Legal implications of Brexit on UK Defence Procurement

By Dr Luke Butler, Lecturer in Law (University of Bristol Law School).*

38611963Defence procurement may not be at the top of the Brexit agenda but it has courted some controversy in the press.[1] It has also been considered as part of the broader arguments about the impact of Brexit on the UK’s defence and security posture. [2] This blog hones in on a more mundane but no less important issue: what, if any, are the implications of Brexit for the legal regulation of defence procurement? There are at least two good reasons why it is useful to consider the legal position. Firstly, defence procurement, like public procurement, is now firmly within the legal remit of EU public procurement Directives. There is already an emerging discourse on the implications of Brexit for public sector procurement regulation; a perspective on defence procurement adds a further contribution.[3] Secondly, as will be discussed, the UK’s defence acquisition as a whole is undergoing unprecedented domestic reform. My ongoing research examines defence procurement regulation as part of this systemic whole and which is likely to be impacted by any change to the regulatory environment.

Whether we stay or go, the EU has been and will be instrumental in this area

My first observation is not a legal one but one which has conditioned my overall sense about what the Brexit debate means for UK defence procurement in legal perspective. For me, the singularly most important achievement of the EU (if we stay) or legacy (if we leave) is the fact that it has forced the UK to confront the issue of whether or not the Government should intervene to legally regulate defence procurement with all of the consequences that might entail for Government-industry relations. For reasons that will be explained, thanks exclusively to the EU, the question is no longer whether or not legal regulation should have a role but how we can most effectively use legal regulation to achieve defence procurement objectives. For a sector that is politically entrenched and some would say resistant to change, this is a milestone in the history of UK defence procurement.

By way of context, historically, it is fair to say that the UK preferred a lighter touch approach to the legal regulation of procurement, that is, how the Government purchases goods, works and services. In areas involving difficult political choices, we opted for policy guidance principally subject to the limiting constraints of public law and freedom of contract. However, public procurement has been transformed by EU procurement Directives.[4] The Directives now offer coordinated rules on advertising contracts, a set of harmonising procedures ensuring open, restricted or negotiated access and contract awards founded on core EU internal market principles of non-discrimination, transparency and, increasingly, competition. Such awards are subject to legal challenge through dedicated provisions on review and remedies.

However, many Member States have disapplied those same Directives to defence procurement through recourse to Article 346 TFEU which permits disapplication of EU rules when considered necessary to protect their “essential security interests”. Consequently, in 2009, the EU adopted a defence-specific Directive designed to force internal market discipline into the award of defence contracts (no more routine single source contracts awarded directly to domestic suppliers without EU-wide competition unless justified) compensated through specific provisions designed to safeguard Member States’ security interests.[5] The UK has implemented the Directive through the Defence and Security Public Contracts Regulations.[6]

Politicians, civil servants and defence industries may (rightly or wrongly) criticise how the Directive is impacting the UK (more on which below). However, it now seems that even if the UK leaves, few are likely to question whether or not legal regulation of some kind is necessary. If arguments have been made to the effect that we should return to a model of limited or no legal regulation, I have not seen them expressed (that is not to say that those arguments cannot be made). Therefore, at the very least, we have to credit the EU with providing a comparator.

There is an argument to say that we should not give the EU too much credit; the UK would have intervened to regulate defence procurement sooner rather than later in any event. For instance, the UK has recently adopted the Single Source Contracts Regulations (SSCR)[7] as part of a wider institutional reform of defence acquisition under the Defence Reform Act 2014.[8] The SSCR aim to improve oversight of the costing and profiting of defence contracts awarded on a sole source basis (as exceptionally permitted under the Defence Directive) in order to reduce out of control defence contract prices and contractor profits. Of course, the Directive and SSCR may be viewed as separate developments, the former being the imposition of an EU-led free market initiative, the latter being a domestic initiative intended to achieve domestic acquisition reform. Viewed alternatively, the UK’s new found confidence to use legal machinery to regulate defence procurement may have been bolstered to some extent by the EU’s earlier lead.

Whatever view is taken, the co-existence of EU and domestic regulation now presents an interesting dynamic which may be  impacted by Brexit. If the UK remains, the UK will need to develop its new regulatory capacity cognisant of, and in full compliance with, EU law, which increasingly views itself as competent to regulate defence trade. Both are seeking to drive increased competition and transparency into defence procurement whether to ensure non-discrimination, value for money or other objectives. It remains unclear whether this will be mutually reinforcing or productive of tension. If the UK leaves, it is not clear to what extent the loss of EU initiative will be felt in the area. It is fascinating either way (I don’t get out much).

