The "Supply Chain Act": Overview and Classification

Daniel Wuhrmann

Given prominent placement by the Federal Ministry for Economic Cooperation and Development and the Federal Ministry of Labor and Social Affairs, the "Supply Chain Act" has been the subject of intense discussion for months, but the government has yet to present a binding draft: only a few key points and requirements have been announced so far. At the same time, there has been some activity at the EU level, where working groups have been created. Accordingly, it is to be expected that mandatory guidelines will be adopted at the European level in the not all-too distant future. If the structures and content which have become known so far prove to be in the final version, these guidelines will be very similar to what is currently known about the German Supply Chain Act.

Background and current state of things

In 2011, the United Nations adopted Guiding Principles on Business and Human Rights, which defined state duties and corporate responsibilities to respect human rights in global supply chains. In its "National Action Plan to Implement the UN Guiding Principles" (NAP) (PDF only in German) in December 2016, the German government initially sought to implement these principles on a voluntary basis, in the expectation that German companies would ensure that their business does not have an adverse impact on fundamental rights. But since two rounds of studies have yielded only meager and unsatisfactory results, the two Federal Ministries have now stated that they are working on the initial drafts of a "Supply Chain Act" based on the relevant provisions of the NAP and the present Coalition Agreement.

Known provisions

The bill will apply to companies based in Germany with more than 500 employees and will focus on "relevant risk areas" such as forced labor, child labor and discrimination. Its provisions will be based on the aforementioned UN Guiding Principles on Business and Human Rights, as well as the OECD Guidelines for Multinational Enterprises: Due Diligence Guidance fir Responsible Supply Chains. It will define required actions as well as reporting duties. There has also been talk in this context of a federal agency with regulatory functions. Companies will essentially be required to investigate, analyze, prevent, minimize and, if necessary, remedy potential adverse effects which their activities may be having on human rights. The bill will also provide for fines against companies and enforceable damage claims for injured parties, but both the fines and the damage claims will be contingent upon the company's failure to satisfy its "duty to make best efforts." What this means from a legal viewpoint is that the type and degree of due diligence which companies are required to exercise depend on an ex-ante analysis of the requirements for prudent and conscientious management given the specific position and social role of the acting party. In other words, if the company does everything that it could reasonably be expected to do within the limits of its legal and factual ability but an injury nevertheless occurs, the company cannot be held liable.

Consequences for companies if the currently known content is implemented

It remains to be seen whether this bill will even make it to Federal Parliament this session, or if the European Union will preempt it in the end with regulations of its own.

Challenges for the future

The requirements which have become known so far go much further than existing statutory provisions. This will come into play especially for highly complex supply chain structures in which the stakeholders are constantly changing. Companies which are affected by these changes will face great challenges not only due to the need to create structures and resources of their own, but will also have to rely on external structures such as e.g. information and analytics platforms or inspection service providers.

Comprehensive "tools" and binding standards which businesses could use to orient themselves are only available in isolated cases and the potential burden of severe fines and damage claims will exert substantial pressure on companies, which can ultimately be countered only at considerable expense. As a result, it is of urgent importance for companies to stay "up-to-date" on future developments. Ideally, they should act now to analyze their own corporate and supplier structure, as well as their handling of sustainability requirements. Identifying and addressing critical areas and potential solutions in advance will reduce stress in the future. We look forward to hearing from you.

[November 2020]