Chequers confirms that UK state aid rules will stay closely linked to Brussels following Brexit

Posted in Antitrust and competition WTO and international trade

As we recently reported on Inside Brexit, the UK Government earlier this year committed to continue applying state aid rules following Brexit.  The White Paper agreed by the Cabinet at Chequers on 6 July contains further detail on how this new regime might operate, although the plan will be the subject of negotiations with the EU.

In the White Paper, the Government commits to maintaining a “common rulebook” with the EU on state aid rules. Although not expressly spelled out, this means that the UK intends to continue applying EU state aid rules (as opposed to there being some form of mutual recognition of each other’s state aid rules).  This implies not only that the UK will accept the existing EU state aid rules from ‘day one’ of Brexit, but there will be a continuing obligation to mirror new EU state aid legislation and guidelines as they are developed.

That is not to say that new EU state aid rules will be directly applicable in the UK as they are in the EU Member States; the UK will have to adopt delegated legislation or guidelines on an ongoing basis in order to maintain the common rulebook.  Those rules will need to be appropriately adapted, including to reflect the fact that the UK state aid regime will be enforced by the Competition & Markets Authority (CMA) and the UK courts, rather than the European Commission and the Court of Justice of the European Union (CJEU).  The UK Parliament could in theory refuse to adopt implementing measures but, the White Paper concedes, it would have to do so “in the knowledge that it would breach the UK's international obligations”.  This situation could trigger enforcement action and, ultimately, the imposition of penalties (discussed further below).

There is an important caveat to the common rulebook approach – the commitment to harmonise rules is stated to be “without prejudice to the UK’s intention to develop new tailored arrangements in relation to payments to farmers and other land managers for environmental benefits, and the UK’s future public procurement policy.

It is notable that the White Paper also proposes to put in place a “common rulebook” in relation to manufactured and agri-goods, in order to ensure frictionless trade. The agreement envisages the UK seeking to participate in the technical committees which design and implement these, albeit without voting rights.  In relation to state aid, however, it is questionable if the UK will be able to exert any influence on the development of new rules through the existing EU institutional architecture.

The Chequers agreement is less clear on how disputes will be managed (for example, if one party is accused of diverging from, or not enforcing, the common rules) as well as on the status of court judgments interpreting the state aid rules in either jurisdiction. However, the language in the White Paper does offer some clues.

A Joint Committee of UK and EU officials will be established which will “oversee the application of legislative and regulatory commitments” – in other words, it would be a forum through which either party might air grievances about the application or enforcement of state aid law in the other’s jurisdiction.  The Joint Committee will, in the first instance, seek to prevent disputes arising through “structured dialogue”;  if it fails to reach agreement, the question can be referred to binding international arbitration.

Significantly, the text concedes that in resolving disputes, either the Joint Committee (by mutual consent) or the arbitration panel can refer a question before it to the CJEU for interpretation – the Joint Committee or the arbitration panel, as the case may be, would be bound to resolve the dispute in a way that is consistent with the interpretation of the CJEU.

If the UK were to give effect to rules which are decided to be in contravention of EU state aid rules, the EU could “propose proportionate and where possible localised rebalancing measures, for instance, requesting financial compensation.”  If agreement on “rebalancing measures” cannot be reached, the relevant part of the agreement could be suspended – this suggests that market access restrictions could be put in place. 

As the plan proposes to end the supremacy of the CJEU in UK law – and so UK courts will no longer be able to refer questions to the CJEU on the interpretation of matters such as state aid – it is possible that differences in judicial interpretation of state aid rules may arise from time to time. The Chequers plan does not propose that UK courts would automatically give effect to CJEU jurisprudence on state aid law.  Rather, both the UK courts and the EU courts would be asked pay “due regard” to each other’s state aid jurisprudence, but ultimately both would be free to adopt their own interpretations.  In order to encourage consistency of interpretation, both parties would commit to encouraging and facilitating dialogue between the judiciaries of the UK and the EU.

This proposed regime in many ways mirrors the architecture of the European Economic Area Agreement (EEA Agreement).  Under the EEA regime, the EFTA Court when asked to rule on state aid matters must “pay due account to the principles laid down by the relevant rulings” of the CJEU.  The EEA Joint Committee has jurisdiction to consider a difference in the case law of the EFTA Court and CJEU. The EEA Agreement expressly states, however, that resolutions of the EEA Joint Committee “may not affect the case-law of [the CJEU]”; on the other hand, although it is not stated in quite the same terms, the EEA Joint Committee also cannot affect the case-law of the EFTA Court.  An unresolved dispute between the EEA contracting parties and the EU could, in theory, result in the imposition of safeguard measures and ultimately lead to the suspension of the EEA Agreement – but this has not yet occurred in the EEA’s history.

In summary, it appears that the Chequers plan proposes to put in place a regime substantially the same as the EEA Agreement provisions on state aid law. The UK will become a rule-taker on state aid matters but those rules will be enforced in the UK by bodies which are independent of the EU, namely the CMA and the UK courts.  Disputes arising between the parties concerning the application and enforcement of state aid law – or its interpretation by the courts – will be dealt with in the first instance through diplomatic channels (the Joint Committee) and, if necessary, by binding international arbitration (which can refer matters to the CJEU for interpretation).  Any new EU state aid law, resolutions of the Joint Committee or ruling of an arbitration panel would not become binding on the UK automatically – however, non-compliance by the UK would constitute a breach of international law which could result in the imposition of penalties such as the payment of financial penalties and, at least in theory, suspension of parts of the UK-EU treaty.

The White Paper seeks to provide comfort that the UK will continue to follow the existing EU framework to prevent Government subsidies to business distorting competition, but the UK regime would be enforced in the UK, rather than the EU. There are legitimate questions as to how effective such a regime can be within a single state (a UK Government agency essentially being asked to decide whether the UK Government has acted illegally, whereas the European Commission is seeking to ensure consistency between Member States).  There is of course the bigger question as to whether the White Paper will bear any resemblance to the finally agreed position between the UK and the EU, but there is at least an indication of a model the current Government think could work.

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