German Act on Corporate Due Diligence Obligations in Supply Chains 

The risk to become the focus of investigations by the competent German Federal Office of Economics and Export Control (BAFA) into possible violations of due diligence obligations under the German Act on Corporate Due Diligence Obligations in Supply Chains Germany (LkSG) by complaints from third parties, in particular from foreign as well as international non-governmental organisations and trade unions, is – taking into account first press reports – becoming an increasingly realistic scenario for companies that fall within the scope of the LkSG.

Furthermore, the potential risk of a claim for damages, for example, by persons who argue that their protected legal position under section 2(1) of the LkSG has been violated, should not be underestimated. Especially such a lawsuit is privileged by the special capacity to sue (besondere Prozessstandschaft) under section 11 of the LkSG. According to this provision, a person alleging a violation of such legal positions may authorise a domestic trade union or non-governmental organisation to bring proceedings to enforce his rights in its own capacity.

It is important to consider that a complaint or civil lawsuit can also lead to damage to the image and reputation of a company. In the following, we give you a brief overview of sanctions under the LkSG as well as the implications of possible civil lawsuits.
 

Sanctions under the LkSG

The sanction mechanism of the LkSG is regulated in section 24 of the LkSG. According to this, any person who intentionally or negligently for example does not carry out a risk analysis, does not carry it out correctly, completely or in time, or does not take a preventive measure or does not take it in time, or fails to take a remedial action or fails to take such action in time, has committed a regulatory offence.

In case of missing risk analysis or in case of incorrect, incomplete or untimely risk analysis, an administrative fine of up to five hundred thousand euros may be imposed. If a preventive measure or remedial action is not taken or not taken in time, an administrative fine of up to eight hundred thousand euros may be imposed.

However, in the case of a legal person or association of persons with an average annual turnover of more than 400 million euros,

(a) a failure to take remedial action or to take such action in time, or

(b) a failure to draw up a corrective measure or to implement it or implement it in time,

may be punished with an administrative fine of up to 2 per cent of the average annual turnover.

Additionally, for companies that have been fined with a certain minimum amount for a legally established administrative offence, there is a threat of exclusion from the participation in procedures for the assignment of a supply, works or service contract until self-cleaning is proven. The exclusion may only take place within an appropriate period of up to three years.

This range of sanctions shows how important it is to optimize the own processes for risk management and risk analysis and to effectively implement at least the legal minimum requirements for preventive measures and remedial actions in case of identification of human rights and/or environment-related risks or violation of human right-related and/or environment-related obligations. Not only the operating side of implementing and carrying out risk analysis, preventive measures and remedial actions is important, but also legal support and constant monitoring of these measures appears necessary. This is particularly important in order to be able to react to complaints or sanctions in the best possible legal way.
 

Implications of potential civil lawsuits

There is also a risk of potential lawsuits by affected persons asserting claims under civil law, such as claims for damages. A violation of the obligations under the LkSG does not give rise to any civil liability pursuant to section 3(3) of the LkSG, but any civil liability arising independently of this Act remains unaffected. Therefore, the tortious liability rules of the German Civil Code (BGB), such as sections 823(1), 826, 831 BGB, come into consideration as a basis for a claim.

In this context, however, there are a number of legal hurdles for a civil claim, both on a procedural (prozessual-rechtlich) and on a substantive (materiell-rechtlich) level. Nevertheless, these hurdles are not unmanageable and the scenario of suddenly becoming a defendant in such a lawsuit as a company is therefore not entirely excluded.

In the case of a lawsuit by an affected party from another country, the first question that arises is the international jurisdiction of the court. Depending on the applicable provision (e.g. Brussels-Ia-Regulation (Regulation (EU) No 1215/2012), Lugano Convention), a contestation of the jurisdiction may have to be raised in due time in order to avoid a failure to object court’s lack of jurisdiction. Under the special capacity to sue, the affected person does not have to be the plaintiff, but may authorise a domestic trade union or non-governmental organisation to bring the lawsuit in order to assert the affected person’s rights in court. It should be noted that the special capacity to sue under section 11 of the LkSG only covers claims for the violation of a paramount protected legal position under section 2(1) of the LkSG. Therefore, it has to be carefully assessed whether the asserted claim is actually based on the violation of a paramount protected legal position.

Another aspect will be the question of the applicable law. If it is a plaintiff with permanent residence and domicile in another country, it will be decisive that German law is applicable. The LkSG is a German statute, as well as the general civil law basis for claims from the BGB. From a German law perspective, the applicable law will probably have to be assessed according to the Rome-I-Regulation (Regulation (EC) No 593/2008) or Rome-II-Regulation (Regulation (EC) No 864/2007). This already follows from the respective universal application of the Rome-I-Regulation or Rome-II-Regulation. Should German law not be considered as applicable under these provisions, the further question will arise – which has not been conclusively clarified in the legal literature - whether the LkSG should be classified as overriding mandatory provisions under Art. 16 Rome-II-Regulation in connection with the tortious basis for the claim. If there is no overriding mandatory provision under Art. 16 of the Rome-II-Regulation, the subsequent question would then be whether – when assessing claims under foreign law – the LkSG should be taken into account as appropriate rules of safety and conduct pursuant to Art. 17 of the Rome-II-Regulation.

Due to the fact that there is neither specific case law with reference to the LkSG nor a trend in case law in this regard, there is some uncertainty as to how a court will assess the applicability of German law with reference to a foreign country in an individual case.

In the context of the burden of explanation and proof (Darlegungs- und Beweislast) with regard to the claims asserted, there is also a recognisable trend that courts increasingly assume a secondary burden of explanation (sekundäre Darlegungslast) in favour of the plaintiffs to the disadvantage of the defendant party. It would not be unexpected if this trend would also be continued in the context of the LkSG.

Nevertheless, many legal questions related to civil liability are still not clear. However, civil liability under the provisions of the BGB, e.g. sections 823(1), 826, 831 BGB, is not excluded entirely. Based on the lack of case law, it is not possible to predict and assess reliably the risk and chances of success of civil lawsuits.
 

Conclusion

There is a risk of possible sanctions and civil lawsuits. In addition – due to the current press reports – it is clear that the first organizations are already active and, above all, are taking a look at companies that fall within the scope of the LkSG. It is all the more important to constantly check whether the due diligence obligations according to the LkSG are being observed. The anchoring of contractual obligations to cooperate with suppliers for preventive measure and remedial action is also relevant in this respect. Likewise, the company’s own efforts regarding the obligations of due diligence should always be documented and if applicable be legally prepared in order to be able to defend oneself as best as possible against subsequent impending sanctions or possible civil lawsuits.

_{Published: May 2023}