A first look at the new German Supply Chain Due Diligence Act

On June 11, 2021, the German parliament passed a federal bill on corporate due diligence obligations with regard to supply chains under the title “Gesetz ueber die unternehmerischen Sorgfaltspflichten zur Vermeidung von Menschenrechtsverletzungen in Lieferketten,” also known as “Lieferkettensorgfaltspflichtengesetz” or “LkSG.

This new law is the outcome of a project that dates back to 2016 and was aimed at implementing the UN Guiding Principles (UNGPs) on business and human rights in Germany. It is worth noting that the Bundestag passed this bill in the penultimate session of the four-year term of the previous government, the end of which also marked the end of Angela Merkel’s long tenure as chancellor.

The LkSG introduces a new standard of corporate duties in Germany and follows in the wake of similar laws enacted recently in California, the United Kingdom, France, and the Netherlands. Human rights and corporate environmental impact are top priorities on the EU political agenda: the EU Commission conducted a “Study on due diligence requirements through the supply chain” in 2020 and is expected to issue a draft regulation on the subject in 2022.

As of January 1, 2023, any German company with more than 3,000 employees will be subject to the LkSG, and one year later it will apply to companies with more than 1,000 employees. It will also apply to foreign companies that operate in Germany and reach those employee thresholds.

This law introduces a new standard for compliance duties that will require German companies (as well as those that operate in Germany, under certain conditions) to review their value chains in their entirety and implement compliance and governance mechanisms on the basis of appropriate risk management systems. The aim is to impose a duty on companies to respect human rights and to comply with environmental protection standards along the entire chain of suppliers. The latter concept is extensively expressed by the LkSG in a way designed to include not only suppliers, but all players both upstream and down to consumers; moreover, it concerns not only the company’s factories and sites, but also those of their direct suppliers (“Tier 1”), and it applies no matter where suppliers and sites are based.

The LkSG cites a long list of international human rights treaties and multilateral environmental protection agreements that will shape a new compliance management system. Additionally, the law provides a detailed list of policies and protocols that companies shall set up in order to prevent, detect, and remedy any risky situations along their entire value chains. This may even trigger the termination of contracts with suppliers as an extrema ratio.

Sanctions include hefty fines and penalties, disgorgement of profits, entry in the competition register, and exclusion from public tenders. Clearly, a high risk of reputational damage is also involved.

Companies subject to the LkSG will be supervised by the Federal Office of Economics and Export Control (a public body known as the “BAFA”), and it is worth noting that this law allows trade unions and non-governmental organizations to take legal action, meaning that companies that infringe related obligations may face both administrative proceedings and civil court claims. The latter option is still debated, in light of the LkSG, but German Courts will decide whether and in which terms it is possible to start a civil case based on violation of this law.

In conclusion, the LkSG is a first and important step toward further German legislation in the field of company compliance and corporate liability reform; more broadly, it will be part of a general ESG regulation whose effects are already being felt by many other countries. Finally, iIt is expected to have particular impact from an Italian perspective, in light of the very close commercial relationship between the two countries.

Follow us on