The German Supply Chain Due Diligence Act is a major advancement in the supply chain network, improving international human rights and environmental standards across the board. It focuses on issues of child labour, health and safety standards, and the role of trade unions, and will have substantial effects on all relevant parties concerned due to its scope and importance. For instance, the Act bans all sorts of conduct from discrimination to forced labour. Serbia in particular will be considerably impacted, since Germany is the country's largest trade partner.
This article will therefore examine the nature of the Act and its implications for Serbia's companies and supply chain.
Due diligence and the importance of the Act
To understand the impact of the Act, it is first necessary to highlight its purpose. Due diligence is a risk-based process, it being understood that the risks are those related to the people producing the goods and services they are delivering. Consequently, all Serbian companies that are part of the supply chains of German companies are required to establish risk management processes meeting certain obligations in the areas of human rights and the environment. Companies are currently obliged to assess 11 human rights and three environmental risks listed in the law. The latter are based on the UN Guiding Principles on Business and Human Rights, as well as the Basel Convention on Hazardous Waste and other relevant environmental conventions. Therefore, the Act is crucial in achieving the overall objectives of promoting fair practices in accordance with recognised guidelines and removing unfair economic practices and business from the market.
Affected companies and their obligations
The law applies to Serbian companies exporting to German enterprises of sufficient size (i.e. having a central administration, principal place of business, headquarters, statutory seat or branch in Germany) and employing at least 3,000 employees in Germany. From 1 January 2024, it will also apply to all companies with over 1,000 employees in Germany. The law pertains both to companies registered in Germany and their affiliated companies abroad, as well as to direct and indirect suppliers in their supply chains. For instance, if the indirect supplier relationship is structured to circumvent the due diligence obligations in relation to the preparation of risk analyses and remedial measures, these obligations will apply to indirect suppliers as if they were direct suppliers. Moreover, the complaints procedure (outlined under the heading below) must enable complaints in respect of economic actions of indirect suppliers. If violations of human rights or environmental obligations by an indirect supplier are suspected, the company must run a risk analysis, set up preventive measures and devise a plan to prevent, cease or mitigate the violation. Lastly, the law will only affect product and service supply chains, not the export of final products by Serbian companies to Germany.
The content of the law and complications
On a technical level, the law covers nine steps, primarily requiring companies to put a stable risk analysis system in place. Complications may arise for companies that have thousands of suppliers and will therefore need to scan production based on multiple factors, from markets to processes. They are therefore expected to take two types of action: preventative (if there is a likelihood of a risk to arise) and remedial (if the risk has already materialised). In addition, the company needs to ensure that a complaints system is in place for everyone in the supply chain. Therefore, anyone whose right is infringed can make a complaint at the company level about a certain lapse. Lastly, companies need to document everything they are doing and report it. The system contains an official reporting document.
The Act describes obligations to "make reasonable efforts" to identify and remove risks, implement the necessary grievance mechanisms and take remedial action when required. Thus, there is no "obligation" as such to ensure and guarantee with absolute certainty that no human rights or environmental obligations have been breached. This is mainly due to the understandable fact that the risks to be avoided only exist when there is a "sufficient probability" that a prohibition from an exhaustive list will be violated. Hence, if a company is not aware of a grievance in its supply chain, it cannot be held accountable, as long as all required steps have been taken to discover it. Nevertheless, as soon as the grievance becomes known, the company will be required to take remedial action. This will include contractual assurances of compliance and control mechanisms, including assurances by direct suppliers that they will address the human rights and environmental objectives further down the supply chain. Failure to do so will result in heavy fines and the company potentially being excluded from public tenders for up to three years.
An evaluative approach must be taken to determine when a contract with a direct supplier must be terminated (where the supplier is in violation of a human rights or environmental obligation). For example, termination is required if the breach is very serious, other measures fail to remedy the situation and no less severe alternative is available. If a company subject to the Supply Chain Act notices that a breach has already occurred or is imminent at a direct supplier level and cannot be ended in the foreseeable future, it must arrange a plan for ending or minimising the violation. The plan may include a temporary suspension of the business relationship.
Guidance provided in Serbia
Despite possible difficulties with adhering to and implementing the Act, the Chamber of Commerce of Serbia (CCIS) in cooperation with the German International Cooperation (GIZ) will launch a "helpdesk" (Responsible Business Hub) for advising companies in the first quarter of this year. The helpdesk is intended to smooth the transition for companies in meeting the demands of foreign suppliers in Serbia. The quality of support offered is reinforced by Tanja Lindell, Deputy Manager at the Industry Department. "We will work on creating a network of strategic partners and consultants, and in the coming period, the CCIS will also organise a range of seminars, events and consultations directed at raising awareness and inciting dialogue between the interested parties about the German law on supply chains and the upcoming EU regulation," Lindell said.
Jurisdiction at the EU level?
Lastly, to gain a broader perspective, there are also efforts at the EU level to establish a regulation regarding human rights due diligence. Currently, the EU Parliament is pushing the Commission to draft an EU-wide regulation, whose completion could be accelerated by Germany as the largest economy in the Union. The actual implementation of such a comprehensive regulation remains to be seen.
By Marija Vlajkovic, Partner, and Andrija Saric, Associate, Schoenherr