Brexit and the EU Budget (EUC Report)

Lord Davies of Stamford Excerpts

Thursday 6th April 2017 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, I am not a lawyer, any more than the Lord Chancellor is a lawyer, although I hope that I am not less of a lawyer than she is either—that would be rather a bad position to be in. But all citizens are deemed to know the law, and anybody who sits in a legislature has to have a clear sense of the foundations of the law. Until a few months ago, I was a member of the committee. I enjoyed the role very much; it was a great privilege to serve under the extremely able chairmanship of the noble Baroness. I regard all those who served with me on that committee as personal friends, and I hope they will not be unduly upset if I feel today that I must take issue with their conclusion. We all feel, as a matter of principle, that, if we have pressing views on an important subject that have not otherwise been expressed, it falls on us to stand up and make sure they are not ignored.

We are here in the very imprecise and uncertain realm of international law. So imprecise and uncertain is it that there has been a respectable view for a long time, which I might describe as an extreme positivist view, that there is no such thing as international law, for the simple reason that there is not in existence the essential prerequisite of a system of law: a sovereign body that legislates and is able to enforce its decisions in the area of its claimed jurisdiction. I think there would be general agreement that a form of positive law exists in the world which cannot be contested, in the form of individual contracts or treaties between states—conventional law. That applies only to the parties to those conventions, of course; in other words, only to those who have ratified the conventions. The concept of convention is well established, and I can see that the committee takes it very seriously. It concludes that the Vienna convention applies in this particular case, and I believe it when it says that 26 out of 28 members of the EU have ratified that convention. I suppose you could argue that the matter is anyway now one of customary international law, so it is a reasonable basis on which to proceed, and my argument will be on that basis.

Customary international law is of course a very vague area. The concept has been with us for a very long time, since at least Grotius in the 17th century. It is often quite unclear what customary international law is or, indeed, how it relates to conventional law. I take as an example the law of the sea convention, which fundamentally departed from traditional customary law when it was negotiated in the 1970s. Does it now represent customary law as well as conventional law, or are there two regimes in the world—one for the great majority states that have ratified the law of the sea convention and one for those that still have not done so? I do not know the answer to that question.

Finally, moving away from the positivists as far as you can to the idealist view of international law, there is natural law, which, as the House knows, has been in existence for even longer as a concept. I think that it goes back at least to the view of St Thomas Aquinas that there is an element of divine rationality in all of us by which we are guided, and through which we know the difference between right and wrong. One can substitute for God, if one wants to secularise the process, by introducing some kind of formulaic mechanism such as the utilitarian calculus or perhaps the Kantian categorical imperative. However, we should not neglect in that natural law, because it was the basis of the indictments at Nuremberg after the war, which would not have been pursued on any basis of positive law because there was no basis to claim that those appalling crimes had been infractions of any positive law that existed at the relevant time and place. Therefore, we are in a very difficult area here.

As I said, the committee decided that the Vienna convention is the appropriate basis for looking at the international legal aspects of this matter. I agree with that. The committee report quotes the relevant article of the convention—Article 70:

“Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention:


(a) Releases the parties from any obligation further to perform the treaty;


(b) Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination”.


The important phrase here is:

“Unless the treaty otherwise provides”.


This is where I part company, I am afraid, with the committee, because it argues—as did the noble Baroness a moment ago—that because of Article 50 of the Treaty on European Union, which does indeed deal with the issue of member states leaving, under the Vienna convention paragraph (a) should apply, not paragraph (b):

“Releases the parties from any obligation further to perform the treaty”,


should apply, rather than,

“Does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination”.


I do not need to quote Article 50: we all know it practically by heart after the events of the last few weeks. However, it is clear to me, on my reading of the treaty, that Article 50 provides no guidance at all on whether or not outstanding obligations and liabilities should be dealt with in any kind of agreement. It provides no rules whatever—there may be substantive rules—for the withdrawal of a member. All it deals with is the timing. It says that the negotiation must take place within two years. Still less does the article provide an actual formula for calculating and distributing assets and liabilities or anything of that kind. Therefore, given that Article 50 in my view does not provide any substantive guidance on this matter at all, it seems to me, contrary to the committee’s conclusion, that paragraph (b) and not paragraph (a) applies here. Therefore, it is necessary for us to behave in what we imagine would be a common-sense way anyway once one leaves any kind of venture—namely, that obligations, liabilities and assets on both sides are looked at, evaluated and distributed on a fair basis, which, presumably, means on the basis of the proportionate contribution beforehand of resources to the organisation. That could easily be worked out.

