New German Law on Duty of Care in Supply Chain Organization enters into force on 1 January 2023

Last week, the German Parliament (Bundestag) passed the new Act on Supply Chain Duties of Care (Lieferkettensorgfaltspflichtengesetz, the “Act”) with a majority of the votes of the governing coalition of the Christian Democratic Party (CDU/CSU) and Social Democratic Party (SPD) and the votes of the Greens (Bündnis 90/die Grünen). The Act will come into force as planned on 1 January 2021. Companies exceeding a certain size by employees will then obliged to analyze their own business area as well as their supply chains (procurement & distribution) for compliance with human rights and environmental obligations and to take preventive and remedial measures. The draft published on 19 March has undergone numerous changes, but these have not changed much in substance. Essentially, clarifications and linguistic adjustments have been made.

Scope of application

From 1 January 2023, the Act will apply to companies with 3,000 or more employees. From 1 January 2024, it will also affect companies with 1,000 employees and more. The prerequisite is that the head office, the main branch, the administrative headquarters or the registered office must be located in Germany. However – and this is new - the Act will also apply to branches of foreign companies, provided that the aforementioned thresholds relating to the number of employees are reached or exceeded.

Expansion of environmental obligations

The human rights-related and environmental obligations to be complied with by companies are defined in the Act to the effect that the international treaties and agreements listed therein must be observed. These are listed in an annex to the Act. Newly added are more extensive environment-related obligations with regard to the import and export of waste as well as waste trade. In addition to the Stockholm Convention and the Minamata Convention, the Basel Convention has now been expressly included.

Civil liability risk remains

The risk of tort liability for companies remains existing. Although the Act itself does not provide for any specific liability, the risk of a general liability in tort under sections 823 (1) and (2) of the German Civil Code remains. Even if, according to Art. 4 (2) Rome II Regulation, the law of the country in which the damage occurred (place of performance) is to be applied in principle, it cannot be ruled out that a court will interpret the rules of the Act as internationally mandatory standards of German law. The revision of the draft law has not brought any clarity here. In addition, the current draft directive of the Legal Affairs Committee of the European Parliament stipulates that the member states must ensure that an internationally mandatory provision is included in a national law that must then be adapted to the directive.

However, there is also an important passage in the explanatory memorandum to the Act that could benefit companies. The legislator states very clearly that no company may be required to do anything that is legally or factually impossible. In such cases, there is also no liability. In addition, those who claim to have rights under German tort law against a company must still show and prove the breach of the duty of care. This is because the new law does NOT provide for a reversal of the burden of proof.

The lawmakers have stated in the explanatory memorandum that a company fulfills its duty of care even if it could not trace its entire supply chain or take certain preventive or remedial measures because this would have been factually or legally impossible: ‘Legally impossible’ means, for example, that its conduct would violate applicable law. ‘Factually impossible’ means, for example, that a company has reached its limits due to a lack of influence. An example of a company - despite making reasonable efforts – being unable to trace the origin of a raw material processed in its product is where the raw material could only be obtained via international commodity exchanges. However, the legislator also sets high hurdles here. Constantly developing technical, in particular computer-based, possibilities (e.g. the use of blockchain technology) have to be taken into consideration. Consequently, the courts will presumably impose high requirements and possibly also demand the use of technologies available on the market.

Outlook

Companies affected by the Act must now set themselves up organizationally as quickly as possible in order to meet the requirements of the Act. This is not just a matter of civil liability risks. Because under the Act, breaches of the duty of care are sanctioned with drastic penalties and fines. Developments similar to those in antitrust law and data protection law are to be expected. Possible aggravations may once again result from a European directive.

Link to current draft (German language)