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The new German Supply Chain Act - consequences for businesses

After lengthy discussions, the government draft for a law on corporate duties of care in supply chains - commonly known as the "Supply Chain Act" - was passed by the federal cabinet on 3 March.

The law is to be passed before the end of this legislative period and is to come into force on 1 January 2023. The government draft falls significantly short of the original ideas of the "Supply Chain Act Initiative", which in particular still envisaged civil liability for breaches of duties of care and aimed at covering environmental protection to a much greater extent. It already provides an opportunity for companies to review their compliance with human rights duties of care within their supply chains and, if necessary, to take new compliance measures.

What is the purpose of the Supply Chain Act?

On the basis of the Supply Chain Act, companies shall in future bear responsibility for human rights violations in the supply chain. Environmental duties of care are covered insofar as environmental risks can lead to human rights violations - especially through health hazards. The starting point was the United Nations Guiding Principles on Business and Human Rights. After the voluntary implementation of these Guiding Principles within the framework of the federal government's "National Action Plan" is considered to have failed, a legally binding Supply Act law is now to be introduced.

Which companies are affected by the planned supply chain law?

The Supply Chain Act is to apply to companies, irrespective of their legal form, which have their head office, principal place of business, administrative headquarters or registered office in Germany and which generally employ at least 3,000 workers. This threshold is to be reduced to 1,000 employees as of 1 January 2024.

What new duties of care result from the Supply Chain Act?

Affected companies are to be obliged to observe the legally defined human rights and duties of care in their supply chains in an appropriate manner. The protected legal positions include, for example, protection against forced labour, child labour or discrimination, compliance with labour protection regulations, freedom of association as well as protection against problematic employment and working conditions with regard to the payment of an adequate wage and compliance with certain human rights-related environmental standards.

However, companies shall only have to bear direct responsibility for the observance of human rights in their own business sector and with their direct suppliers. The government draft for the Supply Chain Act does not provide for the companies concerned to be responsible for their entire supply chain. With regard to the actions of indirect suppliers, companies should only be subject to specific obligations if there are indications of violations (e.g. because corresponding complaints have been received).

In particular, companies should prepare for the following requirements:

  • Risk management and analysis: The establishment of adequate and effective risk management requires, among other things, the definition of responsibility for monitoring risk management. According to the government draft, this can be done by appointing a human rights officer. The company's management has to inform itself regularly, at least once a year, about the work of the human rights officer(s). If, in the course of conducting risk analyses, human rights risks are identified in the company's business area or at its direct suppliers, appropriate measures must be taken without delay.
  • Reporting and documentation: Affected companies shall provide annual public reports on the actual or potential adverse human rights impacts of their operations. These reporting obligations are also accompanied by documentation and publication obligations.  
  • Prevention: Companies shall be required to adopt a policy statement on their human rights strategy and to embed appropriate preventive measures in their own business operations and vis-à-vis their direct suppliers. In their own business operations, these shall include in particular the implementation of the defined human rights strategy, the development and implementation of appropriate procurement strategies and purchasing practices, the implementation of training and risk-based monitoring measures. With regard to direct suppliers, human rights and related environmental expectations shall be taken into account in the selection process. In addition to the implementation of contractual control mechanisms, contractual assurances shall be obtained in particular that direct suppliers comply with the required specifications and address them appropriately along the supply chain.
  • Complaints mechanisms: In order to identify human rights violations as early as possible, internal complaints procedures must be introduced or participation in external complaints mechanisms must be provided for.
  • Remedial action: If the company determines that a violation of a protected legal position or an environmental obligation has already occurred or is imminent in its own business area or at a direct supplier, it must immediately take appropriate remedial action. However, a termination of the business relationship with the direct supplier is only required in exceptional cases if serious violations of human rights or environmental obligations are involved, the implementation of the measures developed does not bring about a remedy, no other milder means are available to the company and the increase of its ability to exert influence does not appear promising.

The due diligence obligations provided for must be implemented by the companies concerned in an appropriate manner. In this respect, there is no obligation to succeed, but only an obligation to make an effort. This means that companies are not obliged to prevent all human rights violations under all circumstances. Rather, it is determined on a case-by-case basis which measures are appropriate and reasonable for the respective company. The type and scope of the company's business activities, its ability to influence the direct perpetrator, the typically expected severity of the violation, the reversibility of the violation, the likelihood of a repetition and the nature of the amount of the violation must be taken into account.

What are the consequences of the Supply Chain Act for the affected companies?

Wilful or negligent violations of the Supply Chain Act may result in a maximum fine liability of EUR 8 million or 2% of the average annual turnover, whereby the worldwide annual turnover of companies or associations of companies is used for the assessment. Furthermore, infringements can also result in exclusion from public tenders. Civil liability, on the other hand, is not envisaged - contrary to what was originally planned. The competent supervisory authority will be the Federal Office for Economic Affairs and Export Control (BAFA).

Outlook

The German Supply Chain Act is scheduled to come into force on 1 January 2023, but will probably undergo some amendments in the course of the legislative process. In addition, there is already an initiative at the European level for a directive on corporate duties of care and accountability, which provides for significantly more extensive obligations - especially with regard to environmental and climate protection - than the draft for the German Supply Chain Act. However, this process will probably still take a few years. Nevertheless, German companies should make preparations as early as possible in order to be able to implement corresponding duties of care in accordance with the German Supply Chain Act in time, especially since implementation requires a lot of time and also new structures. Another argument in favour of early implementation (if necessary, also on a voluntary basis by smaller companies) is that it can send a clear signal for the respect of human rights and certain environmental standards. In this respect, the anticipated German solution is not necessarily to be seen as a competitive disadvantage and German companies will benefit from a pioneering position in view of the future overall European solution. Finally, it should be pointed out that there is a threat of fines if the measures taken under the planned Supply Chain Act are not implemented in time. Therefore, it is important to start taking preventive measures now; companies can, for example, impose certain duties of care and reporting obligations on their suppliers in general terms and conditions and supply contracts in order to comply with human rights, labour and environmental standards (e.g. by committing to compliance with a corporate code of conduct for suppliers flanked by participation in the United Nations Global Compact).

Contact

If you have any questions on this topic or any need to adapt the general terms and conditions used by your company, agreements with suppliers and/or existing codes of conduct, please contact Sara Bandehzadeh, LL.M. (San Francisco) (sara.bandehzadeh@fieldfisher.com) or Anke Saßmannshausen (anke.sassmannshausen@fieldfisher.com).
 

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