The German Supply Chain Act – A High Risk of Liability

last updated on 25 October 2023 | reading time approx. 4 minutes

Compliance with the obligations of the German Supply Chain Act is important. Viola­tions of the act must be carefully prevented, because the power of third parties to conduct lawsuits raises many questions in legal practice. For this reason, the Supply Chain Act (long: Act on Corporate Due Diligence in Supply Chains – German: “Liefer­kettensorgfaltspflichtengesetz”) is very relevant these days and on many companies’ radar but is the actual scope of the act correctly understood by all parties involved?

It is emphasized everywhere that the Supply Chain Act does not result in any civil liability. This conclusion is based on the provision of § 3 (3) Sentence 1 of the Supply Chain Act. A provision that states, that a breach of the obligations under the Supply Chain Act does not result in civil liability. However, the following sentence of this specific provision states that any civil liability which is not related to the Supply Chain Act remains unaffected. On second thought, this phrase only means that two points are made clear. First, that the violation of a provision of the Supply Chain Act alone does not establish civil liability, and second, that pre-existing liability (based on provisions other than the Supply Chain Act) is not waived by aforementioned "disclaimer" of the Supply Chain Act.

This seems to clarify that no additional liability risks have arisen for companies in terms of civil law due to the entry into force of the Supply Chain Act on 1 January 2023.

However, this conclusion ignores two essential points: On the one hand, the Supply Chain Act provides a special litigation status (“Prozessstandschaft”) in § 11 of the Supply Chain Act. In order to understand the consequences of this provision, it is first necessary to understand the legal significance of a litigation status according to German law. Generally speaking, lawsuits can only be initiated by parties claiming the infringe­ment of their own rights. E.g. if a company is not supplied on time by its supplier, this can only be pursued by the company that is not supplied, not by its trade association, for example. The principle is that everyone is responsible for protecting their own rights. There are many good reasons for this. For example, only the com­pany that was not supplied has full knowledge of the facts of the case and its rights. Also, the law prohibits multiple enforcement of what is being litigated. Once a lawsuit is pending, it is against the law to claim it again at the same time or after the judgement.

A litigation status gives another person the right to act on behalf of the person, whose rights were injured. It authorizes the litigant to claim the rights of the injured person in his or her own name, i.e. as if he or she were affected. The group of those who can claim the violation of rights under the Supply Chain Act is thus expanded by the new act.

From the legislator's point of view, there are good reasons for this. Due to worldwide exchange of goods and services, it is now common knowledge that effective enforcement can also be limited by factual obstacles. Such a complication exists, for example, when workers in a country outside the EU want to claim the violation of their rights in the EU. Conducting litigation abroad is even more costly than conducting litigation in one's own country. For one thing, it is necessary to act in a foreign legal system plus considerable travel expenses do incur – this is probably the most serious complication, conducting a legal dispute is time-consuming and cost-intensive.

On the other hand, the wording of § 3 (3) of the Supply Chain Act emphasizes only that additional civil liability is not established by the act. It is possible, on the other hand, to impose fines, just as any other sanctions under administrative and criminal law do remain unaffected. These, too, can result in payment obligations on part of the company if fines are assessed or, for example, a collection – more correctly: a confiscation of the benefits of the violation – comes into consideration. It is correct that these consequences require the speci­fication of violation of rights first- but that does not detract from the fact that such financial consequences can occur.

The litigation status as stipulated in the Supply Chain Act, which is the focus of our consideration here, is subject to the provision of § 11 (2) of the Supply Chain Act. This means that only such entities – either trade unions or non-governmental organizations- may act as litigants, that have a registered office in Germany and that are neither commercially nor only temporarily engaged in implementing human rights with regard to the national law of a state. In a nutshell, the aim is to prevent any commercialization of litigation.

In this respect, this can be compared to a certain extend to the regulation on the model declaratory action ("Musterfeststellungsklage") in the German Code of Civil Procedure (“Zivilprozessordnung”): only if the plaintiff is an entity established for a relevant period of time and pursues non-commercial purposes, it shall be autho­rized to conduct litigation. In this way, the commercial nature of litigation, i.e., the conduct of litigation solely for the purpose of generating profits, is prevented. This objective is even more obvious when it comes to the Supply Chain Act than in the case of the model declaratory action. After all, considering the violation of human rights, the generation of profits by third parties as a result of the illicit action of a involved company would be morally unacceptable. The litigation would then flourish only because of the exploitation of the affected parties. Whether the prerequisites for admissible litigant status exist must be assessed in the respective lawsuit by the court, which in the meantime can refer to previous rulings in model declaratory actions. It is easy to understand, that the prerequisite for the right to conduct proceedings is the fact, that the relevant entity must have its registered office in Germany for a certain period of time. However, whether this requirement can be upheld in the long term, i.e. whether the law legitimately refers to a registered office in Germany only, could result in disputes in the future. After all, in the European Union, an unequal treatment of EU citizens and entities must be avoided.

The Supply Chain Act gives German trade unions in particular the opportunity to enforce the rights of their own members, at least indirectly. According to the explanatory memorandum of the Federal Government's draft law of 19 April 2021 (Bundestagsdrucksache 19/28649, p. 52) and a decision of the Federal Court of Justice (BGH, judgement of 31 July 2008 - I ZR 21/06), it is sufficient for trade unions to be able to take legal action if they have been impliedly, i.e. conclusively, entrusted by those affected with the protection of their human rights. Protected human rights are often regulated in conventions that cover working conditions. In the case of violations of the human rights of those affected in supply chains, some organisations could therefore not only have an interest in protecting the rights of others, namely those of those affected in the supply chain, but at the same time indirectly protect their own members' legal positions. In the context of such a lawsuit, the defendant companies would not only be threatened with a cost-intensive process, but also with a considerable loss of their reputation. Both of these are positions that have value under civil law and are also protected by civil law.

In this respect, provision § 3 (1) of the Supply Chain Act, according to which civil liability will not be established by the new act, should be interpreted with caution. It might be true that claims will probably not arise solely on the basis of the Supply Chain Act. Nevertheless, the act may well cause civil damages to the parties involved – through the costs of litigation – and an expected loss of reputation.