02 Jan 2018

Brexit - What should the railway industry be doing now?

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January 2018: as dawn breaks on a new year, we can look on the profoundly changed landscape wrought by Brexit – riven and divided it is true, but one with perhaps significant implications for the railway industry. 

The negotiations are about to begin in earnest, and with both sides in relative agreement that the options for trade lie between a Canada-style free trade agreement and a "no deal" World Trade Organisation tariff arrangement; there appears to be a trade solution emerging from the winter fog. 

So what does this mean for the railway industry? And what (if anything) should you be doing now in anticipation of Brexit?

In this update we consider: (a) the legal and wider implications of the current Brexit plans for the railways; and (b) what you should be considering now in relation to (i) entering into contracts or long term arrangements spanning Brexit (highlighting some of the issues that should be top of your agenda); and (ii) the opportunities presented by the current phase of negotiations, if you wish to influence the outcome of any Brexit related legislation and/or trade agreements.

Legal and wider implications of Brexit

No change - yet
Having invoked Article 50 of the Treaty of the European Union (EU) on 29 March 2017, the date by which the United Kingdom must leave the EU (subject to any transitional arrangements) is 29 March 2019. Up to this date, the legal position will not change. The law and regulations applying to the UK will remain the same, and businesses will be expected to continue to comply with their obligations arising from European and domestic law. 

Transition
The details of a possible transitional arrangement are just now being negotiated, but the current guidelines of the European Commission (EC) have made clear that whilst the United Kingdom will be required to adhere to all the requirements of a Member State, the United Kingdom's status will revert to that of a "third country" in EU parlance from March 2019. What "third country" status will mean in practice will be subject to intense debate, but it seems likely that it would include acknowledgement of the UK's right to negotiate with countries outside of the EU. The EC has announced, in any event, that any "transition period" will not continue beyond 31 December 2020.

Withdrawal
Once the UK leaves the EU and following the end of any transition period, the process to extricate the country from the EU will be neither easy nor quick. The recent Parliamentary amendment to the European Union (Withdrawal) Bill requires Parliamentary approval to any agreements around withdrawal before there is any new law. This will create additional hurdles to be overcome to establish a stable legislative footing post-Brexit. 

New law?
Even after withdrawal, the withdrawal bill has the effect of incorporating the entirety of the EU legislative status quo (as much as possible) into UK law. Whilst some aspects of railway law and regulation have their origins in European law (such as access to facilities, safety, licensing and standards) the core structure of railways regulation in the UK also pre-dates European legislation (through the Railways Act 1993). So there may need to be new law – but it is unlikely to lead to much change in the short to medium term.

There is new European regulation that is ready to be enacted/adopted – for example in the recast of the First Railway Package and the implementation of the Fourth Railway Package which takes "separation" requirements further than previously. Yet these too are likely to be adopted by the UK, in the short to medium term, in order to minimise disruption to the railway industry and to trade.

Into the future
In the longer term, the Government will have to tackle how it wishes to approach trade, regulation and tariffs as an independent nation-state. The approach the Government takes, and the resulting impact on rail businesses, remains to be seen. For now, it's legal business as usual.

What should I do now? 

Our previous advice note immediately after the Brexit vote provides an overview of some of the likely impacts of Brexit on the various areas of the UK railway industry. It includes commentary on train operations and franchising, separation of infrastructure from train operations, rolling stock and infrastructure.

See also the Stephenson Harwood briefing which also considers some legal implications of Brexit in a variety of areas.  

With Brexit a more real, and substantially nearer, prospect today, railway companies should consider what actions they should be taking now to protect their position and also to lobby for future change. 

Contracting/Commercial Drafting
Many railway contracts being considered and entered into now will span the period of Brexit, of transition and also into whatever the future may hold, be those contracts franchise agreements, financing contracts, rolling stock supply agreements or long term maintenance arrangements. It is difficult (if not impossible) to predict what changes could arise, but that does not mean you shouldn't consider what the future impact might be and/or try to protect or mitigate any risks. 

Generally, you should consider how Brexit will affect your business and commercial arrangements with third parties. In particular, in relation to important contracts you may want to assess if they are either clear on the implications of Brexit or provide sufficient protection against Brexit risks. You may also want to consider whether to amend or renegotiate existing contracts that are not clear on Brexit implications where these contracts continue beyond March 2019. 

