THE SUPPLY CHAIN ACT OF GERMANY: A STEP IN THE RIGHT DIRECTION

– Aradhya Dixit, Third Year student at National Law University, Jodhpur

BACKGROUND

At any given time in 2016, an estimated 40.3 million people are in modern slavery, including 24.9 million in forced labour. Working conditions under the global capitalistic regimes are not conducive for the workers and profit-oriented corporations refuse to invest in human resources. In the light of this scenario, the United Nations Guiding Principles on Business and Human Rights (“UNGPs”) came into existence in 2011 which recognised the responsibility of states and all business enterprises to comply with all applicable laws and to respect human rights and freedom.

Following this, Germany adopted a National Action Plan on Business and Human Rights (“NAP”) which reiterated the principles enshrined in the UNGPs without setting any legal standards or providing any legal recourse for breach. However, ten years later, when a survey was conducted to test the efficacy of the NAP, it was found that only 13-17% of companies were in compliance with the obligations provided under NAP, whereas approximately 85% were not, and less than 1% had any implementation plans in place to ensure future compliance.

Therefore, on July 22, 2021, the Act on Corporate Due Diligence in Supply Chains (“Supply Chain Act”) was published in the German Federal Law Gazette.

THE LAW

The Supply Chain Act, which will come into force on January 1, 2023, has been implemented to ensure stricter compliance of the UNGPs and to encourage companies to undertake measures in order to protect the environment. It contains a list of eleven international conventions, principles and guidelines from where it derives inspiration. The Supply Chain Act, applies to all business enterprises with their headquarters, administrative headquarters, principal place of business, branch office, or registered seat in Germany and have 3,000 or more employees in Germany. Under the Act, a supply chain includes all the companies that are part of the manufacturing process of the principal enterprise – beginning with the extraction of raw materials to the delivery to the customer. Financial services also form a part of the supply chain. Thus, an enterprise is required to set up a risk management system, define internal responsibility for compliance with the risk management system, and carry out regular risk analyses etc. not just for itself, but the entire global supply chain.

Unlike the previous NAP guidelines, failure to meet GSCA requirements could lead to fines up to €800,000. For companies earning more than €400 million in annual turnover, fines can reach up to two percent of worldwide turnover.  Furthermore, companies that have been fined a minimum of €175,000 can be prohibited from participating in public tenders for up to three years

SHORTCOMINGS

While the Supply Chain Act is a progressive act, there are some lacunae that are likely to inhibit it from reaching its goal.

1. The obligations that an enterprise is required to undertake is only necessary for itself and its direct suppliers and not indirect suppliers – In case of violation of the Supply Chain Act within the business operations of the companies, they are required to take immediate remedial action that is guaranteed to end the violation. In case of violations within the operations of the direct supplier and it is not possible to end the violation in the foreseeable future, the companies are required to create a concrete plan for minimisation and prevention of the said actions. However, in the case of indirect suppliers, companies are not required to conduct a risk analysis proactively and systematically, but only on an ad hoc basis, when they gain “substantiated knowledge” of a potential human rights violation. This leaves the majority of enterprises outside the ambit of the law.
2. Lack of civil liability – The Supply Chain Act provides for levying of fine in case of violation of the obligations provided under it. However, it does not createa cause of action under civil law for non-compliance. This is likely to result in ambiguity with respect to the enforcement of the Supply Chain Act. Further, it might lead to a failure in exerting the intended deterrent effect.
3. Restricted application – The Act applies to companies with 3000 employees (from 2024: with more than 1,000 employees) Thus, the number of companies falling within the purview of the Act is too small. Small and medium-sized companies with more than 250 employees, operating in sectors with history of human rights violations  must also be brought under the Act in order to cover more industries that are also capable of violating human rights and environmental duties.

INDIAN CONTEXT

India and Germany have an extensive trade history with bilateral trade amounting to Euros 21.9 billion in 2017-2018. Germany is one of the main buyers of Indian generic drugs in the European Union. This indicates that Indian industries are part of the supply chains of several German businesses incentivising such manufacturers in India to comply with the obligations under the Supply Chain Act. This will be advantageous to the labour in India because, much like many other developing countries, labour laws in India are not very strict. Relaxed labour laws exist in order to attract industries and increase employment opportunities but often paves the way for exploitation of labour.  Further, due to the pandemic, certain states of India have modified some labour laws increasing the likelihood of violation of the human rights of the workers. Such global supply chain obligations encourage the principal, Germany-based, company to ensure that the companies in India are also complying with the obligations under The Supply Chain Act. However, this may not be immediately executed in practice as the relationship between the companies is such that the Indian manufacturers are often classified as an indirect supplier. This liberates the German companies from the obligation of conducting regular risk analysis surveys and due diligence. Further, it might get difficult to ensure compliance of companies deeper in the supply chain. Thus, the impact of the Supply Chain Act is not likely to be visible in the Indian market.

CONCLUSION

In today’s time, the issue of social, environmental and governance accountability from companies has come to the forefront. Not just the governments, but investors and consumers have also started to demand due diligence from the companies. This awareness of the consumers is slowly leading companies to adopt better and more sustainable policies. However, as has been mentioned above, the situation still demands improvement.

Treaties and soft laws imposing obligations on companies to comply with human rights standards have been in place for decades now. However, no substantial change could be seen in the condition of the workers. Therefore, the Supply Chain Act was the need of the hour. Despite some drawbacks, the Supply Chain Act is a big and progressive step forward towards ending the exploitation of labour at the global level, especially in developing countries. Various other countries have also been enacting similar supply chain laws to increase accountability amongst all the intermediaries forming a part of the supply chain. For example, Netherland’s Child Labour Due Diligence Act (2019), France’s Loi de Vigilance (2017), and the UK’s  Modern Slavery Act (2015) are all local laws that impose obligations on companies to conduct due diligence. Even though it will take longer for large scale impact of these laws to be visible, the countries enacting these laws have brought the issue of human rights violation of labour on centre stage again at the global level which is likely to encourage several other developed nations to follow their steps. Such accountability, in turn, is likely to improve the condition of labour in the developing countries as well.