By Daniel Stein, Partner, Osborne Clarke & Dr. Timo Karsten, Partner, Osborne Clarke

On 23 February 2022, the European Commission published its proposal for the Corporate Sustainability Due Diligence Directive to protect human rights and the environment in global supply chains. While the legislative process is still ongoing at the EU level, similar provisions already apply in Germany: On 1 January 2023, the Supply Chain Due Diligence Act came into effect. The Act sets out human rights and environmental due diligence obligations that companies must observe in their own operations and in their supply chains. Violations of the Act are punishable by fines of up to 2% of the annual global turnover of the company and its group. Companies found to have violated the Act may also be excluded from public tenders.

Finnish companies doing business in Germany or with German customers may now wonder what the new German legislation means for them.

Photo by Christian Wiediger on Unsplash.

Relevance of the Act for Finnish companies acting as suppliers to German customers

Companies based in Finland will not be caught by the Act unless they maintain a subsidiary or branch office in Germany with more than 3,000 (or, as of 1 January 2024, 1,000) employees in Germany. However, the Act may still be relevant to Finnish companies even if they are not themselves subject to the Act. If they are a direct or indirect supplier to a German company that is subject to the Act, they will form part of the German company’s supply chain and the German company will have to take certain measures with respect to them in order ensure its own compliance with the Act.

Specifically, in order to meet its obligations under the Act, the German company will have to conduct a risk analysis to determine whether there is a risk that the Finnish company might violate any of the human rights or environmental standards that the Act seeks to protect, or whether there is a risk that such violations might occur further up the supply chain (i.e., at the Finnish company’s suppliers, or its suppliers’ suppliers, etc.). To carry out its risk analysis, it is likely that the German company will approach the Finnish company for information regarding the Finnish company’s operations and supply chain.

If the German customer identifies a risk in its business relationship with the Finnish supplier or its pre-suppliers, which could be a merely abstract risk (e.g., because one of the pre-suppliers is from a high-risk country), it is required by the Act to take preventive measures in relation to the Finnish supplier. These measures might include, for example, the following:

imposing a contractual obligation on the Finnish company to comply with the German customer’s human rights and environmental expectations and to address them along the supply chain,
seeking to agree contractual mechanisms for monitoring the Finnish company’s (and its suppliers’) compliance with such expectations,
requiring the Finnish company to undergo training and further education (or to provide the same to its suppliers).

The German customer might also demand that the Finnish company take preventive measures of its own, e.g., by setting up a compliance management system that includes a whistle-blower system. The customer might also request ISO or other certifications to be furnished as proof of the Finnish company’s compliance.

Risk of losing the contractual relationship

In cases where a supplier is unwilling to comply with the standards set by the Act and the degree of non-compliance is significant, the Act requires (as a last resort) that the relationship with the supplier be discontinued. To ensure that it has the right to do so, the German company will want to include in its contract with the Finnish supplier a right to terminate for cause.

Finnish companies that are faced with demands from their German customers to agree to requirements of the types mentioned above will want to know whether they have to give in to such demands.

In principle, a Finnish company that is not itself subject to the Act will not be in violation of German law if it refuses to accept any measures which the Act requires its German customer to take. However, its refusal will likely cause significant difficulty to the German customer, who will be unable to comply with its own legal obligations and who may therefore have to reconsider its business relationship with the Finnish supplier.

Finnish companies will be well advised, therefore, to be cooperative. However, this does not mean that they must accept every demand from a German customer, even where the customer asserts that it is subject to the German Supply Chain Due Diligence Act. It is not uncommon for German companies to take a broad-brush approach when dealing with their suppliers, which might mean that they try to impose obligations on suppliers in relation to whom they have not identified a risk, or that they try to impose broader obligations on suppliers than are strictly necessary. In these cases, there will be room for negotiation. Where German companies try to solve the issue through standardised documents, there is also a risk (or, from the Finnish supplier’s perspective, a chance) that the obligations set out in such documents will be unenforceable, because the rules of German law that govern standard-form contracts are very strict.

For Finnish companies, it is therefore definitely worth taking a closer look at what their German customers might be proposing to them in the context of the new German legislation.

Implementation of compliance measures in Germany

Finnish companies that are caught by the Supply Chain Due Diligence Act or that are required by their German customers to implement compliance measures under the Act might be compelled (or might choose) to implement these measures throughout their entire organisation. For companies with a subsidiary or branch office in Germany, this can mean additional challenges. For example, if a works council has been established at the subsidiary or branch office, the implementation of a whistle-blower system and of many other measures require a co-determination procedure to be followed. This can be a time-consuming exercise, which is why Finnish suppliers should waste no time in considering which, if any, measures they might need to implement on account of the new German legislation.

The German Supply Chain Due Diligence Act – What should Finnish companies expect?