The Pros and Cons of Brexit

What does a nonbinding referendum really mean? And what are the implications for maritime?

In the Dutch legend of the hero of Haarlem, a boy plugs a hole in a dike using his finger and stays on site throughout the long, cold night until the townsfolk can find him and make the necessary repairs. But for that finger and the boy's courage and the townsfolk’s quick response to a crisis, the city of Haarlem could have been swept away in a terrible flood.

With the Brexit result in favor of Leave, it may be too late for hole-plugging. Or perhaps, more optimistically, the dike is not yet broken but simply under stress and, like the people of Haarlem, we have a chance to pay closer attention to the precarious nature of the situation. We ought to bear in mind that the triggering event for the U.K.'s formal departure from the E.U., namely, the member state's invocation of Article 50 of the Lisbon Treaty, has yet to occur.

Although Leave sent ripples globally, its relevance is based on custom – namely, the political fallout if the perceived will of the people is ignored. In other words, the referendum lacks any binding legality. Having presented to the British electorate an oversimplified, up or down, "yes" or "no" vote on whether the U.K. should exit the E.U., British politicians were left holding the bag. What did the vote even mean, pundits puzzled.

Validation

It was soon suggested that the result of the U.K.-E.U. Brexit negotiations would have to be validated through a second referendum, a view given credibility by statements like that of Professor Kenneth Armstrong of Cambridge University: "It would need to be a general election in three to four months' time that indicated a changed politics, and maybe then you'd be right to go back and check with the people that this is what we really wanted."

As it currently stands, an arbitrary question has led to an arbitrary answer from the voters, which it appears will lead to an arbitrarily managed exit process. Depending on how the negotiations go and the mood of the British electorate when they conclude, it appears to this observer that the dike may hold even without a finger to plug it.

Let’s contrast all this with how the Brexit referendum could have been handled. The State of California, from 1910-2012, had a total of 1,216 statewide ballot measures, compared to three nationwide referenda in the U.K. during its entire history. The California system gives referenda the force of law following an affirmative vote. The measure must be first written out – in long form! – as the text of a hypothetical law. It then receives a formal title and a content summary, and the California Legislative Analyst's Office submits a report on its perceived fiscal impact. In this way, it is abundantly clear to all involved what the consequences of the vote are.

Of course, the British have always relished doing things their own way, and now the other 27 E.U. member states are along for the ride as decades of legal arrangements unravel and are put up for A-to-Z review.

What Stays the Same

Rather than launch into more doom-and-gloom forecasting, let’s catch our breath for a moment and review a few items that will not change:

• Immigration: As the U.K. is not a member of the Schengen Treaty, immigration and transit will not be impacted. Ship and airline passengers to and from the U.K. and the E.U. and other parts of the world are already subject to passport controls at the border. The experience of entering into or passing through the U.K. will therefore remain largely unchanged.

• Maritime Labor Laws: Far-ranging maritime labor deregulation, as some have posited, will prove unlikely in light of the fact that the U.K. is a signatory to the Maritime Labour Convention, which has already been fully adopted into domestic legislation with respect to anti-fatigue rules and living and working conditions. However, the U.K. will no longer be bound by the European Union Working Time Directive (mandatory minimum rest hours per day, maximum weekly working hours, etc.) or the Agency Workers Directive (enhanced rights and equality of treatment between temporary and full-time workers). It’s therefore possible some reforms will occur in the gaps.

• Arbitration Awards: Thanks to the venerable New York Convention on the Recognition & Enforcement of Foreign Arbitral Awards, English arbitration awards in maritime disputes will remain enforceable in 156 countries worldwide.

• Port Regulation: Ports in the U.K. will operate as before, outside the planned Port Services Regulation. This thwarts E.U. plans to establish towage, terminal and pilotage services via the mandatory appointment of a national port services regulator with authority to review prices. The U.K., with its largely privately owned and operated ports, saw itself at a disadvantage compared to other E.U. members that heavily subsidize their ports, like Germany and Belgium. The logic is that a fair market rate is very different for a port that gets taxpayer subsidies versus a port that is self-funded on the basis of free-market principles. Another thorn in the side of the British Major Ports Group and the British Ports Association was the imposition of the Regulation‘s financial transparency requirement, since this “risks undermining commercial confidentiality.”

And the baker will still bake loaves, the pub will still sell beer and, without doubt, business as usual will continue in one form or another.

The shortness of this list should be a concern for an industry like maritime that is based on enabling different people in far-flung parts of the world to engage with each other through trade. Even if we are all used to rules being different from place to place and aren’t strangers to being confronted with foreign challenges, we basically prefer consistency.

“Never pray for a new king,” says the old Hebrew proverb. And by nature, we as an industry are wary when it comes to calls to toughen up borders and limit trade access. So if Brexit turns into Frexit, Grexit and other various "X-exits," we will be living in interesting times indeed.

What Changes

That said, here are some of the weightier changes in store thanks to Brexit:

• “Passporting”: In a fast curve ball to marine insurance, the practice of underwriters in one E.U. member state selling insurance in other member states while only complying with the regulations of their home jurisdiction will no longer be possible. This will subject U.K. insurers and P&I clubs to regulation in, potentially, 27 additional jurisdictions.

• Enforceability of Verdicts: English state courts and law could be much less attractive compared to the courts of E.U. member states given that English state court verdicts may lose their enforceability under the E.U. Brussels I Directive (E.U. Directive 44/2001). States which are not part of the E.U. but are part of the European Free Trade Area, like Norway, enjoy mutual enforceability under the Lugano Treaty. Of course, for the Lugano Treaty to benefit the U.K. it must in fact join the European Free Trade Area. In the same vein, until the U.K. in fact leaves the E.U., the Brussels I Directive still applies.

• Limited Liability Companies: If Brexit comes to pass, the freedom of establishment for U.K. corporate forms operating within the E.U. will end. These corporations will become foreign and potentially subject to winding up in jurisdictions like Germany that apply the “real seat” theory, i.e., prohibit letterbox businesses and look, for the purposes of the law, to where the actual corporate management is done. Although the British Limited Liability Company was a desirable corporate form for many years, these entities will need to consider reregistering either as domestic corporations or as corporations under a different E.U. member state.

• Customs Rules: These will change if the U.K. is unable to gain access to the Common Market through the European Free Trade Area. Given that Leave’s desire to restrict immigration to and from E.U. member states is incompatible with Common Market access, which has as one of its four pillars the free movement of labor, we must wait and see if the new government distances itself from arguments made during the referendum and instead pursues a more moderate course.

“Second Coming”?

In terms of things that change and things that stay the same, it’s clear there is much to consider and much to be done. But with one chief Leaver, Nigel Farage, “brexiting” the political scene and the other, Boris Johnson, declining candidacy for prime minister and instead handing the dirty work over to Remainer Theresa May, one is reminded of “The Second Coming” by William Butler Yeats: “The best lack all conviction, while the worst/Are full of passionate intensity.” – MarEx