The new standard: German Supply Chain Duty of Care Act adopted

With the final deliberations of the German Bundesrat on 25 June 2021, the German Supply Chain Duty of Care Act (the Act) has officially passed through the legislative process after having been adopted by the German Bundestag on 11 June 2021. While there have not been many changes compared to the draft by the German Government and an earlier draft proposal, we would like to provide a summary of the most important elements of the Act below.

The Act ties in with current legislative activities of other European countries that – seemingly unimpressed by the forthcoming EU directive on supply chain due diligence – are drawing up their own regulatory framework on human rights and environmental compliance for corporates.

Scope of application

The Act will apply to companies that are incorporated in Germany or have their headquarter or principal place of business in Germany. In addition, the Act now explicitly includes foreign companies having a branch office in Germany. From 1 January 2023, the Act will be applicable to companies with generally at least 3,000 employees; from 1 January 2024, companies with generally at least 1,000 employees will be captured as well. For the calculation in case of group companies, the total number of employees in all German subsidiaries is decisive.

According to the German government, it is expected that the Act will cover 900 companies from 2023 and approximately 4,800 companies from 2024 onwards. However, since companies are obliged to pass on imposed duties of care to suppliers via contractual obligations, a much greater number of companies is expected to fulfil the human rights and environmental due diligence obligations of the Act in the future.

Due diligence obligations

As also previously reported, companies will be required to conduct adequate due diligence throughout their supply chains in relation to human rights and (certain) environmental risks. This includes conducting a risk analysis, establishing internal responsibilities for human rights and environmental protection, comprehensive preventative measures, and grievance mechanisms.

The prohibitions stipulated in the Act relate to a broad range of human rights violations, incl. child and forced labour, slavery, illicit eviction and occupational health and safety. The Act incorporates via its annex many ILO Conventions as well as the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights. Environmental protection is embodied in the prohibition of certain acts under three international environmental law treaties: The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, the Minamata Convention on Mercury, and the Stockholm Convention on Persistent Organic Pollutants. Therefore, it is apparent that environmental protection only plays a subordinate role under the German Act.

The reach of imposed due diligence duties extends to (i) a company’s own business operations; (ii) direct suppliers; and (iii) indirect suppliers on an “ad-hoc basis”. As regards a group of companies, own business operations encompass subsidiaries belonging to the parent company if the parent company exercises a decisive influence on such subsidiaries. As mentioned in our earlier blog posts due diligence with respect to indirect suppliers only needs to be conducted if there was “substantiated knowledge” on a potential human rights or environmental violation. Yet, according to legislator’s reasoning substantiated knowledge could be established rather easily by e.g. human rights reports pointing to concrete risks for particular regions and the like.

Reporting obligations

The companies concerned are obliged to continuously document the fulfilment of due diligence obligations and to keep records in this respect for at least seven years. In an annual report, which must be published on the company's website and submitted electronically to the competent authority, companies must report on their adherence to due diligence obligations. The report needs to be submitted no later than four months after the end of the business year.

Sanctions

The Federal Office of Economics and Export Control (BAFA) is the competent authority for monitoring compliance with the law. Its powers serve both, preventative purposes and the preparation of sanctioning proceedings. Hence, the BAFA can order companies to perform specific actions in order to fulfil the imposed obligations; on the other hand, the BAFA is granted far-reaching investigative powers, such as access rights, information and inspection rights. Companies are obliged by the Act to hand over documents, which includes documents relating to business partners.

Non-complying companies may face administrative fines of up to EUR 8 million or up to 2% of a group company‘s worldwide annual turnover. Serious non-compliance may also result in exclusion from public procurement for a maximum period of three years. The respective company will also be added to the German competition register.

No specific civil liability regime 

It is explicitly specified that the Act itself does not lay down specific grounds for civil liability. However, the Act also clarifies that civil liability in general (e.g. pursuant to German tort law) remains applicable. In addition, the Act provides NGOs and trade unions with representative litigation status, i.e. under certain conditions they would be in the position to assert the violation of human rights obligations. This provision underscores that by far the German legislator did not intend to rule out corporate liability with respect to the Act.

Recent context

At about the same time that the German Act was adopted Norway joined the circle of European states providing for mandatory human rights due diligence laws: It introduced its Transparency Act that imposes due diligence and reporting duties with regard to human rights (with a particular focus on decent working conditions) on about 8,800 large companies. Similar to the German Act the Norwegian law provides for a certain extraterritorial reach in that it obliges foreign companies that operate on the Norwegian market or are subject to Norwegian tax duties as well. This extended scope differs, for example, from the French pioneer law on corporate human rights and environmental protection, the Duty of Vigilance Law, that does not cover foreign companies, but imposes a broader spectrum of obligations, including environmental due diligence duties.