Global menu

Our global pages

Close

Germany: New legislation imposes duties of care with respect to global supply chains (Supply Chain Due Diligence Act)

  • Germany

    11-06-2021

     

    On 11 June 2021, German Parliament passed a law which will, from 1 January 2023 onwards, impose duties of care with respect to the global supply chains of many companies incorporated or active in Germany. The Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz) addresses human rights and environmental risks and has been adopted after intense discussions, in particular around potential civil liability of affected companies. Below, we summarise the most important points that affected companies will have to prepare for.

    Objective: responsibility for compliance with human rights and environmental standards along supply chains

    The Supply Chain Due Diligence Act (“SCDDA”) intends to foster compliance with internationally acknowledged human rights and environmental standards along supply chains. Therefore, affected companies are obliged to adhere, in their supply chains, to the duties of care laid down in the SCDDA in an appropriate manner with the aim to prevent or reduce human rights and environment related risks or to stop any infringements of human rights or environment related duties.

    Affected companies: incorporation or activity and minimum number of employees in Germany

    The duties of care of the SCDDA apply to companies incorporated or active and with a minimum number of employees in Germany.

    Incorporation or activity and at least 3,000 employees in Germany

    The Act addresses any companies, irrespective of their legal form, which have

    (i)            their head office (Hauptverwaltung oder Hauptniederlassung) or seat (Verwaltungssitz oder satzungsmäßigen Sitz) in Germany, and

    (ii)           as a rule at least 3,000 employees in Germany (including any staff members posted to foreign countries, as well as temporary staff engaged for more than six months, and, with respect to parent companies, those of any subsidiaries).

    In addition to this approach, which was already contained in the original draft law, the scope of application includes any companies having a subsidiary (Zweigniederlassung) with at least 3,000 employees in Germany. This extension has been agreed within the government coalition following criticism from stakeholders that the draft act would not sufficiently address activities of companies incorporated in other countries and hence result in a competitive disadvantage for German corporates.

    Decrease of minimum number of employees to 1,000 from 2024 onwards

    Whilst the new duties of care will at first, from 1 January 2023 onwards, apply if relevant companies have, as a rule, at least 3,000, this threshold will be decreased to 1,000 on 1 January 2024 so that a much greater number of companies will have to comply with the SCDDA. Like in other contexts, the term “as a rule” requires a retrospective as well as forward-looking assessment to determine whether the 3,000/1,000 employees’ criterion is fulfilled.

    Corporates will have to carefully assess if, and from when, the duties of the SCDDA will apply to their different entities incorporated or active in Germany.

    Scope of protection: human rights and environment related duties

    The SCDDA refers to a total of 14 international human rights and environmental conventions. The human rights conventions are also referred to in the United Nations Guiding Principles on Business and Human Rights of 2011, the OECD Guidelines for multinational companies, as well as in the Taxonomy Regulation (EU) 2020/852. The legislator considers the Conventions as an exhaustive catalogue which sets the framework for the protected legal positions and duties of care under the SCDDA.

    Aim to prevent risks and infringements

    The SCDDA addresses both risks to, and infringements, of human rights related duties:

    • Human rights and environment related risks are defined as any condition in which, due to actual circumstances, there is a sufficient probability of an imminent violation of one of the human rights and environment related duties defined in the SCDDA.
    • Infringements of human rights and environment related duties are any contraventions to the prohibitions defined in the SCDDA.

    Exhaustive definition of human rights and environment related duties

    Based on these international conventions, the SCDDA defines exhaustive lists of 12 human rights related duties and eight environment related duties. A company is in breach of its human rights related duties if it violates any of the following prohibitions:

    1. Prohibition of the employment of children under, in principle, 15 years of age
    2. Prohibition of the worst forms of child labour for children under 18 years of age as defined in the ILO Worst Forms of Child Labour Convention, 1999 (No. 182)
    3. Prohibition of the employment of persons in forced labour
    4. Prohibition of all forms of slavery, slavery-like practices, servitude or other forms of exercise of domination or oppression in the environment of the workplace
    5. Prohibition of disregarding the occupational health and safety obligations applicable under the applicable national law if this gives rise to the risk of accidents at work or work-related health hazards
    6. Prohibition of disregard for freedom of association of employees
    7. Prohibition of unequal treatment in employment
    8. Prohibition of the withholding of a reasonable wage
    9. Prohibition of causing harmful soil contamination, water pollution, air pollution, harmful noise emissions or excessive water consumption
    10. Prohibition of unlawful eviction and deprivation of land, forests and waters in the acquisition, development or other use thereof, the use of which secures the livelihood a person
    11. Prohibition of the hiring or use of private or public security personnel for the protection of the company's project if, due to lack of instruction or control on the part of the company (i) the prohibition of torture and cruel, inhuman or degrading treatment is violated, (ii) life or limb is violated or (iii) freedom of association is violated
    12. Prohibition of any act or omission in breach of duty going beyond numbers 1 through 11 above which is directly capable of impairing in a particularly serious manner a protected legal position resulting from any of the eleven human rights conventions referred to in the act and the unlawfulness of which is obvious based on a reasonable assessment of all the relevant circumstances.