I am afraid that I disagree also with another aspect of the committee’s report. Paragraph 133 states:

“The jurisdiction of the CJEU over the UK would also come to an end when the EU Treaties ceased to have effect. Outstanding payments could not, therefore, be enforced against the UK in the CJEU”.


There seems to be confusion here. It is quite obvious that it is correct that once we have left the Union, the CJEU no longer has any jurisdiction over us, and the CJEU can say nothing about any subsequent arguments we might have with other former fellow members of the EU. But until the day we leave, clearly the CJEU has such jurisdiction. I have never heard of a court anywhere in the world which, once it had accepted jurisdiction over a case because the acts and the decisions involved were taken at a time when the individuals concerned were under its jurisdiction, subsequently allowed one of those parties to the case retrospectively to remove themselves from its jurisdiction by simply subsequently leaving the organisation. It seems to me that the CJEU, once it has accepted jurisdiction for determining the liabilities attaching to us or any other member state up till the time of our departure, would continue to be able to declare that judgment. Only liabilities accumulated after our departure could not be subject to the jurisdiction of the CJEU, but no one is suggesting that we could accumulate any liabilities after our departure, so that question does not really arise.

The final confusion—or at least the point on which, frankly, I disagree with the committee—relates to the whole issue of enforcement. The committee says at paragraph 136 that,

“international law is slow to litigate and hard to enforce”.

I do not know what it means by “hard to enforce”. As I have already argued, it seems to me that international law is impossible to enforce—that is one of the salient points about international law. Somebody might say, “Well, you can enforce it through a Chapter 7 resolution of the Security Council”, but, apart from the difficulty of getting that, you obviously cannot use that mechanism against a permanent member state with a veto or a group of countries of which one is a permanent member state. Therefore, that does not really arise. Perhaps if the noble Lord, Lord Howard, were in his place, he would suggest that you could always enforce it by sending a gunboat to Brussels or something of that sort.

However, in all seriousness, international law cannot be enforced. I do not know whether the committee accepts that, perhaps taking the positivist view that that means there is no such thing as international law. I do not think so, because the whole argument in the report is based on the assumption that there is such a thing as international law. Whatever the committee might feel about that, I hope that the other explanation does not apply and that what it has in mind—I do not think it does—is that we could always say, “All right, we’ve lost the case, but come and get us. You’ll never get a penny out of us and we won’t acknowledge the judgment of the court”. I agree very much with the noble Baroness: it would be horrific if this country took that line, and I am sure that we would not. Therefore, I am very confused about what the committee means by saying that it is hard to enforce, and about the relevance of that comment in this case.

I very much agree with the committee’s pragmatic recommendation—if not its legal analysis—that we as a country should not say that we owe absolutely nothing as a result of our membership of the European Union. That would be completely non-credible. We are clearly liable for that portion of the Union’s liabilities accumulated with our taking part, by consent, in the relevant judgments until the day we leave. We are also, certainly morally, obliged in relation to the costs that will be incurred purely and solely because of our unilateral decision to leave—such as the need to pay redundancy payments to British subjects employed by the Union’s institutions.

However, whatever happens, we certainly should not do what has been suggested in certain quarters, although very much not by the noble Baroness today, which is simply to walk away from our obligations. I thought that one of her analogies was particularly poignant when she talked about walking away from the table. We can all imagine someone going out to dinner with a group of friends—perhaps 27 friends in this case—then getting up from the table and leaving without paying the bill. No honourable person would like to think of himself or herself behaving in that fashion, and I do not think that anyone in this country would like to think that we would do so. I am very glad that there is unanimity in this Chamber—certainly based on the speeches I have heard so far—that that should not be the way forward.

--- Later in debate ---

[Lord Butler of Brockwell]

I accept that but the point is, as the noble Lord has said, that the budgets for the periods after we leave have not yet been set so we are not committed to them. The annual budget for 2019 and 2020 has not been set, so I regard any claim on the UK in respect of those years as weak. As paragraph 46 of the report points out, this view seems to be shared by the German Finance Minister, Wolfgang Schäuble, who has said that it will be necessary to negotiate a new MFF on the assumption that the UK contribution ceases in 2019—when we depart from the EU. Continuation of the UK’s payment under a multilateral financial framework that continues after we have left is not in fairness a strong claim on the UK.

