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Supply Chain Act

  • Legal Development 18 February 2021 18 February 2021
  • UK & Europe

The German Government has adopted a draft Human Rights Due Diligence Regulation (Supply Chain Act). The Supply Chain Act is a result of perceived lack of self-regulation of companies in order to avoid human rights violations by suppliers. The law now obliges companies to ensure that also their suppliers respect human rights.

However, contrary to previous discussions, the adopted draft will not introduce new liability obligations and, thus, is less strict than feared by the business community. The Act is planned to be passed by German Parliament before the General Election in September but will not become effective prior to 2023 (cf. the German press release here).

In contrast to earlier drafts, the adopted draft provides that not all companies with more than 500 employees but at first only large companies (> 3000 employees) and then, from 2024, also smaller companies (> 1000 employees) are affected by the regulation.

The Supply Chain Act contains various obligations, such as a duty to conduct risk analysis and take measures if violations are discovered. Risk areas covered are e.g. forced labour, child labour and environmental damage. Furthermore, there is an obligation of annual reporting of actual and potential human rights violations caused by the company's actions.

Instead of civil liability, companies now face fines in case of human rights violations. The exact fines have not yet been set, but according to the Government, they could amount to up to ten per cent of the annual turnover, analogous to the law on corporate integrity and similar provisions in the GDPR and competition law. Due to the difficulty of having one company survey all suppliers, a gradual responsibility applies to indirect suppliers beyond tier 1. A risk analysis is only required if an employee of an indirect supplier makes a complaint to the German company.

The proposed legislation has been widely criticised, considering that this unilateral action taken by Germany may disadvantage domestic companies in international competition. At European level, an even stricter Supply Chain Act is currently being worked on.

The new compliance obligations also imply insurance ramifications. This includes a further increased risk exposure for directors and officers alongside the sanctions against companies. Important questions include, e.g., the insurability of fines or whether and to what extent companies might seek recourse from their D&Os and, if so, how D&O insurance policies respond to such claims. 

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