The new French law on the duty of vigilance imposes new obligations on companies to prevent human rights, health and environmental disasters with prohibitive fines in case of non-compliance, and the law has a broad extraterritorial application.

The French MPs behind the new bill relating to the so-called ‘duty of vigilance’ (led by the majority leader of the lower house of the French National Assembly) wanted lawmakers to adopt coercive measures in order to prevent major human rights, health and environmental disasters such as the Rana Plaza collapse, the Bhopal gas tragedy and the sinking of Erika. The French Parliament has been examining the new bill since February 2015. The bill has proved controversial and has for a number of months been subject to heated debates among French parliamentarians, in particular as to possible sanctions.

On 21 February 2017, the bill was definitively adopted by the French Parliament. However, it was then subject to a challenge and referred for review by the French Constitutional Council on 23 February 2017, so has yet to be enacted. Due to the innovative nature of the duty of vigilance imposed on parent companies, the referral to the French Constitutional Council has challenged numerous provisions of the bill on the grounds of unconstitutionality, arguing, for instance, that French criminal law should not allow vicarious liability. The French Constitutional Council will rule within one month and its opinion will address each of the challenges made. If it rules invalid any of the provisions in the four articles which comprise the legislation, three options will be available: (i) the law could be enacted without the invalid provisions, (ii) the law could be debated again before Parliament, or (iii) the French Constitutional Council’s expressed reservations could be taken into account in future implementing decrees. At this stage, it is in any case clear that significant changes have been made to the approach regulators will take with respect to the relationship between entities within a group of companies and cooperating entities within the supply chain when faced with a major disaster.

Which companies are targeted by the new law?

Those affected are companies registered in France with at least 5,000 employees including employees in direct or indirect affiliates located in France, or 10,000 employees including employees in direct or indirect affiliates located in France or abroad. French newspapers have stated that this would affect approximately 150 companies.

By contrast, the recent French Bribery Act, adopted on 9 December 2016, applies to companies with at least 500 employees and a yearly turnover of over €100 million, and is expected to affect about 1,570 companies.

Extraterritorial application

The new duty of vigilance will therefore have a more limited scope as it would apply to fewer companies. That being said, the long arm of the law will enable it to target, in particular, foreign affiliates and therefore have a clear extraterritorial remit.

Extraterritorial jurisdiction has also been provided in the French Bribery Act, which applies extensively to acts of corruption committed abroad by a French citizen or by a person located abroad who has his or her habitual residence in France or by a company which carries out all or part its activities in France. On that last point, the French law draws its inspiration from the UK Bribery Act, which covers corruption committed both in the UK and abroad. English courts are competent to rule over corruption-related offences, regardless of the place where an offence is committed, as long as the relevant company carries out all or part of its activities in the UK.

The new law clearly pursues the same goals.

What are the obligations imposed on companies?

Companies are required to implement a ‘vigilance plan’, which should resemble in many respects the compliance programme provided for under the French Bribery Act.

Each company’s vigilance plan should contain reasonable measures to identify risks and prevent serious harm to human rights and fundamental freedoms, the health and safety of persons, and the environment as a result of the activities of the company, any affiliates or any other entities under its control, as well as the activities of any subcontractors or suppliers with whom it has an “established commercial relationship” when the said activities relate to this relationship.

The new law has therefore a much broader scope than the French Bribery Act in that (i) it covers much broader issues than anti-bribery compliance and (ii) it applies extensively beyond the company to the company’s affiliates, subcontractors and suppliers. In particular, the vigilance plan should include:

  • risk-mapping to help with the identification, analysis and prioritisation of risks
  • procedures for regularly assessing the status of affiliates (and subcontractors and suppliers with whom there is an established commercial relationship) with respect to risk-mapping
  • appropriate actions to mitigate risks or to prevent serious offences
  • a whistleblowing system designed to collect reports relating to the existence or likelihood of risks
  • a system to monitor the implemented measures and evaluate their efficacy

What sanctions are provided for by the new law?

Sanctions against corporations that fail to comply are twofold:

  • A civil penalty of up to €10 million in case of failure to implement a vigilance plan. Any third party who has an interest in taking legal action may seek an injunction requiring execution subject to fine until the company complies with the requirement to implement the vigilance plan. This would probably enable legal action to be taken by NGOs, consumer defence associations or even trade unions.
  • Damages resulting from the company’s failure to implement a vigilance plan, which might give rise to civil liability claims against the company. In addition, in case of damages, the amount of the civil penalty can be raised to a maximum of €30 million.

It is worth noting that the penalty amounts are significantly greater than those incurred for a failure to implement the compliance programme under the French Bribery Act, which can be sanctioned by the newly created anti-corruption agency with a limited fine of up to €1 million. In addition, if the company is found guilty of corruption, the judge can force it to implement an appropriate compliance programme.

Controversial issues

In regard to companies’ respect for human rights, certain mechanisms already exist, such as the OECD Guidelines for Multinational Enterprises adopted in 1976, which provide, for instance, that companies have to respect internationally recognised human rights and “carry out risk-based due diligence, for example by incorporating it into their enterprise risk management systems, to identify, prevent, and mitigate actual and potential adverse impacts of their activities”. One could also cite the Tripartite Declaration of Principles concerning Multinational Entreprises and Social Policy adopted in 1977 by the International Labour Organization, as well as the United Nations Global Compact, which encourages companies to adopt sustainable and socially responsible policies and to report on their implementation. In addition, the Guiding Principles on Business and Human Rights adopted in 2011 by the Human Rights Council provide specifically that where companies have large numbers of entities in their value chains, they should identify general areas where the risk of adverse human rights impacts is most significant, whether due to the context in which certain suppliers or clients operate.

In contrast with these mechanisms, the new French law relating to the duty of vigilance imposes financial penalties in case of non-compliance, and therefore adopts a punitive approach which has proved highly controversial during parliamentary debates.

Another controversial issue in France relates to the prevailing principle of independence of legal persons, which acts as a screen between the liability of the parent company (and its affiliates, subcontractors and suppliers) and the ordering company (and its affiliates, subcontractors and suppliers). Whatever their commercial or capital links, companies within the same group or cooperating within the same value chain are considered as distinct entities, each one assuming the liabilities related to its own activities. French law generally ignores solidarity and interdependencies between companies belonging to the same group of companies. This leads to situations where in case of damages resulting from a decision taken by the parent or ordering company but executed through a subordinate company, the liability of the said parent or ordering company is diluted because of the principle of independence of legal persons.

The new French law breaks away with this traditional approach because it is not only aimed at overcoming the principle of independence of legal persons, but it also extends the duty of vigilance more broadly, to affiliates, subcontractors and suppliers.

The implementation of the vigilance plan will obviously constitute a challenge to multinational corporations.

The level of risk in terms of fines will lead such corporations to closely monitor implementing decrees.

Vigilance, as a matter of fact, starts with keeping a close eye on this new set of regulations.