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Germany’s New Supply Chain Act – Part 3 of 4 – Litigation

The Supply Chain Due Diligence Act (the “Act”) does not create any new civil liability for in-scope companies. The Act does, however, increase the risk to companies of litigation under the existing civil liability regime by allowing for representative actions by trade unions and NGOs on behalf of potential tort victims.

This represents a political compromise. It was reached after long and heated debate between those who wished to expand and those who wished to limit corporate liability for impacts in supply chains. That debate took place against the backdrop of the Jabir v KiK case ("Jabir case"). In that case, a German clothing retail company was sued in Germany by the victims of a fire in a textile factory operated by one of the company’s suppliers in Pakistan in 2012.

According to the claimants, the work safety measures enforced by the operator of the factory did not satisfy the minimum labour law standards set out in a code of conduct. The code of conduct was agreed with the German company and was based on "relevant rules of the United Nations". The claimants argued that the non-compliance with the code of conduct caused the severity of the damages.

The German courts considered whether the German company was potentially liable under tort and contract law. Eventually, the German courts dismissed the claim because the tort law claim was time-barred under Pakistani law and that there was no basis for a contractual claim. The new Act provides for a clarification that it is not intended to change this legal regime.

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The Supply Chain Due Diligence Act is aimed at public law enforcement as discussed in Part 2 of our series. It does not bring clarification with regard to potential private civil liability of German corporates for violations of human rights and environmental standards in their supply chains. The Act introduces German trade unions and NGOs as potential new claimants in supply chain related litigation. This option may lead to the bundling of a large number of claims, which may in turn result in considerable financial and reputational risks for corporates active in Germany with the relevant number of employees. The merits of such claims will mostly depend on foreign law and on the interpretation of the contractual arrangement with the supplier.

A&O’s series of briefings will provide an overview on key aspects that companies doing business in Germany need to be aware of.

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