Editor’s note: Katharine Booth holds a LLM, Advanced Programme in European and International Human Rights Law from Leiden University, Netherlands and a LLB and BA from the University of New South Wales, Australia. She is currently working with the Asser Institute in The Hague. She previously worked for a Supreme Court Justice and as lawyer in Australia.

Overview

On 12 February 2020, the United Nations High Commissioner for Human Rights (Commissioner) issued a report on all business enterprises involved in certain activities relating to Israeli settlements in the Occupied Palestinian Territory (OPT) (Report). The Report contains a database of 112 businesses that the Commissioner has reasonable grounds to conclude have been involved in certain activities in Israeli settlements in the West Bank. Of the businesses listed, 94 are domiciled in Israel and the remaining 18 in 6 other countries: France, Luxembourg, the Netherlands, Thailand, the UK and the US. Many of the latter are household names in digital tourism, such as Airbnb, Booking, Expedia, Opodo and TripAdvisor, as well as Motorola.

Swift and Mixed Reactions

The drafting and publication of the Report has been much delayed and hugely controversial. The UN has repeatedly been criticised for its “disproportionate focus and unending hostility” as well as political bias towards Israel. In the press release accompanying the publication of the Report, the current Commissioner, Michelle Bachelet, acknowledged its controversial nature: “I am conscious this issue has been, and will continue to be, highly contentious”.  

Unsurprisingly, reactions to the Report have been swift and mixed. Within hours of its publication, Israel’s Ministry of Foreign Affairs denounced the Report as a “blacklist” of companies and, as a self-described “exceptional and harsh measure” in retaliation for its publication, suspended its ties with the United Nations Human Rights Council (Council). By contrast, the Palestinian Foreign Minister praised the Report as a “victory for international law”, and the Prime Minister entreated companies in the database to immediately cease their operations in the Israeli settlements, stating that his government would “pursue the companies listed in the report legally through international legal institutions and through the courts in their countries for their role in violating human rights”.[1] Closer to home, a spokesperson for the Dutch Ministry for Foreign Affairs criticised the Council’s one-sided focus on Israel, as well as the UN’s involvement in the issue of companies operating in the OPT, which in the opinion of the Dutch government is not primarily the responsibility of the UN but of states.

NGOs focused on responsible business conduct (RBC) have welcomed the Report as an important step to holding listed businesses to account under national and international law. Al-Haq, an NGO based in the West Bank, commented on Wafa, the Palestinian newsagency, that the database was “integral to ending corporate complicity in human rights violations” and emphasised the importance of the database being updated annually: “Adding and removing companies from the long-awaited database creates a necessary incentive and deterrent against engaging with Israel’s illegal settlement industry.”[2] Moreover, Human Rights Watch commented, “The long awaited release of the UN settlement business database should put all companies on notice: to do business with illegal settlements is to aid in the commission of war crimes.”

Scope and Purpose of the Report

The Council mandated the production of the Report in Resolution 31/36 on “Israeli settlements in the Occupied Palestinian Territory, including East Jerusalem, and in the occupied Syrian Golan”, adopted in March 2016. Paragraph 17 of the Resolution required the Commissioner, in “close consultation” with the UN Working Group on Business and Human Rights, to produce a database of all business enterprises involved in activities contained in paragraph 96 of the Report of the independent international fact-finding mission to investigate the implications of the Israeli settlements on the rights of Palestinians in the OPT (Fact-Finding Mission Report). In particular, the drafting of the list involved interpreting and applying three cumulative elements: (a) “business enterprises”; (b) “involved”; (c) in one or more “listed activities”.

(a)   “Business Enterprises”

The Commissioner construed “business enterprises” to mean “all relevant entities” of concern, “including parent companies and their subsidiaries, franchisors and franchisees, local distributors of international companies, partners and other entities in relevant business relationships.” The nature and substance of the functions and activities of the businesses’ entities, irrespective of the corporate structure or characterisation of the business under national law, was taken into account for the purpose of the Report. Notably, the broad construction of “business enterprises” in the Report reflects the equally broad meaning of “business relationships” in the United Nations Guiding Principles (UNGPs), namely “relationships with business partners, entities in its value chain, and any other non-state or state entity directly linked to its business operations, products or services.”

