Does the new German Supply Chain Due Diligence Act also apply to legal entities under public law?

What is the German Supply Chain Due Diligence Act (LkSG)?

On June 11, 2021, the German Bundestag has adopted the “Act on Corporate Due Diligence in Supply Chains” (Supply Chain Due Diligence Act - LkSG). It came into force in its essential parts on January 1, 2023. The law is part of a recent legal development at EU level and in individual countries, which pursues the goal of responsible and sustainable global business and no longer relies solely on voluntary action, but increasingly on legally binding requirements.

According to its official explanatory memorandum, the Act serves to

“improve the international human rights situation by responsibly shaping the supply chains of companies domiciled in the Federal Republic of Germany; as of a certain size, companies domiciled in Germany will be required to better fulfill their supply chain responsibilities in relation to respect for internationally recognized human rights by implementing the core elements of the human rights due diligence.”

This also covers environmental protection issues and the combat of corruption, to the extent human rights are directly affected by environmental damage or corruption or if a direct reference is made to international environmental agreements. The law imposes specific due diligence obligations on affected companies within the scope of an effective risk management in order to recognize risks for the mentioned legal interests, avert damage, and eliminate infringements already occurred. In our opinion, in particular the various mandatory preventive measures, for example, for the implementation of adjusted procurement practices (Art. 6 (3) No. 2 LkSG) or taking into account protected interests in selecting direct suppliers (Art. 6 (4) No. 1 LkSG) have a substantial practical impact on the obliged companies’ actions. 

Who is obligated by the Supply Chain Due Diligence Act?

Pursuant to Art. 1 (1), the Supply Chain Due Diligence Act applies to

companies which, irrespective of their legal form,
1.    have their headquarters, head office, administrative headquarters or registered office in Germany, and
2.    usually employ at least 3,000 people in Germany; …”

From January 1, 2024, the latter threshold will decrease to 1,000 employees and could thus also cover various legal entities under public law. 

An understanding of the term “enterprise” as defined in Art. 1 (1) LkSG is decisive for the question of whether or not the LkSG, now or as of next year, will be applicable directly (and not only indirectly through a correspondingly adjusted “institutional policy”) to legal entities under public law and thus, in particular, their procurement and tendering procedures must be adjusted in order to comply with the law. 

According to the official explanatory memorandum with regard to Art. 1

“the term “enterprise” serves as generic term and is neutral in terms of the legal form. The law’s addressee and nexus for the employee-related threshold is the respective individual or legal entity or other partnership with legal capacity as the enterprise’s legal representative. Since the existence of risks related to human rights or environmental concerns does not depend on the enterprise’s selected legal form, the law does not provide for any restrictions in this regard. Legal entities under public law assuming a local authority’s administrative functions are not covered by Art. 1 to the extent they do not perform any business activities on the market.”

Does the Supply Chain Due Diligence Act also apply to public institutions, foundations, universities or municipal undertakings? 

In light of the deliberately broad definition of an enterprise under the LkSG, first opinions are expressed in the – just growing – literature, according to which, for example, universities, foundations and public institutes such as state banks are covered by the LkSG’s scope, as these did not perform “a local authority’s administrative tasks” and could perform “business activities on the market”. This might similarly apply – irrespective of their legal form – to municipal undertakings, if they offer services or a product (also free of charge) to third parties and if this is done in competition with other market participants (other companies and/or other legal entities under public law), i.e., if the service or product can also be offered by other market participants. 

In order for the LkSG to be applicable, the part of the legal entity performing the business activities must (independently) meet the requirements of Art. 1 LkSG. Vice versa, any legal entity under public law not performing any business activities on the market or the business activities of which do not reach the threshold pursuant to Art. 1 LkSG, is not subject to the obligations under the LkSG. Procurement activities alone, even if these are performed on the market, should not qualify as “business activity”. 

The regularly “serving” character of a legal entity under public law does not contradict an applicability of the LkSG in the first place. According to its Art. 2 (5) sentence 1, the German Supply Chain Due Diligence Act expressly includes “any activity for the manufacture and utilization of products and for the provision of services”; according to the explanatory memorandum, the latter is in any case supposed to include “any form of financial services” which are thus directly included in the LkSG’s scope. 

What obligations arise from the LkSG’s applicability?

A direct application of the Supply Chain Due Diligence Act would significantly affect the actions and, above all, procurement of any legal entity under public law. Such entity would not only be required to draft its tender documents to that extent that the obligations imposed on bidders or contractors under the LkSG can be described in detail and implemented effectively; it would also have to adjust its internal structures to the law’s (mainly organizational) requirements. These include, in particular, the establishment of a risk management system (Art. 4 (1) LkSG), a definition of internal responsibilities (Art. 4 (3) LkSG), the performance of regular risk analyses (Art. 5 LkSG), the establishment of appropriate preventive measures (Art. 6 (1), (3) and (4) LkSG), as well as documentation and reporting obligations (Art. 10 (1) and (2) LkSG). 

Conclusion

Without an in-depth consideration and interpretation of the German Supply Chain Due Diligence Act and its legislative history, such law’s direct applicability to a specific legal entity under public law cannot be reliably confirmed nor denied, in particular because academic discussion is just beginning, and naturally no corresponding case law is available yet. Apart from that, one can observe a parallel legal development of a supply chain directive at EU level which in turn may provide information for a better understanding of the German law and may influence its future interpretation as well as its personal and factual scope.