_supply chain due diligence act for german companies

The Supply Chain Due Diligence Act ("LkSG"), which will come into force in the Federal Republic of Germany on January 1, 2023, is intended to create the basis for a standard international understanding of human rights and environmental due diligence obligations of companies about supply chains and to help harmonise the legal requirements for these, as well as to shape the debate to develop corresponding EU legislation. 

The intention of the legislator

The UN Guiding Principles laid the cornerstone for the LkSG on Business and Human Rights adopted by the UN Human Rights Council in 2011. 

Particular emphasis is placed here on the so-called human rights due diligence from Guiding Principle 17, according to which companies should be required to exercise due diligence to safeguard human rights when carrying out their business activities. The German government adopted the National Action Plan on Business and Human Rights (NAP) to implement these Guiding Principles in 2016. Since the stipulated target of at least 50 per cent of all companies based in Germany with more than 500 employees applying the core elements of human rights due diligence and integrating corresponding measures into their business processes by 2020 has not been met (only 13 to 17 per cent), the German government says a legally binding due diligence standard that is internationally compatible is now needed. The new Supply Chain Act and its orientation toward "due diligence" standards are intended to strengthen the rights of people affected by corporate activities in supply chains. 

A supply chain here includes everything from the extraction of raw materials to the delivery of the product to the end customer. At the same time, the legitimate interests of companies in legal certainty and fair, competitive conditions are to be considered. The Supply Chain Act must be adapted to future European regulations to prevent competitive disadvantages for German companies. 

Due diligence obligations for companies

The scope of application is limited by company size: from January 1, 2023, the LkSG will apply to companies with more than 3,000 employees, and from January 1, 2024, to companies with more than 1,000 employees.

The LkSG obliges companies with their head office, principal place of business, administrative headquarters, registered office or branch office in Germany to respect human rights by implementing defined due diligence obligations. The protected human rights are listed in Section 2 (2) LkSG. The core elements of the due diligence obligations include

• The establishment of a risk management system and performance of risk analysis,
• the adoption of a policy statement of the corporate human rights strategy,
• the establishment of preventive measures within the company's business operations and vis-à-vis direct suppliers
• taking immediate corrective action. the establishment of a complaints procedure in the event of legal violations, and
• documentation and reporting requirements for the fulfilment of due diligence obligations.

The requirements initially apply to the company's business operations and direct suppliers. In addition to the company itself, its business operations include affiliated companies as defined in Section 15 of the German Stock Corporation Act (AktG) if a decisive influence is exercised over them; this also applies to foreign subsidiaries. About the indirect supplier, a weakened cause-related due diligence obligation applies, i.e. the company must take action in the event of substantiated knowledge of a human rights violation. 

The principle of reasonableness is reflected here as follows: companies are only required to do what is possible based on their context (size, type of business activity, proximity to the supplier). In addition, companies are not required to guarantee success but to implement specific measures.

Sanctions for failures or violations

The Federal Office of Economics and Export Control (BAFA) determines and sanctions any misconduct.

Sanctions can be imposed according to § 23 ff. LkSG, sanctions can result in compulsory fines of up to 50,000 euros or penalties of up to 800,000 euros. In the case of more than 400 million euros in annual sales, companies may even be subject to 2% of annual sales fines. Violations subject to penalties are also recorded in the competition register.

In addition, companies can be excluded from public contracts for up to three years in case of severe violations under Section 22 of the LkSG. This exclusion requires a legally established violation with a fine of at least 175,000 euros (threshold level depending on the severity of the breach). Under Section 22 (3) LkSG, the company must be heard before the decision on the exclusion. In addition, under Section 125 GWB, a company has the option of self-cleaning to avoid exclusion. 

However, breaching the obligations under the Supply Chain Sourcing Obligations Act does not give rise to any civil liability.

We will be happy to advise you on the LsKG as well as on the appropriate set-up of your company to support you in preventing possible misconduct.

Contact

Damon Rahimi Moghaddam, Spezialist Lawyer International Commercial Law.

rahimi@clayston.com

Niki Feric, Lawyer, Associate.

feric@clayston.com