Some key points to consider are likely to include:

  • Express provision on Brexit?: consider whether to include an express provision dealing with the impact of Brexit on your business rather than rely on generic change in law, force majeure, illegality or (material) adverse change provisions. This may include provisions relating to import/export duties, increases in costs or movements in exchange rates.
  • Change in Law: if you do want to consider relying on change in law provisions, ensure that they are sufficient to cover the risks around Brexit. Remember – some of the law may not be specifically changing but the impact on your business will be. Be careful about definitions of "foreseeable" and "discriminatory" changes in law, as well as carve outs for tax changes as these may make the provisions unworkable in a Brexit context.
  • "Change": in a franchise context, consider whether greater "Change" protection may be appropriate to include in the franchise agreement. This is best achieved during the bidding phase of the franchise and/or by way of clarification with the Department for Transport (or other relevant authority). In a non-franchise context, you may want to consider whether Brexit is likely to increase your costs (or decrease your revenue) and specifically provide for a variation in such circumstances. 
  • Delay: could the impact (or uncertainty) created by Brexit cause delay in the delivery of your goods or services? Could your goods be embargoed at the border? You may wish to specifically deal with the prospect of such delay and/or ensure any delay provisions adequately deal with this scenario. In a rolling stock context, this may be a change to "Permitted Delays"; in a franchise context, relief from a Committed Obligation.
  • Taxation: perhaps a subset of change in law, but what are the implications of Brexit in relation to your tax position generally? This may be particularly relevant if the UK's double taxation arrangements with EU Member States are not carried through Brexit.
  • Supply Chain contracts: you may also want to consider whether contracts down your supply chain are consistent with your primary contracts and there are no gaps which could mean you are subjected to Brexit risk that you cannot (or have not) passed down to your supply chain.
  • People: will your people be impacted by Brexit? Are they EU nationals who may not have the right to live and/or work in the UK after Brexit? Could this cause delay and/or increases in costs? It may be wise to consider whether the people carrying out a contract are still able to do so following Brexit and/or put in place measures now to ensure that they can. 
  • Disputes: you may wish to consider where any contractual disputes will be heard – particularly if judgements are not enforceable across EU countries following Brexit. For certainty, you may wish to specify arbitration in a seat such as London and the rules that will apply.
  • "Housekeeping": finally, when considering your existing or new contracts, you may also wish to do some housekeeping and check where certain terms are referred to and if they are still relevant e.g. references to the EU and to EU Law. 

Influencing the Brexit solution
Despite some clarity emerging in relation to the options available for Brexit, and the timeframes under which these might be implemented, we are entering into a period of flux. The decisions reached during the negotiations now beginning between the Government and the EC will determine for example the tariff structure, if any, that will prevail after Brexit and any transition. 

Depending on the depth of the future relationship outlined during this period, the negotiations may also determine the extent of any "regulatory equivalence" between the UK and the EU for the foreseeable future – with all the consequences that would entail for the funding, statutory and operational structures that currently exist in the British railway industry.

UK rail companies may therefore consider whether, either individually or in the relevant trade bodies and associations, to make their voices heard. Not only is there opportunity to influence the wider decision as to the option and length of any transition, but there is also opportunity to influence the specific policies and regulations that may affect your particular business.

Key issues for the railway industry are likely to include:

  • Trade - Duties, tariffs and quotas: influencing the extent of duties tariffs and quotas
  • Procurement: the extent to which EU rules will still apply to prevent transparency and non-discrimination and whether companies with a UK base can obtain a benefit in future procurements for perhaps franchises, rolling stock contracts or infrastructure contracts
  • Application of Standards: there may be a benefit of having consistency of standards across the EU and the UK to ensure that products and services; alternatively are there benefits or efficiencies from having different standards?
  • Rail regulation generally: rail regulation as imposed by the EU has become more and more restrictive and prescriptive since the early 1990s. The opportunity opens up to the UK to diverge from EU regulation and this may offer opportunities for railway industry suppliers.

Brexit means risk but also opportunity in the UK railway industry – and now is the time to take action to protect against the risks, but also to grasp the opportunities that come out of the uncertainty.

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KEY CONTACT

Tammy Samuel

Tammy Samuel
Partner

T:  +44 20 7809 2227 M:  +44 7766 991 053 Email Tammy | Vcard Office:  London

Richard Shepherd

Richard Shepherd
Associate

T:  +44 20 7809 2563 M:  +44 7702 150493 Email Richard | Vcard Office:  London

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