News
12. April 2023
HFK Update: On the national Supply Chain Due Diligence Act (LkSG) of 01.01.2023; EU Supply Chain Directive currently under discussion
While the Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains of July 16, 2021 (lieferkettensorgfaltspflichtengesetz- LkSG) has already come into force at the national level on January 1, 2023, the enactment of an EU supply chain act or a corresponding EU directive is currently still under discussion on the European level. To this end, the European Commission presented a proposal for a guideline on sustainable corporate governance (Corporate Sustainability Due Diligence Directive - CSDDD) on February 23, 2022, which is currently being coordinated. The already applicable LkSG and the draft directive have in common that both contain human rights and environmental due diligence obligations as well as requirements for responsible corporate governance, which are to be implemented by the companies falling within the scope of application in order to avoid negative impacts of their business activities in their own field of business as well as in their global supply and value chains.
The LkSG currently applies to companies with a head office, main branch office, administrative headquarters or statutory headquarters in Germany or a branch office in Germany with, as a rule, at least 3,000 employees. As of 01.01.2024, the above threshold will be reduced to 1000 employees working in Germany.
The requirements of the law thus also apply to clients and contractors in the construction sector, provided that the companies reach the thresholds of 3000 or 1000 employees. In addition, it is to be expected that the requirements imposed by the LkSG will also be passed on contractually - in particular by means of general terms and conditions - to contractors who, due to the size of their business, do not themselves fall under the scope of the LkSG, if they contract with clients falling under the scope of the LkSG.
Furthermore, according to the wording and the history of the Act, it must be assumed that the provisions of the LkSG also apply to public contracting authorities if they not only perform administrative tasks, but are also active on the market as entrepreneurs (for example, in the operation of hospitals or the provision of transport services). In this respect, it must already be ensured in the course of the tendering procedure by means of suitable measures, for example by obtaining a self-declaration and/or the definition of corresponding suitability or award criteria, that the specifications of the LkSG are complied with by the bidders.
The extensive range of human rights protected by the law includes, for example, compliance with the prohibitions on child labor, forced labor and slavery, the prohibitions on disregarding the occupational health and safety obligations applicable under the law of the place of employment, as well as disregarding the freedom of association and the prohibition on withholding a fair wage.
Protected environmental rights include the prohibition of the production and use of certain chemicals, the prohibition of non-environmentally sound handling, collection, storage and disposal of waste, and the prohibition of the export and import of hazardous waste.
To this end, the LkSG requires companies falling within its scope to take extensive measures to observe and fulfill human rights and environmental due diligence obligations in their own companies and in the supply chains. Various obligations imposed on companies are subject to fines of up to EUR 8 million or, in the case of companies with annual sales of more than EUR 400 million, fines of up to 2% of average annual sales. In addition, there is the threat of exclusion from public procurement in the event of violations.
Measures to be taken by companies under the LkSG to ensure greater transparency in supply chains include in particular
- the establishment of a risk management system,
- the definition of corresponding internal responsibilities,
- the performance of regular risk analyses
- issuing a policy statement,
- anchoring preventive measures within the company's own business area and vis-à-vis direct suppliers,
- taking corrective action in the event of violations of human rights or environmental obligations that have already occurred or are imminent,
- the establishment of a complaints procedure,
- the implementation of due diligence with regard to risks at indirect suppliers, and
- ongoing internal documentation and annual reporting on the fulfillment of due diligence obligations in accordance with the LkSG.
When commissioning construction services, the client must therefore contractually pass on to the contractor certain obligations to comply with and monitor the requirements under the LkSG, which will usually be done through the use of appropriate general terms and conditions. In addition, compliance with the requirements of the LkSG must be monitored by the client, at least on a random basis, by means of suitable measures during the execution of the contract, particularly in the case of long-term, larger or particularly risky construction projects. This may include, for example, on-site appointments or audits as well as the implementation of training or further training events, for which the Contractor must assign suitable employees.
In addition, it is recommended to sensitize the companies/persons in charge of construction supervision to the risks related to human rights and the environment and to train and commit them accordingly with regard to their control.
Overall, the LkSG thus significantly increases the requirements for the compliance and risk management system of companies falling within the scope of the Act. The processes and procedures in the company must therefore be reviewed in detail from the point of view of the requirements of the law and, if necessary, adapted accordingly by establishing suitable measures.
Further requirements and obligations for companies that go beyond the LkSG may also arise if the EU Supply Chain Directive currently under discussion enters into force. In this respect, it is becoming apparent that the requirements for companies will then be even more stringent. For example, the reduction of the threshold value for the intervention of the regulations, a previously non-existent civil liability as well as the extension to climate protection goals are under discussion.
For further information on the impact of the LkSG and the planned EU directive on your company and on the implementation of the legal requirements, please contact us.
Your contact persons:
Dr. Sebastian Conrad, Specialist lawyer for public procurement law, specialist lawyer for administrative law, conrad@hfk.de
Franz-Ulrich Kremer, HFK Berlin, kremer@hfk.de