Germany takes a step closer to mandatory human rights supply chain due diligence

A position paper on the key elements for a Due Diligence Act (Sorgfaltspflichtengesetz) has recently been leaked in Germany that would require German companies of a certain size to take adequate steps to prevent adverse human rights impacts in their business activities and supply chains. Relevant companies may face potential civil liability for damages for any human rights violations occurring where they have failed to take adequate steps. There is also a reporting element with companies being required to disclose their efforts in this area. In this post, we look at the main aspects of this new draft law and the wider context in which it has been published. 

When it comes to the topic of mandatory human rights due diligence, Germany lags behind certain other European countries, such as France and the Netherlands, where equivalent laws have been passed in recent years. Instead, the German Government initially advocated a voluntary approach to implementing the UN Guiding Principles on Business and Human Rights in its National Action Plan (NAP). But the tone from the Government is now changing. Recently, Gerd Müller (Germany’s Minister for Economic Cooperation and Development) has said the voluntary approach is insufficient and that he intends to introduce a mandatory human rights due diligence law in Germany. A draft of key aspects for a Due Diligence Act (Sorgfaltspflichtengesetz) has now been leaked.

Voluntary implementation of human rights protection in companies appears to fall short of expectations

In its coalition agreement, the current German Government had already agreed to take legislative action on the national level, if companies failed to implement appropriate voluntary measures to protect human rights. This was to be measured in two representative surveys. In 2019, the first of these surveys to check progress against this target drew a sobering conclusion: only 465 of the 3,325 randomly selected companies with more than 500 employees took part in the voluntary survey and only 17 to 19 percent of surveyed companies fully met the requirements of the NAP. The results of the second survey – which were published on 14 July 2020 – are similar: 445 companies of 2,250 surveyed companies participated and only 22 % are qualified as “fulfillers”.

The obligations of the draft of key aspects of the Due Diligence Act are based on the UN Guiding Principles on Business and Human Rights 

Against this background, a draft of the key points of a proposed new federal law on strengthening corporate due diligence to prevent human rights violations in global value chains went public (the Due Diligence Act).

The proposed criteria for a Due Diligence Act are based on the requirements of the UN Guidelines for Business and Human rights and the OECD Guidelines for Multinational Enterprises. It would require companies that are based in Germany and have more than 500 employees (approximately 7,280 corporates) to analyse whether their activities have a potential or actual adverse effect on internationally recognised human rights. As well as a comprehensive risk analysis, the companies would be expected to take adequate prevention measures and provide access to remedies.

The need for adequacy, proportionality and reasonableness in the measures is emphasized, all by reference to the company’s business activities and risk profile. In addition to an annual report on their website that is available to the general public, companies would also have to report to a not yet determined federal authority on the steps they are taking.

The consequence: Civil liability and official enforcement – but only based on an obligation to take steps rather than on an obligation to succeed

Under the Due Diligence Act, any violations of the requirements would create a cause of action and provide the basis for damage claims brought by private parties before the German courts. However, the liability risk for companies would be limited in several ways. The companies would only be liable if the damage was foreseeable and avoidable if appropriate due diligence had been carried out. The burden of proof will be on those bringing the claims and liability is limited to essential legal interests such as life, body, health, freedom, property and the general right of personality (which under German constitutional law encompasses a number of rights that protect various aspects of an individual’s personality).

Above all, the Due Diligence Act creates an obligation to take steps to prevent adverse human rights impacts rather than an obligation to prevent all such impacts—even where adverse impacts arise, a company will not be liable if it has taken adequate steps to identify and prevent this risk. Adequacy downstream in the supply chain will be measured, in particular, on the proximity to the suppliers and the company’s ability to influence such supplier’s behaviour.

Further, if companies implement “ state-recognized (industry) standards” civil liability would be limited to instances of intent and gross negligence ("safe harbour"). Yet, it remains unclear what exactly is meant by the term “state-recognized (industry) standards” and if it refers to national or even international standards.

In addition to civil liability, the responsible federal authority will be able to impose fines for possible violations. Furthermore, if a legally binding fine is imposed above a certain level, the accused company may also be excluded from public procurement for an appropriate period of time.

It is noteworthy that in 2019 an unofficial proposal for a Supply Chain Act (Lieferkettengesetz) drafted by the German Ministry for Economic Cooperation and Development was leaked. This draft sought to introduce mandatory human rights due diligence for large German companies working in high risk sectors, backed up by significant civil and criminal sanctions for non-compliance and criticism from German Ministries and industry associations. By comparison to that draft, the proposed enforcement provisions in the Due Diligence Act are not as harsh (although still significant).

A binding EU regulation on human rights due diligence on the horizon under Germany’s Presidency? 

Other stakeholders, including many multinationals and investors, are increasingly calling on lawmakers to establish a multinational binding framework. They argue this could level the playing field by imposing universal standards for human rights compliance in supply chains. While various German companies expressly supported proposals for a German domestic law, others favour an EU-wide approach to ensure uniform standards across the EU—a call which seems to have struck a chord with the EU Commission. The EU Commissioner for Justice, Didier Reynders, recently announced that the European Commission will present a legislative proposal on mandatory human rights and environmental due diligence in early 2021. These efforts will, most likely, be supported by the German EU Council Presidency in 2020, which announced that a European regulation on this topic would be part of its political agenda.

Germany’s journey towards mandatory human rights due diligence is certainly far from over. We will continue to monitor these developments and report updates on our blog.