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Insights The German Supply Chain Act was approved by parliament – a legislation in a nutshell

The German Supply Chain Act was approved by parliament – a legislation in a nutshell

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published on 29 June 2022 | reading time approx. 5 minutes

by José A. Campos Nave and Clemens Bauer

       

On 11. June 2021, the German Bundestag approved the “Federal Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains” (German: “Gesetz über die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechts­verletzungen in Lieferketten” or “Sorgfaltspflichtengesetz”) better known as the “Supply Chain Act“ (German: “Lieferkettengesetz”), with the votes of the CDU/CSU, SPD and Greens party. The highly controversial act holds companies liable for the con­ditions at their global suppliers. Rödl & Partner has accompanied the legislative pro­cess and summarises the key points of the new act in this article.


  

      

 

Purpose of the Supply Chain Act

The German Supply Chain Act imposes extensive obligations on companies to protect human rights and –partially – the environment in the supply chain.Along the supply chains, the internationally applicable stan­dards for occupational health and safety and compliance with human rights must be obeyed. All people in­volved in production of goods shall be able to work on basis of acceptable, generally recognized ethical and economic standards.


Scope of the Supply Chain Act

The Act applies to companies doing international business with a domestic workforce of 3,000 (from 1.1.2023) or 1,000 employees (from 1.1.2024) within Germany. The scope of the law includes all companies – regardless of their legal form – with their head office, principal place of business, administrative headquarters or registered office in Germany. Also included in the scope are companies, regardless of their legal form, that have a branch office in Germany pursuant to § 13d of the German Commercial Code (HGB), provided that the company gene­rally employs at least 3,000 employees in Germany.

Within affiliated companies as defined in § 15 of the German Stock Corporation Act (AktG), the employees of all group-companies are to be considered when determining the number of employees of the parent company.

Responsibility along the supply chain

The responsibility for supplier companies extends to direct suppliers, but liability is also assumed for indirect suppliers in certain cases. Full due diligence obligations have been imposed on companies only with regard to their own business and direct contractual partners (§ 2 para. 7, 8 in conjunction with § 7 para.1 Supply Chain Act). Liability of indirect suppliers in the supply chain only exists if the company obtains substantiated know­ledge of any violation. As a result of this, a layered system of corporate responsibility was introduced according to the degree of influence.


The Supply Chain Act establishes the duty to make an effort, but not a duty to succeed. This means, that the act does not require companies to guarantee that human rights violations will always be prevented. However, obligated parties must prove that they have done everything possible to prevent human rights-related risks in the supply chain. 

The extent of the effort is ultimately a question of the individual case and is specified in more detail in accor­dance with § 3 para.2 Supply Chain Act based on the following criteria:
  • the nature and extent of the company's business activities,
  • the company's ability to influence the direct perpetrator of the violation in the supply chain,
  • the typical severity of the violation, the reversibility of the violation, and the probability of the occurrence of the violation,
  • the nature of the contribution to the risk.

    

Subject of the Act

The Supply Chain Act’s subject is to protect against potential or actual adverse impacts on protected legal po­sitions. The range of protected legal positions is basically unrestricted and includes not only elementary human rights but also occupational safety and health positions. In this context, the act refers to a number of conven­tions for the protection of human rights as listed in number 1 to 11 of the annex. Moreover, the subject of the act includes intergovernmental conventions on civil and political rights. This broad range of protected legal posi­tions is difficult to comprehend due to several references to interna­tional agreements; at the same time, there is a lack of best practice and interpretative guidance.

A specification is made in § 2 para. 2 Supply Chain Act, where the focus of the legislator on working conditions is expressed. Among others, the following aspects are mentioned as possible violations of the Supply Chain Act:

  • child labour,
  • forced labour and slavery,
  • failure to comply with occupational health and safety measures, if this results in the risk of work accidents or work-related health issues,
  • violation of the freedom of association,
  • the withholding of an adequate wage, 
  • causing of harmful soil contamination, water pollution, air pollution, harmful noise emission or excessive water consumption.


Due Diligence obligations

Considering all these aspects, respect for human rights must be ensured through the implementation of certain due diligence measures to prevent violations.