To this extent, I align with the view of many public procurement lawyers on the Brexit debate. Any UK model of domestic procurement regulation will be EU-influenced if not inspired. Where I perhaps depart is the emphasis they put on the need for close alignment with EU regulation because, to achieve reciprocity, UK suppliers will need to comply with EU rules when accessing European markets (the same can be said for international markets in countries complying with the World Trade Organisation Government Procurement Agreement (GPA)). In this respect, defence procurement differs slightly. The GPA largely excludes defence procurement as a matter of coverage from its annexes. Further, the UK has also (at least formally) achieved market access in third countries and guaranteed equal treatment without recourse to EU styled regulation. A prime example is the Reciprocal Defence Procurement Memoranda of Understanding concluded between the US and the UK.[9]

In a similar vein, it may be considered how the UK would conduct legal or political relations with EU institutions such as the European Defence Agency. The UK has recently concluded a bilateral defence and security cooperation treaty with France.[10] A cynical view suggests that the UK’s efforts to use bilateral legal relations in the area of defence procurement is a pre-emptive warning of its resistance to further centralisation of national defence procurement policies and which some may accuse the EDA of meddling in. In the event that the UK leaves, it has been proposed that the UK could negotiate an administrative agreement with the EDA (following the Norwegian model) but at the expense of influencing the choice of procurement and R&D projects inside the EU institutional framework.[11]

Space precludes a discussion of how a domestic model of defence procurement regulation would be similar/different to public procurement regulation in light of these and other factors. Nevertheless, if nothing else, the Brexit debate brings to the fore questions about the comparability of modes of public and defence procurement regulation.

 In any event, we must acknowledge the limited impact of EU regulation in practice

The above contribution aside, it must be acknowledged that the impact of EU regulation on UK defence procurement has been limited. A study on the Defence Directive’s implementation has indicated that it has so far had little or no effect on the current status quo.[12] 80-90+ % of contracts continue to be awarded domestically. Myriad variables explain the position although many remain uncited and untested. These include: good old fashioned protectionism; an oligopolistic market straining for competitive tension as there are few buyers and few suppliers; primary recourse to suppliers from third countries (typically the US); deliberate avoidance of EU rules; and, no doubt, occasionally legitimate defence and security concerns. It might be argued that the Defence Directive’s limited impact with all the costs of compliance but without any indication of the benefits further supports the leave campaign: EU regulation and red tape is not delivering the benefits we expected.

However, a more balanced assessment is required. We have to be candid about what the Defence Directive was intended to, and could realistically, achieve. It is a first iteration. It is the ultimate in experimental governance: defence procurement is not just about trade; it’s about defence with all of the fundamental constitutional and competence questions it raises. Its objectives and impacts will necessarily be incremental. Recognising the limits of its tentative reach, the Directive always intended to exclude the most politically complex, high-value defence contracts from its scope. For instance, the Directive contains exclusions relating to: contracts awarded pursuant to international rules (e.g. most forms of procurement undertaken in, and in relation to, NATO); contracts involving collaborative defence procurement involving research and development; and government-to-government contracts (Article 13) (e.g. foreign military sales which enable some trade balance massaging and back scratching). That leaves a sizeable market subject to EU rules but nothing on a scale that would dramatically impact quickly on the defence sector.

Notwithstanding, it must also be acknowledged that the exclusions have raised fundamental questions as to the EU’s legal and institutional competence (and credibility). For instance, anticipating that Member States might use the exclusions to “circumvent” (to use the language of Article 11) the Directive, the Commission issued Guidance on the exclusions. [13] However, the Guidance begged more interpretative questions than it answered. On the ropes, in 2015, the Commission resolved to publish reissued guidance but which shows no signs of ever being published.

In a similar vein, it remains fairly easy to continue to award contracts to domestic suppliers on a non-competitive sole-source basis. To be absolutely unequivocal, I am not making an assessment of whether or not the UK has complied with the Defence Directive not least because the uncertainty of EU law in this area means that I could not even if I wanted. To give just one example, the Defence Directive exceptionally permits Member States to award a contract on a non-competitive basis for “technical reasons” or reasons based on “exclusive rights” (Article 28). Suffice to state, a quick skim through UK contract notices reveals some very creative legal interpretations of what constitutes such reasons. Let’s give the UK the benefit of the doubt (for now).