(b)   “Involved”

Similarly, the Commissioner construed “involved” very broadly to include “substantial and material business activity that had a clear and direct link to one or more of the listed activities”, namely a  business enterprise itself engaged, or a parent company owning a majority share of a subsidiary engaged, or a business enterprise granting a relevant franchise or license to a franchisee or licensee engaged, in a listed company in the OPT. Again, this construction mirrors the UNGPs which provide that the responsibility of businesses to respect human rights requires that they seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by business relationships, even if they have not contributed to those impacts.

Only activities between the period 1 January 2018 to 1 August 2019 fell within the scope of the Report.

(c)    “Listed activities”

In contrast to the broad understanding of the first two cumulative elements, the Commissioner construed the meaning of “listed activities” narrowly. The database only captures the activities listed in paragraph 96 of the Fact-Finding Mission Report. These activities generally relate to the supply or support of Israeli settlements in the West Bank. However, for clarity, paragraph 96 is set out in its entirety: 

Information gathered by the mission showed that business enterprises have, directly and indirectly, enabled, facilitated and profited from the construction and growth of the settlements. In addition to the previously mentioned violations of Palestinian worker rights, the mission identified a number of business activities and related issues that raise particular human rights violations concerns. They include:

(a) The supply of equipment and materials facilitating the construction and the expansion of settlements and the wall, and associated infrastructures

(b) The supply of surveillance and identification equipment for settlements, the wall and checkpoints directly linked with settlements

(c) The supply of equipment for the demolition of housing and property, the destruction of agricultural farms, greenhouses, olives groves and crops

(d) The supply of security services, equipment and materials to enterprises operating in settlements

(e) The provision of services and utilities supporting the maintenance and existence of settlements, including transport

(f) Banking and financial operations helping to develop, expand or maintain settlements and their activities, including loans for housing and the development of businesses

(g) The use of natural resources, in particular water and land, for business purposes

(h) Pollution, and the dumping of waste in or its transfer to Palestinian villages

(i) Captivity of the Palestinian financial and economic markets, as well as practices that disadvantage Palestinian enterprises, including through restrictions on movement, administrative and legal constraints

(j) Use of benefits and reinvestments of enterprises owned totally or partially by settlers for developing, expanding and maintaining the settlements

The scope of the activities that may cause a business enterprise to be listed in the database is therefore restricted. As the Report notes, the database does not cover all business activity in the settlements, nor business activity in the OPT that may raise human rights concerns.  Indeed, several high-profile companies known to be operating in the Israeli settlements by key NGOs have not been named.

The restricted scope of the database assists to identify the purpose of the report, namely:

Private companies must assess the human rights impact of their activities and take all necessary steps – including by terminating their business interests in the settlements – to ensure that they do not have an adverse impact on the human rights of the Palestinian people, in conformity with international law as well as the Guiding Principles on Business and Human Rights. The mission calls upon all Member States to take appropriate measures to ensure that business enterprises domiciled in their territory and/or under their jurisdiction, including those owned or controlled by them, that conduct activities in or related to the settlements respect human rights throughout their operations.[3]

At the heart of the Report are the UNGPs, including the binding obligation on states to protect human rights, and the corporate responsibility to respect human rights in business operations. In the absence of the Israeli government’s compliance with its obligation to protect the human rights of Palestinians in relation to the unlawful Israeli settlements in the OPT, and the inability of the UN to enforce such compliance, the focus of the Council has instead shifted to what other Member States and businesses can do to remediate the harm caused by these settlements. Such states can implement legislation in accordance with the UNGPs, requiring companies to conduct human rights due diligence (HRDD) regarding their operations, thereby effectively ensuring legal accountability for companies that operate in and assist the Israeli settlements. As powerfully stated by the Commissioner in the preliminary report on the database published in February 2018:

… considering the weight of the international legal consensus concerning the illegal nature of the settlements themselves, and the systemic and pervasive nature of the negative human rights impact caused by them, it is difficult to imagine a scenario in which a company could engage in listed activities in a way that is consistent with the Guiding Principles and international law. This view was reinforced in Human Rights Council resolution 34/31 on the Israeli settlements, in which the Council referred to the immitigable nature of the adverse impact of businesses’ activities on human rights.

