New Challenge Due to the Planned Supply Chain Law

New Challenge Due to the Planned Supply Chain Law
May 1, 2021
Insights overview

On February 12, 2021, the Federal Ministries for Economic Affairs, Labor, and Development presented the draft bill for a German 'Supply Chain Due Diligence Act,' which was approved by the Federal Cabinet on March 3, 2021. The introduction of the Supply Chain Due Diligence Act is considered a done deal and was scheduled for final discussion in the Bundestag on Thursday, May 20, 2021. However, the law was taken off the agenda in the Bundesrat at short notice, as the issue of civil liability had not been resolved.

The aim of the law

is to hold companies accountable for human rights violations within their supply chains. The UN Guiding Principles on Business and Human Rights (UNGPs) envisage the implementation of human rights protection through National Action Plans (NAPs). Since the attempt at voluntary self-regulation by the business sector is considered a failure, the NAP is to be enforced in the form of a law. Companies with more than 3,000 employees are expected to be covered by the law from 2023; from 2024, all companies with more than 1,000 employees will be affected.

The affected companies are expected to conduct a risk analysis in the future, identifying and assessing the risks in their supply chains. Risks to be examined in the companies' own operations and their immediate suppliers include:

  • Forced labor,
  • Child labor,
  • Discrimination,
  • Violation of freedom of association,
  • Problematic employment and working conditions,
  • Environmental damage

For indirect suppliers, i.e., sub-suppliers throughout the entire chain up to raw material suppliers, there are only graduated auditing obligations, meaning companies only need to take action based on complaints from employees of their indirect suppliers.

Building on a risk analysis, companies are required to implement measures for preventing, minimizing, and addressing negative impacts. Following the principle of 'Enablement before withdrawal,' companies are supposed to seek solutions in cooperation with their suppliers or within the industry. Terminating the business relationship should only be the last resort to avoid human rights violations in the supply chain.

What's new is that risk analysis and follow-up measures are not interpreted as obligations of success, but as obligations of effort. This means that the new obligations do not require the elimination of human rights violations in the company itself and its immediate suppliers, but rather the premise that companies make reasonable efforts to address the grievances. The corresponding risk management should be proportionate.

The affected companies, however, must disclose annual reports on the actual and potential adverse impacts of their business activities on human rights.

A liability for damages of German companies for foreign damage cases of other companies in the global supply chain is not provided for in the draft law. However, under current law, it is possible for third parties to claim damages abroad before German courts. In this case, German courts must apply foreign law and consider local circumstances. The chances of success have been relatively low so far. According to the current government draft, trade unions and non-governmental organizations should be allowed to represent individuals affected by supply chains from both Germany and abroad in German courts, which is likely to increase the likelihood of lawsuits and convictions

Criminal consequences for German companies due to damages caused by suppliers or subsidiaries are not foreseen. Criminal liability is only attributed to the perpetrators themselves. It would be different if agents caused the damage, which could trigger tortious liability. However, suppliers or subsidiaries usually do not fall under the definition of agents.

The responsibility for compliance with the provisions of the Supply Chain Act and corresponding controls will lie with the Federal Office for Economic Affairs and Export Control, which will receive complaints from affected parties.

In the event of violations of the Supply Chain Act, fines and penalties of up to 10% of the company's annual turnover, as well as bans on public procurement for up to three years, are envisaged.