In this context, the legislator requires a comprehensive risk analysis as well as successive and interlinked pre­ventive and remedial measures, namely:
  • the establishment of a risk management system (§ 4 para. 1 Supply Chain Act),
  • the establishment of an in-house responsible body for human rights protection (§ 4 para. 3 Supply Chain Act),
  • the establishment of regular risk analyses (§ 5 Supply Chain Act),
  • the setup of policies (§ 6 para.2 Supply Chain Act),
  • the establishment of preventive measures within the company's own business area (§ 6 para.1,3 Supply Chain Act) and vis-à-vis direct suppliers (§ 6 para. 4 Supply Chain Act),
  • remedial action in the event of violation of a protected legal position (§ 7 para. 1-3 Supply Chain Act),
  • the establishment of a complaints procedure (§ 8 Supply Chain Act) for the notification of violations of human rights,
  • the implementation of due diligence measures with regard to indirect suppliers (§ 9 Supply Chain Act), 
  • documentation (§ 10 para. 1 Supply Chain Act) and reporting measures (§ 10 para. 2 Supply Chain Act).

Effective measures are considered those that make it possible to identify and minimize risks regarding human rights and environmental violations and to prevent, end or minimise violations within the supply chain. At the same time, companies should consider the interests of both their own employees and those within the supply chain when establishing and implementing their risk management system (§ 4 para.4 Supply Chain Act). 

    

Consequences for Corporate Compliance

Companies must implement far-reaching compliance measures considering the new organisational, auditing, action, documentation and reporting obligations.
 
The question of whether a company has fulfilled the requested due diligence obligations is answered on an in­dividual risk assessment based on various factors. Major criteria for the assessment are, in addition to the in­dustrial background, the regulatory framework conditions of the production site (e.g., child labour in third world countries, occupational safety in textile production).

Since the human rights situation is dynamic, the measures, in particular the risk analysis, must be reviewed at regular intervals, but at least annually. Furthermore, changes in business activities and in the business environ­ment may give reason for a review. Generally speaking: The greater the risk of the business activity, the greater the individual standard that applies to the due diligence obligations.

Even though the Supply Chain Act primarily focuses on a company's own business operations and its direct suppliers, misconduct by indirect suppliers can rise to obligations to take action as soon as a company has gained substantiated knowledge of possible human rights violations in the supply chain. In these cases, the obligation to initiate appropriate measures arises (risk analysis, preventive measures, remedial measures). 

Corporate liability

The Supply Chain Act does not introduce any additional civil liability compared to existing German Civil Law, but violations against the act are subject to fines.Though as innovation, German trade unions and NGOs are allowed to represent the interests of employees of foreign companies against German contractors in court proceedings in Germany.  


Control and enforcement of the Supply Chain Act

The Supply Chain Act will be controlled and enforced by the German Federal Office of Economics and Export Control. In case due diligence obligations are not implemented in a proper way, there is a risk for regulatory infringement proceedings to be initiated. Particularly due to the highly formalized procedure associated with the various reporting obligations, it can be assumed that sooner or later the wrong or incomplete implemen­ta­tion will result in fines.


Possible fines:

  • fine of up to 800,000 Euros (§ 24 para.1 Supply Chain Act),
  • for companies with annual turnover of more than 400 million Euros, fine up to 2 percent of worldwide turnover (§ 24 para. 3 Supply Chain Act),
  • exclusion from public contracts for up to three years in case a fine of at least 175,000 Euros has been imposed (§ 22 Supply Chain Act).

Risks for companies

Complex supply chains and a poorly defined standard for corporate due diligence in the supply chain create a high liability risk for companies in practice.

In terms of corporate governance, management and compliance officers must now take action to supplement existing compliance management systems with regard to the new requirements and to adapt contractual agree­ments with the new obligations in mind. 
  • In any case, human rights violations in the supply chain must be stopped. If this is not possible, a concept must be developed to minimize any negative impact. Against this background, companies are urged to pre­pare carefully now. Starting points can be:
  • the creation of an overview of the company's own suppliers/origin and product countries,
  • a risk assessment based on the respective country and industry risks,
  • communication with and passing on of information to suppliers regarding future (stricter) obligations,
  • the adaptation of contracts, in particular adding the obligation to comply with labour standards/production conditions,
  • a general restructuring of supply chains.

Contact

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Carla Everhardt

Associate Partner

+49 221 9499 093 43

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