Brexit Update: U.K. Parliament Rejects Proposed Withdrawal Agreement and Looks for Brexit Plan B

On 15 January 2019, the U.K. Parliament overwhelmingly rejected, by a margin of 230 votes, the proposed withdrawal agreement with the EU put forward by Prime Minister Theresa May. Rejection of the withdrawal agreement does not mean no Brexit, and the clock continues to countdown to the deadline on 29 March 2019 when the U.K. will leave the EU by operation of law. The U.K. now enters a period of significant political uncertainty with a number of options being debated..

Renegotiation

The government may propose to engage in substantive renegotiation of a withdrawal agreement (provided, of course, the EU is willing to re-enter negotiations). As this would take time, the U.K.’s Article 50 notification would likely require extension by agreement of all EU27 countries – an outcome itself fraught with uncertainty.

In recent weeks, the proposal that the U.K. should seek to join the European Free Trade Association and become part of the European Economic Area has been mooted as a serious alternative to the proposed deal. This would involve the least disruption from a business perspective, but crosses many of the current government’s red lines.

The official positions of both the EU Commission and the U.K. government was that the withdrawal agreement put forward was the only deal available and there is limited appetite and political will to reopen negotiations.

No-Deal Brexit

As things stand, the U.K. will automatically exit the EU by operation of law on March 29, 2019, regardless of whether there is a withdrawal agreement in place (no-deal Brexit). Most economic forecasts suggest that a disorderly no-deal Brexit would be the most damaging outcome for the U.K. in the short to medium term, and the most impactful on international businesses. To assist with no-deal planning, we will be setting out some key issues for business in a follow-up alert.

General Election

Prime Minister Theresa May could decide that the best way out of the deadlock would be to hold an early general election in order to obtain a political mandate for her deal. Calling an early election (as U.K. general elections typically occur every five years) would require the support of two-thirds of all MPs. The earliest date for the election would be 25 working days later.

Second Referendum

Another potential outcome involves the extension of the U.K.’s Article 50 notification to allow time to hold a second referendum (it is already too late to hold a referendum before March 29). Once regarded as an unrealistic and minority view, the idea of a second referendum has gained traction, with growing demands from both civil society groups and from MPs. Nevertheless, it is far from clear what form the referendum question would take or whether it would provide for a different result. Theresa May has previously ruled out a second referendum while she is Prime Minister, and it does not represent U.K. government policy.

No Brexit

The Court of Justice of the European Union has ruled that the U.K. has the right to unilaterally withdraw its Article 50 notification altogether (which would essentially mean no Brexit). With the U.K. government still committed to Brexit, it is very likely that a major event such as a further referendum or change of government would likely take place before this option is considered seriously.

That said, the consensus from financial markets following the Prime Minister’s defeat is that the prospect of Brexit being scrapped altogether has increased, and that a no-deal Brexit is less likely. Chancellor Philip Hammond has also sought to reassure the business community that a no-deal Brexit can be avoided by extending the March 29 Brexit deadline under Article 50.

Prime Minister Theresa May is expected to make a statement to the U.K. Parliament on January 21, presenting a "plan B" for the exit agreement. We will provide further updates as the plan takes shape.