Germany's Supply Chain Due Diligence Act Faces Initial Challenges

The German Supply Chain Due Diligence Act, in effect since January 1 of this year, has been thrust into the spotlight as the first cases under this groundbreaking legislation approach.

This law, which enables prosecutors to levy fines of up to 2 percent of a company's global turnover for neglecting to identify and prevent human rights and environmental impacts within their supply chains, has far-reaching implications.

Applicable to companies with a registered office or principal place of business in Germany, as well as foreign firms with a branch office there, the law initially affects companies with a workforce of at least 3,000 employees. However, from 2024, it will encompass those with just 1,000 workers, further widening its scope.

One key facet of this legislation is that it does not introduce fresh civil liability; nevertheless, it is expected to embolden non-governmental organizations (NGOs) to pursue legal action more readily against alleged human rights violations within German courts.

The European Center for Constitutional and Human Rights (ECCHR), spearheading a coalition of labor groups, recently made the first complaint under the legislation. Their target: Amazon, IKEA, and Tom Tailor. The complaint centers on these companies' purported lapses in ensuring the safety of employees producing goods on their behalf in Bangladesh. Notably, the complaint is not a claim of liability for harm but rather an assertion of failures in upholding safety standards.

Continuing their pursuit of accountability, the ECCHR filed another complaint on June 21 with the German Federal Office for Economic Affairs and Export Control (BAFA). This time, it targeted automotive giants Volkswagen, BMW, and Mercedes-Benz. The ECCHR alleges that these companies have yet to provide substantiating documents demonstrating their adequate response to the risk of forced labor in supplier factories in China's Xinjiang region.

Crucially, none of the companies named in either of the ECCHR's complaints believe they have violated the law. Each emphasizes their commitment to labor rights and supply chain safety.

Experts have shed light on the ambiguity surrounding companies' potential culpability under this new legislation due to the absence of guidance and case law. According to Simon Geale, Executive Vice President of Procurement at consultancy Proxima, the efficacy of the legislation should be evaluated not merely by the speed of investigations but by its capacity to bring about substantive change.

The law establishes a duty of effort rather than an obligation to achieve a specific outcome. Consequently, companies find themselves grappling with questions about the standards they will be held to and the repercussions of non-compliance.

As these initial cases unfold, they offer a glimpse into the impact of the German Supply Chain Due Diligence Act on corporate practices and accountability. The outcomes will undoubtedly shape the future landscape of supply chain due diligence, underscoring the importance of human rights and environmental considerations in the business world.

By fLEXI tEAM