Even more fundamentally, there is a strong suggestion that recourse to Article 346 TFEU continues to be widespread across Member States. Confining my obligations to the UK, there are formal MOD procedures for notifying and verifying recourse to Article 346 TFEU internally. Again, to be unequivocal, there is no reason to suspect that the UK is “abusing” Article 346 TFEU, a charge levelled at many Member States. However, even current UK policy guidance still refers to Article 346 TFEU as a “war-like stores exemption” (a bit Cold War, don’t you think?). What, if anything, does this tell us about continuing attitudes towards Article 346 TFEU on the ground?

Further, it is open to question to what extent there is any incentive for suppliers, other Member States, the Commission or EU courts to challenge Member State practices. Do angels fear to tread? Again, confining my obligations to the UK, there has only been one UK challenge to a procurement conducted in accordance with the Defence Directive.[14] It should be added that the decision went in favour of the MOD, a deterrent if ever there was one. This confirms what was, in my view, an overly optimistic assessment that the number of challenges to defence contracts would likely increase as a result of the UK’s implementation of the Defence Directive. One is more than none but it certainly has not matched the number of challenges to public sector procurement. Again, many factors explain this position and which are obvious (the MOD and defence companies will not wish to air their dirty linen in public for very good commercial, confidentiality and even security reasons). Similarly, I do not know of any instances in which UK suppliers have (successfully) challenged defence procurement awards in other Member States.

Thus, whether we choose to leave or remain, in the short to medium term, the Defence Directive is unlikely to significantly impact UK defence procurement in legal terms. At present, it appears to be a case of working with legal uncertainty versus the uncertainty of not having a legal framework in place. Neither is conducive for a sector that puts a premium on certainty.

 Concluding thoughts

 Distilling some thoughts from the above, a critical assessment of the Defence Directive should not necessarily be taken as an argument in favour of Brexit. It simply indicates that if we left, there would not be immediate and profound implications in legal terms. The defence sector is not the financial sector. Taking a more balanced view of the legal position, whether the UK leaves or remains, it is first important to acknowledge the EU’s formative impact in this area over such a short period. If we leave, EU regulation provides a comparator that we have never previously had. Whilst we might be sighedly nostalgic about how the law of England and Wales reigned supreme in the days before all of our laws were made in Europe, we do not have much to look back on in the context of defence procurement and everything to look forward to, or, better put, to be forward-looking about. If we stay, EU regulation will inevitably influence an emerging UK regulatory capacity in this area and vice versa.

Whether domestic or EU initiative, we are both attempting to achieve real changes in transparency and competition in this area. We might point to our own lead in complying with the Defence Directive and our emerging domestic efforts as entitling us to significantly influence (and/or properly constrain) the direction of EU regulation in this field. But we cannot deny the reality that getting EU defence procurement regulation to work is an uphill task. An important question is whether it is worth the UK’s time and investment and, if so, how we can make it work for us (and not just the EU and its other Member States). These are political and economic questions for another time (preferably before the referendum).

Finally, as in life, timing is everything – I have bored you enough. The EU is conducting a scheduled review of the Directive. As predicted, it has been delayed. The results of that review will only be known after the referendum. The UK is also conducting its own review of implementation of the Directive but which is not due for publication until later this year (the findings of which I hope to revisit in a later post/publication). One thing is clear about Brexit, we are working almost exclusively on intuition, with limited or no evidence. Bon chance!

_______________________________

[1] Alix Culbertson, ‘Top MoD chief backs leaving the EU to save cash when buying weapons’, Sunday Express, 2 March 2016: http://www.express.co.uk/news/uk/649112/MoD-Brexit-weapons-procurement; Larisa Brown, ‘Top MoD mandarin breaks ranks by saying that leaving the EU could HELP British manufacturers, Daily Mail, 2 March 2016: http://www.dailymail.co.uk/news/article-3472207/Top-MoD-mandarin-breaks-ranks-saying-leaving-EU-HELP-British-manufacturers.html.

[2] For a selection of just a couple, see M R H Uttley and B Wilkinson, ‘A spin of the wheel? Defence procurement and defence industries in the Brexit debates’ (2016) 92 International Affairs 659-586; Think Defence, ‘A Few Defence and Security Thoughts on Brexit’, 6 March 2016: http://www.thinkdefence.co.uk/2016/03/defence-security-thoughts-brexit/.

[3] Again, citing just some of the many, see: Albert Sanchez Graells, ‘Would a Brexit significantly change the way the English public sector buys supplies and services?’ 17 June 2016, University of Bristol Law School Blog: http://legalresearch.blogs.bris.ac.uk/2016/06/would-a-brexit-significantly-change-the-way-the-english-public-sector-buys-supplies-and-services/; Michael Bowsher QC, ‘Procurement law after Brexit’ 16 March 2016, Practical Law Public Sector Blog: http://publicsectorblog.practicallaw.com/procurement-law-after-brexit/; and Ruth Smith and Tom Benjamin, ‘Brexit and public procurement’ 10 March 2016 Public Law Today: http://www.publiclawtoday.co.uk/local-government/procurement/308-procurement-and-contracts-articles/29149-brexit-and-public-procurement.

