Supply chain due diligence legislation in Germany: Due diligence obligations directly affecting suppliers in the supply chain
In principle, the due diligence obligations under the SCDDA apply only to enterprises within the scope of the Act.
However, most substantive obligations (those directly linked to due diligence) are designed to be implemented not only within the enterprise but across the supply chain, involving suppliers in business relationships with the enterprise. In such cases, the enterprise’s obligations directly impact suppliers, requiring their cooperation or affecting their participation in the enterprise’s supply chain.
The SCDDA distinguishes obligations towards direct suppliers and indirect suppliers.
1. Obligations affecting direct suppliers
Overall, under the SCDDA, the following due diligence obligations of enterprises within the scope of application are relevant to direct suppliers:
- Conducting periodic risk analysis:
Analyses must be carried out regarding human rights/environmental risks or violations in the operations of direct suppliers. Correspondingly, direct suppliers are obliged to ensure compliance with human rights/environmental standards to prevent potential or actual risks/violations.
- Issuing a Policy Statement:
The Policy Statement must include the human rights criteria and expectations that the enterprise applies to its direct suppliers. These constitute enterprise-specific standards that direct suppliers are responsible for complying with.
- Implementing preventive measures:
The set of preventive measures applies specifically to direct suppliers. Accordingly, direct suppliers must participate in the implementation of these preventive measures.
- Implementing corrective measures:
The law sets out specific requirements regarding the outcomes of corrective measures addressing risks/violations occurring in the operations of direct suppliers. Factors to consider when applying corrective measures to direct suppliers include, among others, the conditions under which business relationships with the supplier may be terminated. Consequently, the relevant suppliers are directly affected by these regulations/requirements.
In detail, regarding the obligations to implement preventive and corrective measures (the two obligations that have the greatest impact on direct suppliers), the SCDDA provides specific rules on certain aspects of measures applied to direct suppliers as follows:
Preventive measures
Article 6(4) Clause 1 of the SCDDA sets out the preventive measures that enterprises within the scope of the law must apply to direct suppliers, specifically as follows:
- Consider human rights and environmental criteria/standards when selecting direct suppliers;
- Require suppliers to sign a commitment (contractual) to comply with the human rights and environmental standards established by the enterprise and to apply these standards throughout their supply chain;
- Implement initial and advanced training measures to enable suppliers to fulfil the commitments mentioned above; and
- Agree on appropriate control mechanisms and their implementation (based on the level of risk) to monitor the compliance of direct suppliers with the enterprise’s human rights strategy.
Corrective measures
Article 7(2) Clause 1 of the SCDDA provides for corrective measures regarding human rights/environmental violations by direct suppliers as follows:
- Enterprises within the scope of the law must participate in ending such violations;
- If the enterprise cannot end these violations within the specified timeframe, it must immediately develop a Remediation Plan with a concrete timeline (and may temporarily suspend business relations with the supplier during the remediation period); or
- The enterprise may terminate the business relationship with the direct supplier if the conditions specified by law are met.
|
Conditions for terminating business relationships with direct suppliers Although contract termination is one of the measures that enterprises under the SCDDA must consider when a supplier violates human rights/environmental standards, this measure is only required when all three of the following conditions are met: - The violation of legal rights or environmental obligations is considered very serious; - The remedial actions set out in the Remediation Plan have been implemented but have failed to resolve the issue by the deadline; and - The enterprise has no other means to address the situation, and giving additional opportunity to remedy the issue is unlikely to succeed. Note: The fact that the host country government (where the direct supplier operates) has not ratified one of the Conventions listed in the Annex of the SCDDA or has not incorporated the related provisions into domestic law does not automatically constitute grounds for terminating the business relationship with that supplier. |
2. Due diligence obligations affecting indirect suppliers
Compared with direct suppliers, the due diligence obligations of enterprises under the SCDDA with respect to indirect suppliers are significantly more limited and generally apply only if there is a high risk.
Specifically, Article 9 Clause 1 of the SCDDA provides that if there is factual evidence indicating a high likelihood of human rights/environmental violations at an indirect supplier, the enterprise must:
- Adjust its risk management system in a timely manner; and
- Implement the following due diligence activities: risk analysis, adoption of preventive measures, prevention, cessation, or mitigation measures as appropriate for the responsible party, and updating the enterprise’s Policy Statement (if necessary).
Thus, if an indirect supplier presents a high-risk situation for potential violations of due diligence standards in its operations, it may be required to cooperate with the enterprise in certain due diligence activities, particularly in the prevention and corrective measures carried out by the enterprise.
Source: Compiled by the TTWTO-VCCI Research Group