Minimum standards along the supply chain - Effects of the supply chain law on German companies

For internationally operating companies, new demands on their international supply chains are coming into focus. In Germany, the political debate concerning a so-called supply chain law is taking shape. A first draft is expected within the next few months. At the same time, the introduction of a similar set of rules and regulations at EU level is being discussed; a decision on this matter is expected in 2021. Other European countries such as the Netherlands and the United Kingdom have already introduced corresponding legislation.

With the supply chain law planned in Germany, large and medium-sized companies are to be obliged to guarantee minimum ecological and social standards also with respect to their foreign business partners in the supply chain. At its core, it is a matter of compliance with basic human rights standards in the supply chain, for example with regard to the prohibition of child labour or the slavish exploitation of employees. Up to now, the prevention of such practices among foreign suppliers has been based mainly on voluntary commitments by German companies, with the exception of a few legally defined special regulations, such as those concerning so-called conflict minerals.

Compliance obligations andcompetitive advantages

With a legal requirement in the supply chain law, stricter regulations on ecological and social minimum standards beyond the previous voluntary commitments can be expected. It is now already foreseeable that violations will have severe consequences for German companies. These could range from administrative offences to claims for damages against the companies concerned. In addition, there are personal liability risks for responsible managers in the companies.

Customers in Germany and other industrial nations are also increasingly paying attention to the extent to which companies are internationally positioned with regard to the protection of human rights and sustainability. In B2B business, numerous suppliers and customers are already demanding today that compliance with social standards and environmental requirements be guaranteed. This applies increasingly to the private sector, but also to public procurement. Effective compliance mechanisms to protect minimum standards for sustainability and human rights can therefore already be a decisive competitive advantage today.

Clearly-defined consequencesfor German companies havinginternational supply chains

Already today, internationally operating companies can start to minimize risk potentials by preparing due diligence measures with respect to existing supply chains at an early stage. A particular challenge in this regard is, not only in the case of direct foreign contract partners, to ensure compliance with minimum standards concerning human rights and sustainability issues. Rather, in the future it is likely that subcontractors and other companies being part of the supply chain will also have to be reviewed for their ecological and social compliance. In this respect, the principle of “Know Your Supplier” applies! Accordingly, German companies have to know the “chain links” in their supply chains where risks must be identified and analysed.

The content-related design of the due diligence can follow the guidelines of the UN Principles for Business and Human Rights and the OECD Guidelines for Multinational Enterprises. Essential obligations are therefore, among other things, the observance of human rights and the pursuit of sustainable development. The new supply chain law will probably also be based on these principles. Thus, transparency obligations are expected, e. g. in the form of reporting and publication requirements. The key topics along the supply chain will, in particular, be the freedom of association and collective bargaining, the prohibition of forced and child labour, and the elimination of any discrimination. Further due diligence obligations can, among other things, be expected with regard to the fight against corruption, consumer interests, science and technology, competition and taxation.

From a legal perspective, international supply agreements will require an adjustment of the contractual arrangements in future in order to ensure that the necessary information is passed on along the supply chain. In fact, medium-sized and large German companies will have to systematise and examine a large amount of data and information from the supply chains. The introduction of structured processes and the use of legal tech tools will help companies to meet these challenges.

Another key element for ensuring minimum ecological and social standards in the supply chain is the establishment of preventive and remedial measures as well as effective complaint mechanisms along the supply chain. This also includes measures for whistleblower protection and the documentation of due diligence measures to protect social and sustainability standards. At the same time, the implementation of such concepts can help internationally operating companies to avoid becoming the focus of foreign official investigations or legal disputes if a supplier violates (local) legal requirements.

Extended liability risks forauditing companies?

By conducting audits and issuing certifications for foreign suppliers, auditing companies make it easier for German companies to prove compliance with minimum social and ecological standards in their supply chains. Many internationally operating companies are using the services of such auditing companies within the framework of voluntary commitments already today.

Up to now, in the event of incorrect assessments by auditing companies, there has only been a liability risk vis-à-vis the (German) contract partner who relies on an issued assessment.

By introducing the new regulations of the supply chain law, however, an extension of the liability of such auditing firms is being discussed. Accordingly, additional liability risks could arise for auditing firms if the supply chain law created a basis for claims for damages by affected persons from (incorrectly) audited companies raised directly against the auditing companies.

Details on this are currently still being politically fine-tuned and cannot be assessed in advance. Nevertheless, it can be anticipated that the use of additional compliance mechanisms by auditing firms in their international activities will become a virulent topic in the foreseeable future.

We are continuously monitoring legal developments in connection with a supply chain law and the resulting consequences for internationally operating companies. If you have any questions, please contact us at any time. We will be happy to provide advice and work with you to develop solutions being tailored to your business model.