The new supply chain due diligence act – also relevant for small companies?

In Germany, starting from 2023 – large companies will be the required by law to check the extent to which their business activities violate aspects such as occupational health and safety, minimum wage, health and environmental standards. The legal framework therefore is the new Supply Chain Due Diligence Act.

The corporate obligations will apply from 2023 for companies with generally at least 3,000 employees. From 2024 on, the applicability threshold will drop to 1,000 employees. And an EU directive could lower the scope to up to 250 employees in the future. Smaller companies might now feel relieved as they could fall below these thresholds. But that is only part of the story: The company could still be indirectly affected – namely through supply and work contracts provided by large business partners and already aligned with the Supply Chain Due Diligence Act, in which they in turn pass on their own obligations along the supply chain. However, they are not without protection. In the following, I will show you what you need to pay particular attention to and which clauses you should view critically and may be able to renegotiate.

Under the principle of freedom of contract, which is standardized in German commercial law, companies are fundamentally free to draft supply contracts and contracts for work and services. However, contractual freedom is limited by the law on general terms and conditions (which also applies between companies).

In particular, no clauses may be included which unreasonably disadvantage the contractual partner and which are not transparent (Section 307 (1) of the German Civil Code).

In practice, three clause groups in particular have proved critical in connection with the Supply Chain Act:

First of all, guarantee declarations are problematic. By means of a guarantee, a debtor agrees to be liable without express proof of fault. The Federal Court of Justice (BGH NJW 2006, 47) takes a critical view of the almost “boundless” liability that arises from this, as it could represent an unreasonable disadvantage.

Secondly, overly far-reaching audit clauses are critical. Unannounced company visits are only acceptable if they do not disrupt business operations, there is a certain cause, there is no risk to company and trade secrets, and there are no data protection concerns. Outsourcing auditing to a third party is also critical. Here, there should at least be a separate confidentiality agreement and a right to a co-determination vote in the selection of the company should possibly be agreed.

Finally, contractual penalties are also problematic. Here, a prior (written) threat should be made. In addition, the clause must be clearly understandable and the amount of the contractual penalty should be in reasonable proportion to the nature of the breach of duty.

Lastly, I would like to give a few practical hints in dealing with the subject:

First of all, use our tips on “critical clauses” as a basis for negotiation, but do not deliberately escalate the process. A hard dispute up to the level of a legal dispute usually ensures a broken business relationship.

Use valid factual legal arguments in the negotiation.

Concentrate on a few aspects in the negotiation. This will increase your chances of success, especially if the business partner already has a strong negotiating position.

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