Another foreign law overflowing to the Serbian market
On 1 January 2023, the German Act on Corporate Due Diligence Obligations in Supply Chains (“Supply Chain Act“) entered into force (an English translation is available here). The Supply Chain Act is a product of a long-term and global aspiration to introduce international human rights standards, often in combination with environmental standards, into the corporate world and throughout supply chains. (We wrote earlier about other examples of such legislation.) However, considering that Germany is Serbia’s top export destination, the Supply Chain Act will certainly have a stronger effect on Serbian manufacturers, suppliers and exporters than similar laws in other countries.
The new law applies to enterprises of sufficient size
The due diligence obligations under the Supply Chain Act apply to all enterprises (regardless of legal form) having central administration, principal place of business, headquarters, statutory seat, or branch (for foreign companies) in Germany and employing in Germany, directly or in related entities, at least 3000 (as of 1 January 2024, at least 1000) employees (including employees posted abroad).
This means that Serbian companies exporting to German enterprises of sufficient size, as specified above, will be subject to a new type of scrutiny by their trade partners.
German enterprises subject to the new law will scrutinize its Serbian subsidiaries and suppliers
German enterprises must exercise due diligence under the Supply Chain Act across their internal and external supply chains. Internal supply chain includes all enterprises under the decisive influence of the German entity subject to the Supply Chain Act, including those located outside Germany, whereas external supply chain covers both direct and indirect suppliers.
This means that Serbian companies can be scrutinized under the Supply Chain Act either as subsidiaries of German parents subject to the Supply Chain Act, or as direct or indirect suppliers of German enterprises caught by the Supply Chain Act.
Due diligence obligation and preventive and remedial measures
The due diligence obligation consists of a number of components with the common aim to prevent or minimise risks to human rights or environment, or to end violations of human rights or environmental obligations. These components include preparation of a risk analysis, implementation of preventive measures, taking of remedial measures, and establishment of a complaints procedure (allowing anyone to report human rights/environmental risks/violations in supply chains).
Most of these obligations concern the enterprise’s internal supply chain and its direct suppliers. However, certain obligations extend to indirect suppliers as well. Firstly, the obligations concerning the preparation of risk analyses and remedial measures will be deemed applicable with respect to indirect suppliers as if they were direct suppliers, if the indirect supplier relationship is structured to circumvent the due diligence obligations. Secondly, the complaints procedure must enable complaints in respect of economic actions of indirect suppliers. Thirdly, in case of actual indications of possible violations of human rights or environmental obligations by an indirect supplier, the enterprise must run a risk analysis and set up preventive measures as well as a plan for prevention, cessation, or minimisation of violation.
Human rights/environmental risk exists when there is a “sufficient probability” of violation of a prohibition from an exhaustive list. Human rights risks pertain to employment of children and the worst forms of child labour; forced labour; slavery and practices akin to slavery; breach of occupational safety and health rules; violation of freedom of association; unequal treatment of employees; not providing adequate living wage; harmful soil change and pollution; unlawful eviction or taking of land, forests, and waters; the use of security forces in violation of the prohibition of torture, right to life, or freedom of association; as well as any other act or omission in a manifest and serious breach of a number of human rights conventions annexed to the Supply Chain Act.
Environmental risks pertain to the manufacturing of mercury-added products or manufacturing of products by using mercury and mercury compounds; the treatment of mercury waste; the production and use of certain chemicals; the manner of handling, collection, storage, and disposal of waste; as well as export and import of hazardous waste.
If a German enterprise subject to the Supply Chain Act identifies one of the mentioned risks, it has an obligation to undertake preventive measures, which, when it comes to direct suppliers, include contractual assurances of compliance and control mechanisms, including assurances by direct suppliers that they would address the human rights and environmental expectations further down the supply chain.
Termination of a contract with a direct supplier found to be in violation of a human rights or environmental obligation is not always required. Termination is required only if the breach at issue is very serious, if other measures have already failed to remedy the situation, and if no other less severe measure is capable of addressing the issue. Otherwise, if an enterprise subject to the Supply Chain Act discovers that a breach has already occurred or is imminent at a direct supplier level, and cannot be ended in a foreseeable future, it must set up a plan for ending or minimising the violation. Such plan may include a temporary suspension of the business relationship.
Serbian businesses are concerned, but definite relevance depends on German partners
The full breath of the Supply Chain Act is still to be confirmed in practice. Nevertheless, considering that Germany has double relevance for the Serbian economy, as a source of foreign investment and as an export destination, the Supply Chain Act cannot be ignored by Serbian companies that are controlled by German entities or by those who export to Germany. Serbian companies exporting to Germany are likely to face an array of new clauses in their supply agreements with German partners, which they should carefully examine and negotiate. They may also have to negotiate appropriate back-to-back clauses with their own suppliers.