German supply chain draft legislation expected to have far-reaching effect |

Following months of fierce debate, Germany’s government adopted on March 3 a draft “Supply Chain Act” (Lieferkettengesetz), also called the “Due Diligence Act (Sorgfaltspflichtengesetz),” now being weighed in German parliament. On May 7, the legislation passed the upper house; it is currently in the lower house for final discussion and voting.

“What we’re hearing in Berlin is that the Act more likely than not will go through,” says Patrick Späth, a partner at Morrison & Foerster in Berlin. If that’s the case, it’s likely to pass by September and enter into force on Jan. 1, 2023.

Germany’s government took legislative action after the country’s previous system of voluntary self-commitments to human rights failed to meet the desired 50 percent mark. According to a 2020 report published by the German Foreign Ministry, only 22 percent of the 455 companies who voluntarily participated in the survey met the requirements set out in the National Action Plan (NAP). The NAP implements the UN Guiding Principles on Business and Human Rights.

“The challenge for large international companies will be to compare the requirements with respect to human rights due diligence under various jurisdictions.”

Patrick Späth, Partner, Morrison & Foerster

The Supply Chain Act broadly defines “supply chain” to encompass all of a company’s products and services, both domestically and abroad, from extraction of the raw material to delivery to the customer. Additionally, the legislation broadly defines human rights violations as those that include forced labor and slavery; child labor; occupational health and safety violations; and environmental harm that adversely affects people’s livelihoods or health. The harm includes the manufacturing of mercury-added products and the production and use of certain banned chemicals.

Geographically, the legislation applies to companies that either are headquartered in Germany or whose main base of business or registered office is in Germany. “So, if you are an American company of a certain size and you do business in Germany, then you may have to comply with what the law stipulates,” says Johannes Weichbrodt, a partner at Mayer Brown in Düsseldorf. “This is because the law applies to the German subsidiaries of multinational companies, provided they meet the threshold, including U.S.-incorporated companies with German subsidiaries.”

Initially, the legislation will apply to companies with at least 3,000 employees, including employees at subsidiaries and temporary workers whose duration of assignment exceeds six months. Effective Jan. 1, 2024, the minimum threshold will be reduced to 1,000 employees. It is expected the law will impact roughly 3,000 companies.

Except for France, which passed a similar law in 2017, Germany is the only other European country to introduce mandatory due diligence supply chain legislation. Weichbrodt describes Germany’s legislation as “trailblazing,” as it could set the standard for the rest of Europe.

The law comes at a time when the European Union is considering a European regulation that would impose very strict supply chain due diligence obligations on companies. It remains to be seen, however, how the European directive will compare to German’s Supply Chain Act, Weichbrodt says.

Due diligence obligations

Under the Act, German companies must do their best to prevent human rights or environmental abuses in their supply chain but do not have to guarantee the absence of any such abuses. Rather, they must demonstrate they have implemented the due diligence obligations in their supply chains in an “appropriate manner,” leaving each company to decide for itself what measures are appropriate.

The legislation’s core due diligence requirements (translated below from the original German) include the following:

Establishment of a risk management system (Section 4). Under the legislation, companies must have in place an…

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