Businesses have been warned.

The Direct and Indirect Effects of the Report

The Report has no direct legal effect on businesses listed in the database. Indeed, the Report notes that the database “is not, and does not purport to constitute, a judicial or quasi-judicial process of any kind or legal characterization of the listed activities or business enterprises’ involvement therein.” The database is merely a list of business enterprises that the Commissioner has factually determined as being involved in the listed activities. Accordingly, the Report is not in any sense a “blacklist” of listed businesses, nor is it intended to brand such businesses as ‘illegal’ or operating in an illegal manner.

Nonetheless, the Report may have indirect non-legal and quasi-legal effects for listed business enterprises, particularly well-known businesses domiciled outside of Israel that operate in markets in which consumers and stakeholders are concerned about RBC and sustainable investment. In relation to potential, non-legal effects of the database, listed businesses may experience a backlash as a result of public mobilisation. As pointed out in the Ruggie Framework, failure to meet the “baseline responsibility” of companies to respect human rights “can subject companies to the courts of public opinion - comprising employees, communities, consumers, civil society, as well as investors”. The ‘courts of public opinion’ (better known as bad press) may encourage businesses listed on the database to, ultimately, divest from or cease their activities in the Israeli settlements.

Indeed, the Report provides a mechanism for listed businesses to be removed from the database, which is not static but rather is updated annually. Listed businesses may provide information to the Commissioner indicating that they are no longer involved in a listed activity and, if the Commissioner has reasonable grounds to believe that this is the case, the business can be removed from the database. Similarly, businesses that commence one or more listed activities may be subsequently added to the database. Accordingly, business activity in the OPT is and will continue to be closely monitored by the Commissioner and civil society.

Perhaps the Report will add fuel to the fire of the Boycott, Divest and Sanctions (BDS) movement, which aims to discourage companies (and other stakeholders) from supporting the Israeli government and investing in the Israeli settlements in the OPT. Certainly, the identification of specific companies by the UN, the most influential intergovernmental organisation in the world, has been heralded by the BDS movement as ��a first significant and concrete step by any UN entity towards holding to account Israeli and international corporations that enable and profit from Israel’s grave violations of Palestinian rights.” Only time will tell if or how states and stakeholders (including consumers, shareholders, institutional shareholders and civil society) will utilise the database for their own ends.

Proactive governments may also put pressure on companies operating in the OPT to cease their operations. Government may leverage their considerable economic power to encourage companies to engage in RBC, including HRDD. For example, states can implement policies requiring businesses to have in place satisfactory HRDD processes to be eligible for public procurement contracts. However, the effectiveness of such policies in the case of businesses operating in the OPT may be limited, for the simple reason that the majority of listed businesses in the database are domiciled in Israel and therefore in all probability less likely to bid for European or US procurement contracts. However, requiring HRDD processes may be an effective strategy in relation to businesses listed in the database operating in the infrastructure and construction industries, such as those domiciled in France (Egis Rail), the Netherlands (Tahal Group International B.V., Altice Europe N.V., Kardan N.V.) and the UK (JC Bamford Excavators Ltd, Greenkote P.L.C.). Interestingly, these jurisdictions have been at the forefront of the push towards incorporating corporate social responsibility, including HRDD, into national legislation.