[4] See Directive 2014/23 (concessions); Directive 2014/24 (public sector); Directive 2014/25 (utilities).

[5] Directive 2009/81/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC [2009] OJ L216/76.

[6] The Defence and Security Public Contracts Regulations 2011 SI 1848.

[7] The Single Source Contracts Regulations 2014 No.3337.

[8] The Defence Reform Act 2014 Chapter 20.

[9] US/UK Reciprocal Defence Procurement Memorandum of Understanding 1975.

[10] UK-France Defence and Security Cooperation Treaty 2010.

[11] Ian Bond et al, ‘Europe after Brexit: Unleashed or Undone?’ Centre for European Reform, April 2016: https://www.cer.org.uk/sites/default/files/pb_euafterBrexit_15april16.pdf.

[12] European Parliament, Directorate General for External Policies, Policy Department, The impact of the ‘Defence Package’ Directives on European defence, 2015: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/549044/EXPO_STU(2015)549044_EN.pdf

[13] DG Internal Market and Services, Guidance Note, Defence and Security specific exclusions (2009).

[14] NP Aerospace Ltd v Ministry of Defence [2014] EWHC 2741 (TCC).

____________________________________________

* I am particularly interested to hear the views of procurement lawyers and defence professionals. Certain of these insights will feature in my forthcoming book on the subject. I can be contacted at Luke.Butler@bristol.ac.uk.

2 thoughts on “Legal implications of Brexit on UK Defence Procurement

  1. Baud

    I think an important question in addition to how would defence procurement law in the UK evolve following a Brexit, what the legal and economical impact of a Brexit would be for the UK defence industry.
    If we take the most extreme Brexit scenario, where the UK would not join the EEA, then the UK defence industry would not be able to rely on the EU law principles of non-discrimination and equal treatment when bidding in EU countries. As the GPA does not cover the procurement of military equipment (see its annexes), the GPA will not help them, either. So ministry of defences of the EU member states could exclude UK companies simply because they are British.
    In addition, the intra-EU transfer directive would not be applicable to exports from an EU member state to the UK, so we would move back to the traditional case-by-case export licensing system. As some EU member states have already announced their desire to make the UK “pay” for leaving, withholding export licenses is a very easy way to do that. Considering how integrated into the EU defence market the UK industry has become, this could potentially be problematic.
    Just a few thoughts.

    Reply
  2. Luke

    Many thanks for your invaluable comments and insights. The legal and economic impact of Brexit on UK industries in Europe is a significant issue and is one that should be directly addressed. I entirely agree with the statements you have made but playing devil’s advocate here:

    As a matter of EU law, yes, the UK will not be able to rely on EU law principles of non-discrimination and equal treatment. From this statement of fact, is it to be inferred that this legal guarantee in some way yields appreciable benefits to the UK? In theory, many can be identified: it is the clearest declaration of trade reciprocity – much greater than a political guarantee; it provides a legal basis to challenge discriminatory measures in other Member States; perhaps less obvious, it also provides a point of domestic legal recourse for UK bidders challenging domestic procurements involving foreign bidders. However, is there any substantial evidence to suggest that UK industries are benefiting in real terms from those guarantees in practice to a greater extent than before the Defence Directive or ICT Directive? A Brexiteer may not be convinced that that legal guarantee has any real meaning in practice.

    Further, the US appears to consider itself able to secure non-discrimination and equal treatment through a reciprocal defence procurement memorandum of understanding i.e. through political guarantees. I am not, for a moment suggesting that the UK could or would be able to replicate the US’ position for many reasons. One very important one is that, as the world’s largest defence trading nation, the US does not necessarily need, as security, the ability to legally enforce guarantees of non-discrimination and equal treatment. In certain areas, Member States will be dependent on the US so excluding US bidders or companies reliant on US supply chains is not an option. Further, the US has considerable retaliatory trade measures to fall back on. However, there is at least an argument to say that major defence trading nations (the UK being up there) may be able to secure formal non-discriminatory market access and equal treatment through some form of regime based on political guarantees, if not bilateral treaties. Obviously, I accept that there are many arguments to suggest that this might be less effective than legal protection under an EU Directive. Further, the UK would experience the difficulty of having to negotiate bilateral arrangements with each Member State (assuming the EU could not/would not do this on Member States’ behalf). However, perhaps the significance of political agreements or arrangements to achieve formal equality should be considered. As indicated, it is incumbent on the EU to demonstrate to the UK that its legal protections are worth more in practice than political guarantees on paper. Otherwise, there needs to be clear evidence that the regime is worth the UK’s investment. The counterargument is that it is not necessary for the UK to see evidence of the effects of those legal guarantees: the benefit of the Defence Directive is that legal guarantees are there should it be necessary to enforce them and worth just as much, if not more, than a political guarantee.

