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EU financial claims against the UK are enforceable

by Pavlos Eleftheriadis | 22.03.2017

Pavlos Eleftheriadis is a barrister at Francis Taylor Building and a fellow of Mansfield College, Oxford.

What would happen to the UK’s financial obligations to the EU if we failed to agree terms for withdrawal? A wide-ranging report, published early this month by the House of Lords’ EU Financial Affairs Sub-Committee, suggested that the UK may not be strictly speaking obliged to settle any “Brexit Bill” with the remaining members. It said that such an obligation does not arise if the UK leaves the EU without a Withdrawal Agreement. It was a startling statement which, if true, would change the dynamics of the negotiation.

The Guardian reported that according to the Lords’ committee, the “UK could quit the EU without paying a penny“. The Independent has just reported that the EU is contesting these views very strongly and is considering taking the UK to the International Court of Justice over the disagreement. So the question is now of great political significance. Is the House of Lords report correct that the UK can walk away without paying anything?

It is widely expected that the two sides will agree two separate agreements. One will be a withdrawal agreement (by enhanced majority voting, under Article 50). The other will be a trade agreement between the UK and the EU (which will almost certainly require the ratification of all member states as a “mixed agreement” – one that goes beyond the exclusive competence of the EU). Normally, a “Brexit bill” detailing the outstanding financial obligations on the basis of the UK’s budgetary commitments would be agreed.

However, under Article 50 withdrawal is also possible if after two years from notification there is no agreement and no unanimous decision to extend the time for negotiations. Article 50 says that the moment this happens the treaties “cease to apply to the state in question”. What happens to the outstanding financial obligations when the respective financial obligations have not been determined by consent? This is what the House of Lords looked at. The committee concluded that the UK’s obligations are retrospectively wiped out.

The report concerned two different issues. The first is enforcement. The second, which I will address in a separate article, is whether the UK has to pay anything at all. On the first issue, how could any legal obligations arising out of the divorce be enforced against the UK?  As it happens, the government’s White Paper on Brexit, says (par. 2.3) that: “We will of course continue to honour our international commitments and follow international law.”  But what if the government changed its mind?

One of the most distinctive features of the EU, which sets it apart from all other international legal regimes, is that the member states have agreed to comply with the judgements of the independent European Court of Justice (ECJ). The EU is a unique union of states under the rule of law, in a way that the international community is not.

It is therefore true that once the UK leaves the EU there will be no obvious process for securing and executing a judgement against the UK if we default. Once the UK is outside the EU, the jurisdiction of the ECJ will “cease to apply” to it. But this is unimportant. The other states (and even private parties) may have numerous other ways to force compliance, especially if they are highly motivated for domestic political reasons.

Depending on the nature of the UK’s violation of the law, the remaining EU states could, for example, retaliate with sanctions against the UK and its companies under the rules for “state responsibility” of public international law. Potentially they could also use the dispute settlement system under the WTO Agreement. It is hard to predict how this could turn out, but the EU27 could start, for example, by refusing to certify the UK’s new trade schedules in the WTO.

Some claims might find their way to domestic courts. Private parties will be able to rely on the precedent of Argentina, which private bondholders hounded in the US and UK courts after it defaulted. The modern doctrine of state immunity under international law is that states are immune from jurisdiction relating to their “public acts” but not from jurisdiction for their “private acts”, including commercial activities.

In 2011, for example, the UK Supreme Court found (in NML Capital Ltd v Argentina) that Argentina was not entitled to immunity in proceedings for the recognition of a New York judgement against it. The issues will be entirely different (and novel) in the case of Brexit, but this example shows that the protection of states from lawsuits is not absolute. No developed economy would wish to enter such a quagmire.

Finally, the remaining EU members would be able to punish the UK very effectively by simply blocking future trade agreements or starting a trade war. A blatant disregard for existing legal obligations is therefore entirely implausible.

In fact, if one reads the House of Lords report carefully, it is clear that this is not what it is suggesting. It is making a different and more ambitious claim that if Brexit happened without an agreement, there would be no financial obligations at all in law. It is not suggesting that the UK should ignore its legal obligations, only that there would not be any. I have discussed this different claim in more detail in a further article.

This is the first of three articles on the legal implications of quitting the EU without a deal. The second argues that any financial obligations to the EU will be enforceable. The third argues that the vested rights of EU citizens in the UK and Brits in the EU may also continue post-Brexit unless there is an exit deal.

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Edited by Hugo Dixon

One Response to “EU financial claims against the UK are enforceable”

  • I would like to assume that it is a purely academic question discussed in this article. That it is being considered at all is one more proof of the unforeseen and totally negative consequences of Brexit.