Additionally, the Report may have indirect quasi-legal effects for listed businesses. In jurisdictions that have implemented legislation in accordance with the UNGPs and OECD’s Guidelines for Multinational Enterprises (OECD Guidelines), it is possible that quasi-legal action may be commenced against businesses listed in the database. For example, a complaint may be made by a NGO to a National Contact Point (NCP) that a listed business operating in the OPT has not complied with the OECD Guidelines. NCPs are not legal entities in the strictest sense – they rarely issue final determinations and cannot sanction companies for non-compliance with national and international law – but they are quasi-legal in that that they are empowered to issue persuasive, albeit non-binding, recommendations to businesses. In fact, in 2013 a Palestinian NGO successfully complained to the UK NCP that G4S, a global security company contracted by the Israeli government and operating in the West Bank,  had not met its obligation to address the impacts of its business relationship with that government, inconsistent with G4S’s duty to respect human rights under the OECD Guidelines. Successful claims such as these may inspire similar claims in other countries. As such, the Report may not have any legal effect, but it may indirectly support any quasi-legal claim made against a listed business in relation to their operations in the OPT.

A ‘Significant’ and ‘Concrete’ Step Forward

The Council will consider the Report during its 43rd Regular Session, from 24 February to 20 March 2020. Hopefully the Council will provide some guidance to states and listed businesses concerning their responsibilities and obligations under international law, as a result of the Report. Such guidance has been sought by Valentina Azarova in order to clarify the law as it stands for all concerned parties, as well as to ensure the effectiveness, integrity and transparency of the Council. It is essential for the responsibilities and duties of states and businesses to be crystal clear if the UNGPs are to be effectively incorporated into national law and, most importantly, if businesses are to comply with that law. The theory of the UNGPs and the rhetoric contained in the Report must be translated into practical guidance for companies to follow, in order that they may comply with and hopefully exceed their duty to respect human rights.

It has been almost 12 years since the release of the Ruggie Framework and 9 years since the adoption of the UNGPs by the Council. While the Guiding Principles remain just that – non-binding principles that seek to shape national and international legal developments – each year their persuasive influence increases. Slowly but surely, the UNGPs are permeating into the international legal framework – the Report is the most recent example of the normalisation of the notion of RBC. The release of the database is also indicative of what may be described as a shift away from the traditional focus of international law of holding states to account, to the focus on companies and their duties and responsibilities under international  human rights law. In the absence of concrete and effective action by the so-called ‘international community’ to long-standing and ongoing human rights violations, human rights advocates are seeking new mechanisms to hold states and businesses accountable. While these mechanisms are certainly not perfect, it is important to keep in mind that we are in the very early stages of a monumental shift in international law.

The Report is indeed a significant and concrete step towards holding businesses to account for their complicity in human rights violations. While the direct legal effects of the database are indeed limited, its potential indirect effects should be of serious concern for companies operating in the OPT. Listed businesses have been put on notice – on the international stage no less – that their actions are being monitored and may be contrary to national (and perhaps someday international) law. 

[1] ‘Calling to shut down offices in settlements, premier says companies will be pursued legally’ (WAFA, 12 February 2020)

[2] ‘Al-Haq: list of firms integral to ending corporate complicity in human rights violations’ (WAFA, 13 February 2020)

[3] Fact-Finding Mission Report, Paragraph 117

I. What happened so far

It took Ministers Heil (Labour, SPD), Müller (Development, CSU) and Altmaier (Economy, CDU) 18 months to agree on a draft for the Lieferkettengesetz (Supply Chain Law) to be presented soon to the German Bundestag for legislative debates. For an overview of the different proposals put forward by the Ministries and NGOs, and political discussion surrounding them, please check my previous blogs, which you can find here and here. You can also watch the panel discussion on the Lieferkettengesetz that we organized in November 2020 with Cornelia Heydenreich (Germanwatch), Miriam Saage-Maaß (European Centre for Constitutional and Human Rights), and Christopher Patz (European Coalition for Corporate Justice).