    Again, I accept that national ministries of defence could exclude UK companies simply because they are British. However, if a French authority excludes a German company, is the German company likely to bring a challenge under French law and vice versa? As questioned in my blog (a genuine question, not necessarily scepticism) is there any evidence that defence companies are prepared to enforce these legal guarantees before the national courts? By that I would need more than one case in more than one country and for defence contracts worth litigating (high value). If not, reinforcing the earlier point, it is open to question whether those legal guarantees meaningful in practice. I should also add that, in the UK, we don’t litigate on procurement unless we really have to (as many issues in this context are often resolved politically). Therefore, some might argue that the idea of a legal guarantee means even less.

    There is also the “tit-for-tat” argument. If national ministries of defence legally exclude British companies, British companies could exclude European companies. A Brexiteer might also be sceptical about Europe excluding British companies. Unlike in many areas of internal market trade, exclusion in the defence context does not mean exclusion from 28 national markets. Whilst the implications of exclusion from certain Member States’ defence markets requires careful consideration(France, Germany, Italy, Spain), the reality is that many Member States have negligible or no defence market to speak of that could appreciably impact the UK.

    It might also be worth emphasizing that, whilst the precise legal obligations of the UK and France under the Lancaster House Treaties are open to debate, a key objective is said to be to reinforce the UK and French defence industries. It would seem contradictory for a treaty to guarantee legal cooperation between two major defence trading nations whilst reciprocal market access is not guaranteed. French discrimination against the UK would most certainly not suggest a commitment to reinforcing those industries. Admittedly, the treaties were concluded agt a time when these legal guarantees were in place under the Directive (although technically before Member States were required to transpose the Defence Directive). It is quite possible that such a treaty might be repealed. However, a Brexiteer might suggest that a treaty or other arrangement could be concluded with France. If the EDA’s ability to do meaningful cooperation remains doubtful, would Member States sacrifice the bilateral opportunities on offer?

    Concerning the ICT Directive, again, it is accepted that this Directive would not be applicable to exports from an EU member state to the UK, so we would move back to the traditional case-by-case export licensing system. However, a Brexiteer might be more sceptical about the threat of export licences being witheld. The rationale for the ICT Directive was not to address concerns about Member States’ withholding export licences. Quite the contrary. Preparatory studies indicated that out of the many thousands of licence applications made each year, only a negligible number were ever refused (a finding that was surprising at the time). Rather, the principal issue concerned the bureaucratic nature of licencing processes, the scope of licences issued and the inevitable delays incurred in obtaining a licence. Therefore, it is questionable to what extent there would be a greater number of refusals on Brexit. However, I entirely accept the gist of your point that Member States could make export licensing application processes more difficult for the UK. But, then again, the UK could do the same.

    Taking a more moderate view of the UK’s likely approach, it is well known that the UK has been influential in the development of the ICT Directive, the latter inspired, in part, by the UK’s pre-existing system of general licences. In short, the UK played fair in its licencing processes before the ICT Directive. The ICT Directive might be viewed as an attempt to get other Member States to do the same. Therefore, the UK’s approach in this area might not merit the kind of “make the UK pay” mentality. If Member States wish to enforce that mentality, it should do it in areas where the UK deserves it. Few might argue that export controls is an area where the UK deserves retaliatory conduct.

    Further, given the focus on defence procurement regulation, it is beyond the scope of this blog to critique the impact of the ICT Directive. However, a Brexiteer might well point to considerable failings in this regime as another example of a regime that is not producing the kinds of benefits expected. A Brexiteer might go even further and argue that this regime is a retrograde step for the UK which already operates a robust but fair system of export control. By contrast, it might be argued that because the UK has been influential in this area that the UK should continue to be a positive influence on the development of the EU’s licensing regime.

    Again, many thanks for your comments. Many of the issues raised are fundamental. As indicated in my blog, an open issue (that I’m happy to discuss but is perhaps one speculative academic excursion too far) is how the UK might politically negotiate or, indeed, legally regulate procurement relations with other countries on Brexit given the need to protect vital access of the UK defence industry to the European market.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *