After several back and forth exchanges between the French National Assembly and Senate during a period of two years of legislative procedure, the National Assembly adopted, on 21 February 2017, upon last reading, the law relating to the duty of vigilance of parent companies and ordering companies. This law seeks to prevent serious violations with respect to human rights and fundamental freedoms, and the health and safety of persons and the environment, by establishing a duty of vigilance (devoir de vigilance) for parent companies and ordering companies vis-à-vis their subsidiaries, subcontractors and suppliers.
However, the law as adopted on 21 February 2017 was challenged before the French Constitutional Council (Conseil Constitutionnel). By decision No 2017-750 DC of 23 March 2017, the French Constitutional Council held that the provisions relating to the establishment of a civil fine mechanism for companies breaching their obligations under the new duty of vigilance were unconstitutional, given the lack of clarity in the terms used by the legislator in defining the new obligations.
This law is the culmination of works undertaken following the Rana Plaza disaster: on 24 April 2013, the Rana Plaza building, located in Bangladesh and containing garment workshops of numerous Western textile companies in the retail and distribution industry, collapsed on workers causing more than one thousand deaths.
It forms part of the growing trend of Corporate Social Responsibility (CSR) which has existed for several years, both on the international and European levels. Various international – OECD guidelines for instance – as well as European measures provide for non-binding best practice rules relating to CSR.
This law ties in with the French law Sapin II, widening its scope to include protection against serious violations of fundamental rights and freedoms and threats to the safety of persons and the environment.
From a practical point of view, the duty of vigilance requires that the affected companies effectively establish and implement a vigilance plan (plan de vigilance) to identify and assess any serious risks concerning human rights and fundamental freedoms, the health and safety of persons and the environment, in order to anticipate them and prevent their occurrence.
Which companies are affected by the duty of vigilance?
The obligation to implement a vigilance plan is imposed on those French companies which, at the end of two consecutive financial periods, employ:
- at least five thousand employees within the company itself and in its direct or indirect subsidiaries, whose head office is located in France; or
- at least ten thousand employees within the company itself and in its direct or indirect subsidiaries, whose head office is located in France or abroad.
On an exceptional basis, the subsidiaries or controlled companies exceeding the aforementioned thresholds are deemed to have satisfied the above obligation where the company controlling them, within the meaning of article L. 233-3 of the French Commercial Code, establishes and implements a vigilance plan relating to the business activities of the company and of all of the subsidiaries or companies controlled by it.
The law contains two new provisions in the part of the French Commercial Code concerning French limited companies (sociétés anonymes – SA) (articles L. 225-102-4 and L. 225-102-5). By reference, these new provisions also apply to French simplified limited companies (sociétés par actions simplifiées - (SAS)) and French limited partnerships (sociétés en commandite par actions - (SCA).
Which French subsidiaries of foreign groups are affected by the duty of vigilance?
This obligation is imposed on all French subsidiaries or controlled companies, which employ (i) at least five thousand employees within the company itself and in its direct or indirect subsidiaries, whose head office is located in France, or (ii) at least ten thousand employees within the company itself and in its direct or indirect subsidiaries, whose head office is located in France or abroad.
What is the exact scope of the duty of vigilance?
The duty of vigilance requires that reasonable measures of vigilance be implemented in order to identify and prevent any serious violations of human rights and fundamental freedoms, and any risks to the health and safety of persons and the environment, in addition to any risks and violations resulting from the business activities of the company and of those of the companies controlled by it (within the meaning of article L. 233-16II of the French Commercial Code), but also from any business activities of the subcontractors or suppliers with which they have an established commercial relationship, where there is a link between such activities and this relationship.
What obligations are imposed on these companies?
The aforementioned companies are required to adopt various measures intended to prevent any serious violations with respect to human rights and fundamental freedoms, and the health and safety of persons and the environment, namely:
- completing a risk mapping intended to identify, analyse and classify them;
- implementing a mechanism to regularly assess the situation of the subsidiaries, subcontractors or suppliers with which they have an established commercial relationship, for the purposes of risk mapping;
- carrying out any measures adapted to mitigate risks or prevent serious violations;
- establishing an alert and warning system regarding the existence or occurrence of risks; and
- establishing a follow-up mechanism for measures implemented and an assessment procedure to evaluate their efficiency.
Accordingly, the law provides for the establishment of a vigilance plan and report on its effective implementation which are both to be included in the management report of the affected company referred to in article L. 225-102 of the French Commercial Code (as the SAS is not required to issue such management report, this obligation requires further clarification regarding SASs).
A decree by the French Supreme Administrative Court (Conseil d’Etat) may supplement the measures provided and specify the terms of development and implementation of the vigilance plan.
What are the applicable sanctions for any breach of the obligations under the duty of vigilance?
In the event of any breach of the obligations under the duty of vigilance, injunctive measures (subject to applicable penalties) may be ordered.
Furthermore, the company may be required to compensate for any harm which could have been avoided had the obligations under the duty of vigilance been performed, pursuant to the conditions set out in articles 1240 and 1241 of the French Civil Code.
In such case, the competent court may also order the publication, release or posting of the decision or of an excerpt thereof.
It should be reminded that a civil fine, which is not deductible from taxable income and is capped at 10 million Euros (and which may be increased to 30 million Euros in certain cases), was initially provided for but was declared unconstitutional by the French Constitutional Council.
What is the time schedule for the duty of vigilance?
The vigilance plan must be established from the financial period during which the law is published, i.e. for companies with a financial year-end of 31 December, from the current 2017 financial period.
The provisions relating to (i) the report of the effective implementation of the vigilance plan and (ii) the liability of the parent company apply from the issuing date of the management report relating to the first financial period after the publication of the law, i.e. for companies with a financial year-end of 31 December, from the issuing date of the management report for the 2018 financial year.
The implementation of these provisions in SASs – which are not required to issue the aforementioned management report – needs clarification.
Is the law on the duty of vigilance a French Modern Slavery Act?
Although it originates from the same intention to hold companies accountable, the UK Modern Slavery Act is more limited in scope - as it only concerns the risks relating to slavery and human trafficking – than the French duty of vigilance.
The UK Modern Slavery Act of 2015 requires certain entities conducting all or part of their business activities in the UK to issue and publish an annual statement regarding the methodology used to control their supply chain in order to determine the existence of any risk of slavery practices or human trafficking. Any breach of this obligation is subject to an unlimited fine.