that: pre‑Brexit payment obligations. EU finances involve commitments by member states to fund the EU over a Thirdly, the Committee comments that period of years, not merely on an annual other EU member states may seek basis; those commitments involve an redress against the UK for payment of “obligation… created through the outstanding liabilities. That is, of course, execution of the treaty prior to its possible, but the UK’s payment termination” within the meaning of obligation, so far as it has one, will be article 70 of the Vienna Convention; and to the EU itself, not to other member those commitments therefore survive the states. The natural plaintiff will be the UK’s withdrawal from the EU. EU. If the EU takes proceedings, it may do so in the CJEU (indeed, the CJEU What is beyond doubt is that the issue could be the only forum in which, of payments on departure will best be under the treaties, the EU is able to take resolved by negotiation rather than by proceedings). It is, perhaps, less clear litigation and that, as the Committee than the Committee allows that the put it, what is involved is “more than CJEU would cease to have jurisdiction, a negotiation about withdrawal, and more unattractive though continuing than a trial of strength. It is also a jurisdiction would be to the UK. negotiation about establishing a stable, Dispute resolution provisions generally cooperative and amicable relationship survive termination of the underlying between the UK and the EU, so as agreement, though there may be special to promote the security, safety and circumstances rebutting that conclusion well‑being of all the peoples of Europe. in this case. But the Committee is Such a relationship is inconceivable undoubtedly correct that enforcing any without good will.” decision by the CJEU would be hard.
It is not necessary to follow the Committee in all the steps of its argument
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