In Short

The Situation: Countries throughout Europe have adopted due diligence laws to regulate ESG risks along supply chains. In addition, the European Union is currently working on Human Rights Due Diligence legislation that may affect a wide range of companies doing business in Europe and worldwide.

The Development: On June 11 and 25, 2021, the German legislator adopted a Supply Chain Due Diligence Act ("SDDA") obliging major companies to minimize human rights-related and environmental risks along their supply chains. The German law is similar to a French law adopted in 2017, the Corporate Duty of Vigilance Act ("DoV"), that has become the subject of increasing litigation.

Looking Forward: The new German law and the current litigation in France are only the forerunners of a new trend to regulate ESG risks along supply chains. These laws will impact suppliers globally. A closer look at the French and German developments is necessary to better assess the impacts of the upcoming EU human rights due diligence legislation.

With the recently adopted SDDA, Germany joins France in imposing human rights and environmental due diligence obligations along international supply chains of large companies. The SDDA covers companies based in Germany with 3,000 employees, which will be reduced to 1,000 employees by 2024. By comparison, the French DoV applies to French companies with at least 5,000 employees nationally or 10,000 employees globally. In both countries, the due diligence obligations may affect foreign companies, including subsidiaries, suppliers, and subcontractors worldwide. This Commentary discusses some of the key aspects of the German SDDA and how they compare to the French DOV.

Supply Chains

The German SDDA requires regulated companies to perform due diligence with regard to their own business (including group companies), and their direct suppliers. With respect to indirect suppliers, regulated companies may have to take action if there is sufficient evidence of human rights or environmental risks, no matter how far along the supply chain. In contrast, the French DoV restricts responsibilities along the supply chain to the regulated companies' subcontractors and suppliers when there is an "established commercial relationship."

Human Rights and Environmental Protection

The German SDDA defines protected legal positions and human rights-related and environmental risks on the basis of 14 international conventions listed in an Annex to the SDDA. Fully understanding the substantive scope of the applicable human rights and environmental standards will require a case-specific analysis of international, German/French, and local laws applicable to the relevant supply chain.

Risk-Based Approach and the Need to Take Action

Companies must take "adequate measures" to prevent or mitigate human rights-related and environmental risks. The German SDDA, expressly adopting a risk-based approach, contains more specific provisions on the establishment of a risk management system, the performance of regular risk analysis, the adoption of preventive measures, reporting obligations or the establishment of a complaint mechanism. While such risk-based approaches leave some discretion to regulated companies, such flexibility is a double-edged sword as courts or supervisory agencies may later decide that these measures were inadequate. Additional guidance by the German supervisory authority is to be expected; however, such guidance can only be generic and not company-specific. Therefore, companies should carefully analyze all legal requirements and effectively implement an adequate compliance infrastructure tailored to their individual needs.

Enforcement

The German SDDA provides for regulatory fines of up to 2% of the annual global turnover in Germany, a potentially significant sanction given the vagueness of the SDDA obligations. By way of comparison, the French Constitutional Court annulled the provision regarding civil fines in the DoV, considering that the conditions characterizing the infringement could not be clearly defined and in particular that the terms "reasonable due diligence measures," "appropriate risk mitigation actions," and the references to "human rights violations" and "fundamental freedoms," were too general and broad. German courts may have similar concerns regarding a lack of clarity of some of the infringements defined in the SDDA.

In France, any "interested party" can seek an injunction from the relevant French court to order a regulated company to comply with the DoV requirements, after an initial formal notice to such company. This mechanism has already been used by French and international NGOs against major French companies, including on behalf of local communities from third-party countries. An interested party can also bring a civil claim for damages, if the regulated company's failure to comply with its vigilance obligations under the DoV directly caused harm that could otherwise have been prevented

The SDDA contains a clause explicitly stating that its violation shall not give rise to civil liability. Instead of civil lawsuits, the SDDA relies on regulatory monitoring and the pressure to be built by NGOs and the media. Under the SDDA, affected persons will have the right to request regulatory investigations from the competent federal agency. However, civil liability established independently under general tort law remains unaffected. The German SDDA also provides that companies may, in case of serious violations of the SDDA, be excluded from public tenders.

Looking beyond French and German due diligence laws, due diligence legislation at the European Union level is under way after the European Parliament adopted, on March 10, 2021, a resolution requesting the Commission to submit a legislative proposal on mandatory supply chain due diligence.

Four Key Takeaways

  1. Similar to prior French legislation, the German SDDA imposes human rights and environmental due diligence obligations along international supply chains of large companies based in Germany.
  2. The risk-based approach of these regulations calls for a careful analysis of the way companies intend to implement their due diligence obligations.
  3. Enforcement of the due diligence regulations creates new litigation and regulatory risks, including opportunities for NGOs to address violations of human rights or the environment.
  4. The European Union is currently drafting a Directive on Corporate Due Diligence and Corporate Accountability, following the adoption of a resolution by the European Parliament on March 10, 2021.