The second element of a possible EU claim is the commitments made in budgets to which the UK has been a party, which will remain to be paid after March 2019—the so-called reste à liquider, or remainder to be liquidated. Like others, I regard this claim as stronger. There is probably no legal obligation to make these payments after the UK has left the EU, but it may be argued that there is a moral obligation since the commitments were entered upon and budgeted for while the UK was a member.

The EU estimate of the commitments that will be outstanding at the end of 2020 is £254 billion. We do not have an estimate for the outstanding commitments at the end of March 2019, but since commitments contracted for but not paid tend to diminish as the MFF wears on, the figure at the end of March 2019 for outstanding commitments may be higher. However, as has been pointed out, some of these may never materialise. Moreover, some commitments are to the UK itself. These should be netted off, after which the UK share of commitments to other partners is unlikely to amount to more than £10 billion. If the UK were to agree to meet these it would be sensible to do so not in a lump sum but over the next few years as the commitments materialise.

It is right to add that the respected Brussels think tank the Bruegel Institute produces a much larger figure for commitment outstanding, including a large element under the heading, “significant legal commitments”. These are commitments pledged in legal terms but not yet budgeted for. Since they are expected to be budgeted only over a long period, they are not included in the EU’s balance sheet nor in the reste à liquider. In this case it seems difficult to argue that the UK has any liability for these unbudgeted items after leaving the EU.

Thirdly, there is the possibility of a claim based on pension liabilities for past or present employees of the EU or its institutions. Here I agree with the noble Lord, Lord Thomas of Gresford, that this is a weak basis for a claim. UK nationals constitute some 4% of EU staff at present and have never been more than 8%. The Commission currently estimates its actuarial liability for future pensions at €63.8 billion. However, pensions are paid out of each year’s budget. Employees make a one-third contribution to them. Like the noble Lord’s, my view is that, on leaving the EU, the UK has no greater liability to contribute to the annual pension bill that someone leaving a club would have to contribute to the pensions of past and present employees. The nationality of these employees is immaterial. Even if the UK were to make an exit contribution based on the proportion of UK nationals employed, and if the EU’s calculation of a total actuarial ability of €63.8 billion is right—the Bruegel Institute puts it much lower than that—it would not amount to more than a handful of billion euros.

[Lord Davies of Stamford]

Does the noble Lord agree that there are two quite separate issues here? One is potential liability for pensions to be paid—there, I rather agree with the noble Lord’s assessment. The second issue, which is quite specific to this instance of a country leaving the European Union, is the effect on British national employees of the European institutions, who will lose their jobs because it is a condition of their employment that they are a citizen of an EU member state. They will cease to be on the day on which we leave the European Union. They will therefore be fired and have to be given redundancy payments. Do we not have the moral responsibility of making sure that those payments are made? We cannot expect our partners to pay those sums of money, and we certainly cannot expect those employees who are fired for no better reason than their nationality not to receive proper compensation.

[Lord Butler of Brockwell]

With respect, I do not take that view. These are employees of the EU and its institutions. If they are fired for whatever reason, their redundancy payment and severance terms will be determined by their contract and negotiation with the EU and the EU institutions. That does not seem to me a matter for which the UK has a liability.

I again agree with the noble Lord, Lord Thomas, about the other side of the balance sheet—namely, the EU’s assets. I shall not discuss those in any detail, because I doubt whether the EU would agree to distribution of these to a country departing from the EU any more than it would require a contribution as an entry fee from a country acceding. One exception to that is the UK’s stake in the European Investment Bank which, if it has to be surrendered, could be worth anything from €3.5 billion to €10 billion to the UK.

Unless there are other elements of a claim for an exit payment which neither the EU Committee nor others have thought of, it seems clear to me that any reasonable claim that can be made will not amount to anything like the €60 billion figure attributed to M. Barnier and his team. It follows that, leaving aside the legal aspects, UK negotiators do not have a great deal to fear from a negotiation on this subject. In a reasonable world, it should be possible to make sufficient progress to open the way to negotiations on a future trade relationship.

There is one final piece of advice that I would give—again, this point was made by the noble Lord, Lord Thomas. By all means, let us seek to reach agreement on the principles of an exit payment and a future financial relationship, but it would be unwise to agree the details, the actual figure, until the principles of a trade relationship are also agreed. This is an area where, whatever the sequence of the negotiations, nothing should be agreed until everything is agreed.