On 15 February 2021 the government’s “final” draft was published – the so-called “Referentenentwurf”. This initial agreement was met with relief from all parties involved, as it was preceded by a long-lasting deadlock. At first, Minister for Economic Affairs, Peter Altmaier, blocked Cabinet meetings so that the government position paper (“Eckpunkteplan”) published by Ministers Heil and Müller could not be discussed. Afterwards, Altmaier again blocked a compromise proposal brought forward by Müller and Heil in Cabinet. The matter went up to the “Koalitionsausschuss”, the committee that negotiates if members of the coalition parties cannot reach an agreement. This committee failed to come to an agreement. The issue of civil liability and the scope of application were the most controversial points. Thereafter, the matter reached the “Chefetage”, Angela Merkel. She sat down with the three ministers involved and Olaf Scholz, Vice-Chancellor and Minister for Finance (SPD), and tried to mediate between the different positions. The group met twice before, eventually, an agreement was reached resulting in the Referentenentwurf of 15 February 2021. The agreement did not last for long. Peter Altmaier withdrew (again) his support for the draft just after it had been circulated.

On 28 March 2021, another “final” draft was published. Those two drafts differ in subtle but impactful aspects. This blog post was originally based on the first draft; its text has been amended to integrate the changes introduced in the second draft. The second Referentenentwurf is the one signed off by Cabinet on 3 March 2021. In this blog, I will first summarize the main points of the draft(s), and afterwards review the various critical points raised against it.

II. Key elements of the final draft of the Lieferkettengesetz

In twenty-four paragraphs the draft Lieferkettengesetz codifies a “gradual due diligence obligation”[1] applying to risks to human rights and the environment occurring in supply chains. Cornerstone of the draft is the ‘principle of proportionality’: Companies must have regard for human rights in an ‘appropriate’ manner – ‘appropriateness’ depends on size and nature of the business, the degree of influence the company exerts over the entity that directly causes the human rights risks, the expected level of harm and the nature of the company’s contribution to the harm (cf. §3(2)). ‘Gradual’ effectively means that the most rigorous due diligence obligation applies to the company’s own economic activity, while a lower standard of due diligence obligation applies regarding the company’s direct suppliers, with whom it has a contractual relationship. Finally, a much less stringent due diligence obligation is imposed with regard to ‘indirect suppliers’, suppliers that supply the company’s direct suppliers, but with no direct contractual relationship to the company.

1. Personal scope of application

The question of the personal scope of application of a due diligence obligation is always a controversial one. For example, should it cover SMEs or should they be excluded?

The German Supply Chain Law, if enacted as it currently stands, would be applicable as from January 2023 to companies that fulfil two conditions: First, have their headquarters in Germany, and second, usually employ more than 3,000 people (§1(1)[2]). From 1 January 2024, this second threshold would be lowered to 1,000 or more employees. At the moment, there are 2,891 companies with 1,000 or more employees in Germany.[3] For an element of comparison, the French duty of vigilance law applies to between 200 and 300 companies.

The key concept used to determine whether a company falls under the scope of the future German law is whether it usually has more than 3,000 (and then 1,000) employees. The word ‘usually’ accounts for the fact that the number of people employed in a company can fluctuate immensely depending on the period of the year. These temporary fluctuations should not impact whether or not a company falls under the Supply Chain Law. In practice, the number of employees usually employed by a company will have to be determined on a case-by-case basis. Also, the current draft of the law foresees that employees on temporary working contracts will be considered if the company employs them for a duration of more than six months – irrespective of whether they are the same people or employed in the same position (§1(2)).

Finally, where a company is part of a group, the employees of each individual corporate entity will count towards the mother companies’ total number of employees (§1(3)).

Two aspects are particularly noteworthy: The final draft deviates from what NGOs proposed in that it fails to cover businesses which are smaller in size but operate in high-risk sectors such as surveillance or the arms trade. Furthermore, mere “business activity” in Germany does not suffice for a company to fall within the scope of application.

2. Scope of the due diligence obligation

The second fundamental question raised by mandatory due diligence legislation concerns the scope of the obligation. What are companies expected to do under the legislation? What type of processes do they have to put in place? And what type of risks do they have to monitor and prevent?

§4(1) and (2) of the draft law provides that companies must implement an appropriate risk management process, which allows them to identify, prevent, or minimize human rights risks and risks of environmental damage in their supply chains.

