Clifford Chance

Targeted at enterprises registered in Germany, the Supply Chain Act establishes a comprehensive framework of due diligence and reporting obligations relating to human rights and environmental issues in global supply chains.

On 11 June 2021, the German parliament passed the Act on Due Diligence Obligations in Supply Chains (Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten – Supply Chain Act) after months of intense political debate (the relevant material is available in German here).

Main Features of the Supply Chain Act

The Supply Chain Act establishes multiple requirements to protect human rights and address environmental issues in the company itself as well as in its supply chains. As of 1 January 2023, it will apply to all companies, irrespective of their legal form, that are registered in Germany and employ at least 3,000 employees in Germany (from 2024: 1,000). The Act will not only apply to companies with their headquarters registered in Germany but also to subsidiaries of companies from other countries if the subsidiary is registered in Germany and employs at least 3,000 people (from 2024: 1,000) in Germany. The legislative materials suggest that the scope of application shall be evaluated and possibly expanded after 2024.

Protected legal positions: The Supply Chain Act primarily aims at preventing violations of human rights, such as child labour, forced and slave labour. The Act stipulates due diligence obligations for enterprises in respect of employees' rights, including occupational health and safety standards. Furthermore, it includes companies' obligations in respect of organizational and trade union rights, as well as in respect of discrimination and unequal treatment and regarding compliance with environmental standards and other environmental rights. The respective protected rights are further specified by means of a reference to an extensive catalogue of public international law treaties. As a result, private law enterprises are now effectively obliged to take steps (e.g. implementing risk assessment and management as well as reporting mechanisms) to ensure that the human and environmental rights within the scope of the referenced public international law treaties are protected. This in an important development because private enterprises must now comply with a public international law framework that is addressed only at states or international institutions and did not previously create direct rights and obligations for private entities under German law. The resulting vagueness of specific obligations has been subject to pronounced criticism in the course of the legislative process and poses a challenge for enterprises to implement a respective compliance and governance framework.

Due diligence obligations: Companies are required to effectively implement adequate risk management measures including an obligation to regularly analyze the potential risk of a violation of human rights or environmental obligations within their supply chains and implement a commensurate risk management system. Based on this risk analysis, companies must implement measures to prevent, minimize and remedy identified risks. Further obligations include the adoption of a policy statement on the human rights strategy and the implementation of preventive measures in each company's own business units as well as towards suppliers within its field of influence. These substantive obligations are supported by an obligation to transparently document and report on an annual basis on the actual and potential negative impacts of the respective business activities on human and environmental rights. The act also provides for the implementation of an adequate complaint system by a company which allows for the reporting on non-compliance incidents by injured third parties. Finally, German workers councils were granted far-reaching informational rights under the Act.

Supply chain: A company's due diligence obligations apply not only to the company itself but also to its suppliers. Obligations generally extend throughout the entire supply chain encompassing all products and services purchased and all steps necessary for the manufacturing of any products or the provision of its relevant services. The extent of obligations depends on the degree of knowledge of relevant risks as well as the influence the company has over the respective supplier. Hence, the due diligence obligations in respect of a direct supplier are generally stricter than in respect of indirect suppliers since the company usually has more insights in relation to direct suppliers. With regard to indirect suppliers, companies are only required to investigate potential violations by such a supplier if they have a substantiated knowledge of potential violations. Such knowledge is presumed if the sector and/or region in which the supplier operates is risk-prone to violations of human, environmental or workers' rights.

Civil liability: The issue whether the Act should provide for civil liability was controversial during the legislative process. The Act now does not include any specific provisions on a civil law liability. However, a company could still incur civil law liability under the general rules of the German Civil Code.

Control and enforcement: The Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle) has been tasked to enforce the Act. It is responsible for reviewing company reports and investigating complaints. Violations and/or non-compliance may result in fines of up to 2 % of the annual group turnover. In addition, companies may be excluded from public contracts for a certain period of time in the case of serious infringements.

European Initiatives

The establishment of a legislative regulation to introduce mandatory due diligence requirements for businesses to respect human rights and prevent environmental harm across their global supply chains is also being considered by the EU. Whether the scope and extent of EU legislation will create similar – or even more far reaching – obligations remains to be seen. However, the (legally non-binding) proposed draft of an EU Supply Chain Act submitted by the European Parliament earlier this year aims at establishing even stricter rules than the German Act, in particular because the EU Parliament's Draft does not differentiate between direct and indirect suppliers (on this proposal see our blog post here).

Conclusion

The Supply Chain Act is a first legislative step towards obliging German companies to monitor and address human and workers' rights as well as environmental concerns in their respective supply chains. The Act thus poses major challenges for the companies falling within its scope. Existing compliance and governance systems will need to be carefully examined and amended to implement the due diligence and reporting obligations and assure compliance with the new legislation.