Supply Chain Act

how corporations should be liable in the future

Supply Chain Act

In the wake of globalisation, supply chains have become increasingly international, and are now dominated by non-EU Member States with lower environmental and human rights standards. This often leads to European companies indirectly prolonging, or at least profiting from, these conditions in the countries of production. 

To minimise the negative impact of this development on human rights and the environment, a number of countries have already enacted national supply chain laws. However, these laws differ greatly in terms of their scope and content, as well as in the obligations, liabilities and sanctions that result from them. A new EU Directive, which is to be implemented by the Member States, is intended to impose uniform regulation throughout Europe. A proposal to this effect has already been submitted by the European Commission. But what exactly does it regulate? 

The Directive applies to European limited liability companies and all regulated financial companies that exceed certain turnover or employee limits, with lower limits applying to companies in ‘high-impact’ sectors. For companies from third countries, the Directive is only binding if they exceed certain turnover limits within the EU. High-impact sectors include textiles, agriculture and food production, companies that extract or process minerals or chemicals, and the financial sector. Conversely, smaller companies in the high-risk sectors still have two years to comply with these new due diligence requirements. 

The due diligence obligations apply to the company’s own business activities, those of its subsidiaries and all of a company’s activities in the value-added chain with which established business relationships exist. The European Commission’s directive proposal also provides for the performance of risk analyses. This is intended to identify the current or potential negative impact of a company’s business activities on the environment and human rights and to derive appropriate preventive and corrective measures from this. In addition, companies must establish an internal complaints procedure for individuals and organisations. 

The core of the EU proposal grapples with the question of civil liability for affected companies that have not fulfilled their obligation to prevent or end a negative impact. As a result, it focuses on the instances where the negative impact of a business activity should have been identified, prevented or terminated, or could have been minimised through measures being taken. The claim cannot be denied because the state in which the damage occurred does not provide for supply chain liability. In addition to civil liability, Member States should also provide for mandatory penalties for violations of the implementation of the Directive going forward. 

The EU Parliament and the Council will now decide on the current draft. After this, Member States will have two years to transpose the Directive into national law. 


AUTHOR:

Dr. Julia Andras, Attorney-at-Law and Managing Partner at LGP

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