The object of the due diligence process

‘Risk’ is defined as imminent harm to one of the protected rights and the environment (§2(2)). The draft lists a number of specific situations in which the risk materializes, for example the risk that private security officers, hired to protect corporate entities, commit torture and other degrading treatment.

The due diligence obligation extends to human rights as well as the environment. The draft explicitly lists the following rights: Right to life, health, fair labor standards, appropriate living standards, child protection, freedom from slavery or forced labor, freedom of collective bargaining, protection from torture; and codifies certain obligations pertaining to the preservation of the environment (§2(1), (2), (3) and (4)). In this regard, a list of all relevant conventions and treaties is annexed to the draft.[4]

In the following, I will elaborate on the different compounds of the risk management process. As will be seen below, ‘risk management process’ is very similar to the due diligence process enshrined in the UNGPs.

The nature of the due diligence process

The company must first appoint a specialized human rights officer responsible for the company’s compliance with the due diligence obligation enshrined in the law (§4(3)). This obligation comports a number of steps: Risk analysis, preventative measures, corrective measures, communication. Additionally, the law foresees that the company will have to put in place a grievance mechanism.

Risk Analysis

The company must conduct a risk analysis in its supply chain (§5). This risk analysis is to be conducted regularly, at least once a year and as soon as there are changes to the company’s business activity or other factors indicate that a new risk analysis is necessary (§5(4)). Even though the notion of “supply chain” is defined quite extensively,[5] a risk analysis is only to be conducted in the company’s “own field of business activity”[6] and with regard to its direct suppliers (§5(1)). Thus, while indirect suppliers are included in the definition of “supply chain”, on the basis of which the draft operates, the actual obligation to conduct a risk analysis does not extend to them.

However, §5(1) also explicitly states that where a supply chain was designed to circumvent the obligation to conduct due diligence obligation enshrined in the Supply Chain Law – e.g. by creating unnecessary subsidiaries or fictitious intermediaries – indirect suppliers count as direct suppliers. This means that as soon as companies can be shown to have structured their supply chains in order to evade the law, they will have to conduct a risk analysis with regard to what are formally ‘indirect suppliers’.

The risks discovered pursuant to the risk analysis must be weighted and prioritized (§5(2)) according to:

• Nature and size of the business (§3(2) no. 1);
• Degree of influence the company exercises over the company that directly causes a human rights violation or damage to the environment (§3(2) no. 2);

• Typical intensity of the harm that can be expected, reversibility of the damage, probability of damage occurring (§ 3(2) no. 3);
• Nature of the contribution to the risk (§ 3(2) no. 4).

In conducting the risk management, the company must pay due regard not only to the employees of the company and employees of contractual partners, but also to everyone affected by the business activity of either the company itself or its suppliers (§4(4)).

Preventative measures

The next step in the risk management process is the adoption of preventative measures to tackle the risks identified at the risk analysis phase. The draft describes (in great detail) what measures the company could take in its own field of business activity (§6(3)) or towards direct suppliers (§6(4)). Again, indirect suppliers are not per se covered by the obligation to implement preventative measures.

Concerning direct suppliers, the draft requires corporations to adopt the following measures:

• The company has to take into account human rights and environmental expectations when selecting a direct supplier (§6(4) no. 1).
• A contractual commitment of the supplier to abide throughout its supply chain by human rights and environmental standards required by the company’s management (§ 6(4) no. 2).
  

With regards to the second point, the explanatory notes add that the company should contractually enshrine which specific conditions the supplier has to fulfil in order to prevent or minimize the risks to human rights and the environment identified in the risk analysis. [7]

In order to ensure that the direct supplier complies with these obligations, the company should also take the following contractual measures (§6(4) no. 3):

• Enshrine control mechanisms (§6(4) no. 3), i.e. the company’s right to review whether the supplier complies with its obligation.
• Implement training and workshops to be conducted by the supplier.

