More responsibility for companies and more liability risks for them and their managers!
As of 11 June 2021, the Corporate Due Diligence for Supply Chains Act (Supply Chain Act), as amended by the Committee on Labour and Social Affairs, was passed by 412 votes in the Bundestag.
The Supply Chain Act now imposes more due diligence obligations on companies, forcing them to take more responsibility for issues such as environmental protection and human rights worldwide:
For example, the violations covered by the new law and now to be prevented by the company include forced labour, child labour, discrimination, violations of association labour and occupational health and safety, as well as soil and air pollution. The obligation to monitor arising from the law applies to the entire supply chain, without any gradation depending on the influence of the “German” company.
The basis for the proposed law was above all the United Nations Guiding Principles on Business and Human Rights.
When the law was passed by the German Bundestag, it was once again made clear that companies would not be exposed to any civil lawsuits for human rights violations in this context, but this does not, of course, exclude the liability of companies under the law on fines or the internal liability of management towards the company (e.g. § 43 GmbHG) in the event of a violation of the Supply Chain Act. Quite the contrary!
Companies concerned
First of all, partnerships and corporations under German or foreign law that have their main administrative or statutory seat or a main branch office in Germany are directly affected by the Supply Chain Act. Accordingly, foreign companies with branches in Germany or German subsidiaries can in principle also fall within the scope of the Supply Chain Act.
However, the law first only takes companies with more than 3,000 employees (from 1 January 2023) and then from January 2024 also companies with more than 1,000 employees.
Whether companies with fewer than 1,000 employees will also be subject to the catalogue of obligations of the Supply Chain Act in the future, however, is to be decided by summer 2024 at the latest.
New catalogue of obligations for companies
In connection with the introduction of human rights and environmental due diligence, the companies concerned are now obliged to set up a risk management system to monitor their supply chains, or to determine who is responsible for this risk management in or on behalf of the company. Furthermore, the companies must inspect their direct suppliers at least once a year and in the case of information that indicates a violation of human rights and environmental violations – with regard to the aforementioned violations. In the case of only indirect suppliers, the above obligation exists only in the event that the company has substantiated knowledge of possible breaches of duty by the indirect supplier.
If human rights violations are suspected, preventive measures must first be taken. If breaches of duty are then identified, remedial measures must be taken. As a last resort, it may even be necessary to break off the business relationship with the supplier.
It should be noted, however, that the decisions of the companies are fundamentally subject to a reservation of reasonableness and that they and their management benefit from discretionary powers and room for manoeuvre.
Furthermore, compliance with due diligence obligations must be documented and properly stored for 7 years.
In order to publicise the impact of the Supply Chain Act, companies will still be required to submit a publicly available report on the actual and potential adverse impacts of their operations. Management levels are also required to adopt and publicly communicate a policy statement for their corporate human rights strategy.
In addition, the concrete protection of data subjects is to be effectively achieved by requiring companies to set up a complaints procedure for persons who are either directly affected by individual measures that violate human rights or who have become aware of such violations.
Sanctions and liabilities
If violations of the obligations specified in the Supply Chain Act are found, the competent supervisory authority (Federal Office of Economics and Export Control) can issue fines of up to EUR 800,000. Furthermore, companies with a turnover of more than EUR 400 million could face a fine of up to 2% of their global turnover.
If a company is fined at least EUR 175,000, it can also be excluded from public procurement for up to 3 years.
Conclusion
The programme of obligations for German companies and their managers was already a broad field that entailed considerable liability risks. The Supply Chain Act adds a further bundle of behavioural and control obligations that can entail manifold precautionary obligations, legal and economic consequences as well as reputational damage for companies directly and for their management at least indirectly.
As a result, it only remains for the managers of the companies concerned to decisively examine the obligations prescribed by the law, to comply with them immediately and in due time, and then to document everything sufficiently. It is not uncommon for managers to have to resort to legal advice, especially when dealing with a law as recent as the Supply Chain Act.
