Companies Must Prepare for Liability Lawsuits
In mid-March, the member states of the European Union agreed on the new EU Supply Chain Law. While the European Parliament still needs to approve the draft law, this is considered a formality. Subsequently, EU member states will be required to transpose the directives into national law. Companies should begin preparing for the new requirements now, as violations could lead to extensive liability lawsuits.
In Germany, a national supply chain law took effect on January 1, 2023, initially covering businesses with at least 3,000 employees, and from 2024, it will also include businesses with more than 1,000 employees. With the EU Supply Chain Law, companies will need to adapt to new requirements. The exact details will depend on how the German federal government implements the EU directive, according to Michael Rainer, a commercial law expert at MTR Legal Rechtsanwälte.
The EU Supply Chain Law aims to protect human rights and the environment. It will ensure that no child labor occurs within the supply chain in third countries, or that environmental standards are not met. After several dilutions, the regulations now apply to companies with more than 1,000 employees and an annual turnover of at least 450 million euros. Initially, the directive was supposed to apply to companies with more than 500 employees and an annual turnover of more than 150 million euros.
Increased Requirements by EU Supply Chain Law
Fewer companies in Germany are affected by the EU Supply Chain Law compared to the national law. While it still affects companies with more than 1,000 employees, the EU directive only applies to those with an annual turnover exceeding 450 million euros. The German law does not include such a turnover threshold.
However, the EU Supply Chain Law does not ease the burden for German companies. Unlike the national law, they must ensure that there are no violations of human rights or environmental protection throughout the entire supply chain, including at suppliers’ suppliers and beyond. This is a daunting task for companies. Additionally, they could face claims for damages if violations occur.
Individuals and Organizations Can Sue
Until now, the German Federal Office for Economic Affairs and Export Control (Bafa) has monitored compliance with the national supply chain law. While Bafa can impose hefty fines and other sanctions, it has acted rather conservatively so far.
This could change with the implementation of the EU Supply Chain Law. The law grants individuals the right to sue companies if they violate the supply chain law, for instance by failing to recognize human rights violations or not taking measures to stop or at least mitigate them. Furthermore, organizations and unions can file class action lawsuits. This could expose companies to a multitude of compensation claims. Damaged parties may also assign their claims to such organizations, potentially intensifying the lawsuits. Although companies are not supposed to be held accountable if a preceding company in the supply chain alone violated the directives, the risk of being held liable remains.
Five-Year Transition Period
Smaller businesses with fewer than 1,000 employees are not directly affected by the supply chain law. Nonetheless, they must prepare for the regulations, as their larger customers will likely incorporate clauses ensuring compliance with human rights and environmental protection in their contracts.
The EU Supply Chain Law is expected to be implemented in stages over five years—likely by 2029. From 2027, it will affect businesses with more than 5,000 employees and an annual turnover of at least 1.5 billion euros. In 2028, companies with 3,000 employees and a minimum turnover of 900 million euros will follow, and by 2029, businesses with more than 1,000 employees and a turnover of at least 450 million euros per year will be included.
The German government is urged to align existing national regulations with the EU Supply Chain Law. Similarly, affected companies should also adapt and possibly establish an effective compliance system to prevent violations of the supply chain law.
MTR Legal Rechtsanwälte advises on the Supply Chain Law and other commercial law issues.
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