Even though ‘appropriate preventative’ measures only target direct suppliers, the explanatory note goes even further and proposes contractual clauses that could help ensure that human rights and the environment are respected further down the supply chain.[8] Supplier codes could become binding on indirect suppliers via so-called ‘transfer clauses’. Such transfer clauses oblige the direct supplier to impose the company’s supplier code to its suppliers through their contract. Moreover, companies could oblige their suppliers to obtain their raw materials from specified suppliers or buy certain products from certified regions (‘Chain of Custody Certificates’).

The explanatory notes also provide more detail on how the company can exercise control over its direct suppliers. The company could:

• visit the supplier’s premises and review the situation there.
• instruct third parties to conduct audits.
• make use of recognized certification or audit systems.[9]

When opting to instruct a third party or utilize a certification or audit system, the company must ensure that the assessments obtained are comprehensive and impartial.[10] Neither exempts the company from its obligation to conduct due diligence under the Supply Chain Law.

Corrective measures

If the company detects a risk linked to its ‘own business activity’ or to one of its direct suppliers that materialized or is about to materialize, then it must react immediately. The company will need to take appropriate ‘corrective measures’ to prevent, mitigate or terminate the harm to human rights or the environment (§ 7). The draft explicitly states that if a harm is caused by the company’s ‘own business activity’, the measures taken must lead to termination of the harm (§7(1)).

If the business activity of a direct supplier caused the harm, the law assumes that the company will not be able to immediately address it. In such cases, the company will have to draw up an ‘action plan’ in order to at least minimize the harm. This ‘action plan’ must include a clear time frame for implementation. In this context, ending the contractual relationship with its supplier is the last resort for the company. Even if the human rights violation is particularly grave, the company is urged (not obliged!) to end the contractual relationship only if the time frame set for the successful implementation of the ‘action plan’ has unsuccessfully passed, there are no less severe measures left, and it does not seem possible for the company to increase its leverage over the supplier (§ 7(3)).

The corrective measures taken must be reviewed at least once a year, and with every occasion or change in circumstances that warrant a review (§7(4)).

Public communication

Companies are expected to publish a policy statement (§6(2)), which should outline the due diligence process introduced by the company, the relevant risks identified in the risk analysis, and, on the basis of these relevant risks, the company’s expectations for its employees and suppliers regarding human rights and the environment. The company is also expected to publish a yearly report on its compliance with its due diligence obligation and to make it freely available on its website for at least seven years (§10).

Grievance mechanism

Finally, the companies subjected to the law will have to set up a grievance mechanism. The grievance mechanism must fulfil certain conditions:

• There must be a proper written procedure (§8(2)).
• The persons responsible to oversee the grievance mechanism must be impartial and independent; they must treat information confidentially (§8(3) – added by second draft).
• The company must provide accessible information on how to make use of the grievance mechanism (§8(4)).
• The identity of those who make use of the grievance mechanism must be protected. They must also be protected from any disadvantages that might follow from using the grievance mechanism (§8 (4)).

Instead of setting up its own grievance mechanism, the company can alternatively join an external grievance mechanism that fulfils these conditions (§8(1)).

The second draft of the Supply Chain Law includes two changes with regard to the grievance mechanism. First, it obliges the company to engage with any substantiated matters raised with those who submitted their complaint to the grievance mechanism. Second, it allows the company to offer a settlement (§8(1)).

Indirect suppliers

The risk management process, with all its compounds, only apply to direct suppliers, i.e. suppliers the company is in a direct contractual relationship with. There are two exceptions: 1) Where the supply chain was intentionally structured in such way as to evade the obligations of the law (§5(1); and 2) where the company obtains substantiated knowledge about a potential human rights violation or breach of environmental standards linked to an indirect supplier (§9(3)). The company could obtain such knowledge for example through its grievance mechanism or NGO reporting. Indeed, the grievance mechanism must be set up in such a way that individuals affected by violations or individuals who have knowledge of any violations can inform the company of such abuses occurring in its indirect supply chain (§8(1) of the second draft). 