    The environment related duties consist of the following prohibitions:

    1. Prohibition of the manufacture of mercury-added products as specified in the Minamata Convention of 10 October 2013 on Mercury
    2. Prohibition of the use of mercury and mercury compounds in manufacturing processes after the exit date defined for the respective products and processes in the Minamata Convention
    3. Prohibition of the treatment of mercury waste in contravention of the relevant provision of the Minamata Convention
    4. Prohibition of the production and use of chemicals pursuant to the Stockholm Convention of 23 May 2001 on Persistent Organic Pollutants (POPs)
    5. Prohibition of non-environmentally sound handling, collection, storage and disposal of hazardous waste according to the domestic regulations applicable on the basis of the Stockholm Convention
    6. Prohibition of exports of hazardous waste as specified in the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal of 22 March 1989 and Regulation (EC) No. 1013/2006 on shipments of waste as further specified in the Supply Chain Due Diligence Act
    7. Prohibition of the export of hazardous wastes from countries listed in Annex VII of the Basel Convention (members of OECD, EC, Liechtenstein) to any other country not included in that annex
    8. Prohibition of the import of hazardous and other hazardous wastes from a non-contracting party of the Basel Convention.

    Due diligence: appropriate consideration of human rights and environment related duties of care

    To prevent or reduce human rights and environment related risks or to stop any infringements of human rights or environment related duties, affected companies are obliged to consider the human rights and environment related duties of care determined in the SCDDA in an appropriate manner.

    Set of duties of care

    The duties of care defined in the SCDDA comprise the following:

    • Risk management system: affected companies must implement a risk management system in all relevant business operations to achieve compliance with their duties of care under the SCDDA. Relevant measures must be adequate and efficient to allow identification and minimisation of risks as well as prevention, termination and mitigation of infringements, in each case if the respective company has caused or contributed to the risks or infringements.
    • Determination of internal responsibility: affected companies must determine a person responsible for monitoring the risk management, e.g. through nomination of human rights compliance officer.
    • Regular risk analysis: as part of the risk management, affected companies must carry out an annual and, if appropriate (e.g. due to new products, projects or areas of business) an ad hoc risk analysis to determine any human rights and environment related risks in the company’s own area of business inside and outside of Germany, (and, for controlling companies, of controlled affiliates) as well as at their direct suppliers. Any identified risk must be appropriately weighted and prioritized, and communicated to the relevant decision makers, e.g. the board of directors or the purchasing department.
    • Issuance of a fundamental statement: if risks are identified, the management of affected companies must issue a fundamental statement on its human rights strategy which must include at least the following elements of the company’s human rights strategy: description of the process to comply with certain duties of care under the SCDDA, the high priority human rights and environment related risks determined for the respective country on the basis of the risk analysis, the human rights and environment related expectations of the company towards its suppliers.
    • Implementation of prevention measures: affected companies must implement appropriate prevention measures in their own business area (including the implementation of the strategy from the fundamental statement in the relevant business operations, the development and implementation of suitable procurement strategies, the provision of training in the relevant business areas, monitoring of compliance with the human rights strategy through risk based control measures) as well as towards direct suppliers (including consideration of human rights and environment related expectations in the selection of direct suppliers, contractual covenants from direct suppliers that they will comply with the human rights and environment related expectations and will appropriately address them along the supply chain, agreement of appropriate contractual control mechanisms to monitor compliance with the company’s human rights strategy at the direct supplier).
    • Remediation measures: after identification of an actual or imminent infringement of human rights or environment related duties, companies must, without undue delay, take appropriate remediation measures to prevent, stop or minimize the extent of the infringement. Such measures must result in ending the infringement if it occurs in the company’s own area of business in Germany. Other than foreseen in the initial draft law, the remediation measures must only “as a rule” result in ending the infringement if it occurs outside Germany or in the area of business of a controlled affiliated company. If it is impossible to end an infringement on short notice, relevant companies must set up a framework with a concrete timetable considering, in particular, the following measures: (i) elaboration of a mitigation plan with the company causing the infringement, (ii) cooperation with other companies in the context of industry initiatives and standards, and (iii), as an ultima ration, temporary suspension of the business relationship with the relevant company.
    • Complaint procedure: affected companies must procure the implementation of an appropriate internal, or the participation in an external, complaint procedure. The complaint procedure shall allow individuals to flag human rights and environment related risks and infringements of human rights and environment related duties stemming from the company’s own area of business or its direct suppliers.
    • Documentation and reporting: the SCDDA provides for internal and external (i.e. to be published) documentation requirements. Hence, affected companies must continuously document and report annually on the compliance with the above-mentioned duties of care. Records must be kept, and the relevant report be made publicly available for at least seven years on the company’s webpage.