3. Access to remedy and legal representation

Interestingly, the proposal also extends to the legal representation of potential claimants before the German courts. Instead of enshrining new civil liability grounds, the proposal allows individuals, who claim to have suffered a harm due to a violation of human rights as set out in §2(1),[11] to authorize trade unions and NGOs to litigate on their behalf (§11(1)). Violations of environmental standards are excluded. This provision does not change or add to the material law under which a company could be held liable. It is merely supposed to facilitate access of foreign claimants to German courts. Thus, the difficulties linked to the burden of proof, lack of financial aid, language barriers, and regarding the determination foreign law will remain.

4. Enforcement and sanctions

The law foresees that public authorities will be tasked with enforcing the due diligence obligation set out in the draft. The draft law outlines a detailed enforcement process potentially leading to considerable fines and exclusion from access to public procurement.

Monitoring

The Supply Chain Law empowers the competent authorities from the Ministry for Economy and Export Control (§ 19(1)) to:

• assess compliance with the obligations enshrined in the Supply Chain Law (§14(1) no. 1); and
• detect, terminate or prevent a breach of the obligations enshrined in the Supply Chain Law (§15).

In order to do so, the competent authorities are empowered to, for example, enter premises, review official documents and interrogate staff members (§16, §17).

The authorities can also compel the company to take certain action, like for example drawing up an action plan (§15 no. 1 and 2).

Sanctions: Fines and Exclusion from public procurement

In case of non-compliance, the draft foresees two types of sanctions, both of an economic nature: Fines and exclusion from public procurement.

On the one hand, the authorities can impose fines if companies breached their obligations under the law intentionally or negligently. First, they can issue so-called “Zwangsgeld” (§23) up to 50,000 €, which is an administrative penalty payment used to force businesses to comply with a request of the administration (e.g. draw up an ‘action plan’). Second, authorities can impose stiff fines (§24) in case of noncompliance. The fines range from 100,000 to 800,000 euros depending on the obligation breached (§24(2)). Fines can go up to 2% of the yearly average turnover if: 1) The company’s yearly turnover on average exceeds 400,000,000 euros; and 2) If the company failed to implemented corrective measures in time (§24(3)).

On the other hand, the draft currently foresees that non-compliant companies may also be in certain circumstances deprived from access to public procurement. The exclusion from public procurement hinges on the amount to be paid in fines by the company. The threshold is staggered – again, depending on the obligation breached. It ranges from 175,000 euros to 0,35% of the yearly average turnover of a company.  (§22(2)). Exclusion from public procurement ought to last for an ‘appropriate’ time, but must not exceed three years (§22(2)).

The following provisions were removed in the second draft: In the first draft, a company was to be excluded from public procurement irrespective of the penalty paid if the contract that was to be procured was worth more than 3 million euros in case of transportation services, or 10 million euros in case of building projects. Moreover, companies were able to recover their eligibility by so-called “Selbstbereinigung” pursuant to §125 Restriction of Competition Act.  ‘Selbstbereinigung’ essentially would have meant that the company promised to remedy the situation, worked with authorities to resolve the situation, or took active steps to prevent further misbehavior.

[1] “Abgestufte Sorgfaltspflicht”

[2] § denotes „paragraph“. One paragraph consists of multiple „sections”.

[3] Explanatory notes to the Referentenentwurf of 28 February 2021, p. 3.

[4] Explanatory notes to the Referentenentwurf of 28 February 2021, p. 22 et seq.

[5] [...] every contribution the company makes to produce a good or service, beginning from the extraction of raw materials and ending with delivery to the end customer. Supply chain covers: 1. Every act by a company in its own ‘field of business activity’; 2. Acts by contract partners, insofar they are necessary to produce the product OR insofar they are necessary to create or make use of a service (direct supplier); and 3. Acts of every other supplier (indirect suppliers). – §2(5).

[6] Every act intended to benefit the overall aim of the company which can be directly attributed to the company. It includes every location where the company produces or uses products or services. – §2(6).

[7] Explanatory notes to the Referentenentwurf of 28 February 2021, p. 30

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Human rights enshrined in the conventions found on p. 22 et seq. of the explanatory notes to the Referentenentwurf of 28 February 2021.