    Inclusion of indirect suppliers

    If a company has indications that a violation of a human rights related or an environment related obligation, with an indirect supplier may be occurring, it must also take appropriate action on an ad hoc basis. In detail, the company has to carry out a risk analysis as described above and also establish appropriate prevention measures (e.g., implementing control measures, assisting in the prevention and avoidance of a risk, or assisting in implementing industry-specific or cross-industry initiatives to which the company is a party). Indirect suppliers have however been carved out from the scope of the complaint procedure since the initial draft law.

    Required due diligence: appropriate consideration

    The required due diligence under the SCDDA gives room for interpretation. The Act provides that affected companies must consider the human rights and environment related duties in an appropriate manner. Whether a company’s action is appropriate depends on (i) the type and size of its business, (ii) the potential influence on the person directly causing the human rights or environment related risk or infringement, (iii) the severity of injuries that can be typically expected and (iv) the nature of the causal contribution by the affected company to the risk or infringement. Certain guidance can be expected from the information, guidelines and recommendations on compliance with the SCDDA which will be published by the competent authority under the Act. Nevertheless, the required due diligence of appropriate consideration results in flexibility and legal uncertainty at the same time. Therefore, stakeholders have criticized it and requested safe harbour provisions instead.

    Control and sanctions

    The SCDDA provides for a number of control and sanction mechanisms to enforce compliance with the duties of care.

    Administrative review and enforcement

    The Federal Office for Economic Affairs and Export Control will, as the competent authority under the Act, review the annual reports submitted by the affected companies. As the case may be, the authority will request rectifications of reports. It may also take further action to verify and enforce compliance with the duties under the Act. This includes the right to summon persons, the right of access to the premises of affected companies as well as the right to request information and submission of evidence. Cooperation of affected companies may be enforced via coercion moneys of up to EUR 50,000.

    Fines and exclusion from public procurement processes

    Non-compliance with most of the duties of care under the SCDDA is sanctioned by fines, which may amount to up to EUR 800,000 for natural persons and EUR 8,000,000 for legal persons, i.e. the affected companies. If the affected company has an average annual turnover of more than EUR 400,000,000, the fine may amount to up to 2% of the average annual turnover. In addition to the risk to be fined, non-compliant companies may be excluded from public procurement processes for periods of up to three years.

    Civil liability

    The most controversial point in the legislative process was the question of the extent to which the Act can also give rise to civil liability claims by plaintiffs against companies. The explanatory memorandum to the SCDDA sets out that the law is supposed to establish a mere duty of effort, but not a duty to succeed or a guarantee liability. In addition, the SCDDA provides that a breach of the obligations under the Act shall not give rise to civil liability. In this respect, it deviates from the approach of the French supply chain act (loi de vigilance) of 2017. However, the German Act clarifies that any civil liability established independently of the Act shall remain unaffected. For example, claims for damages under the laws of Germany or other countries based on infringements of protective provisions overlapping with the human rights related environment related duties of the SCDDA would obviously not be restricted through the new legislation.

    Representative action by NGOs

    In this vein, individuals who invoke infringements of paramount legal positions protected through the Act may authorise German labour unions and NGOs to file claims on their behalf.

    Outlook

    The Supply Chain Due Diligence Act requires many companies incorporated or at least active in Germany to start implementing the new duties of care in their internal processes and, as the case may be, in agreements with third parties along their global supply chains to ensure compliance with new the legislation from 2023, or 2024 (depending on size). In this context, it can be expected that the guidelines and recommendations to be published by the competent authority will provide appropriate guidance and increase legal certainty for the affected companies. Irrespective, we recommend that affected companies take relevant steps early on.

    It remains to be seen whether the statement from a member of the government coalition that Germany will have the strongest supply chain act in Europe will turn out to be true. Irrespective, the explanatory memorandum of the Supply Chain Due Diligence Act already envisages a potential adaption to a future European regulation.