First aid for "direct suppliers" under the German Supply Chain Sourcing Obligations Act (LkSG)

Having already reported on the most important aspects of risk analysis in our article of 5 October 2022 and on the complaint procedure that needs to be set up in our article of 29 December 2022, we would now like to change our perspective and take a completely new look at the supply chain due diligence law (LkSG):

Even "mere" suppliers (according to the legal terminology: "direct suppliers"), who are not directly subject to the LkSG, are increasingly facing new challenges. In our counselling practice, we have increasingly found that small and medium-sized enterprises in particular are overwhelmed by the requirements of (large) contractual partners, who are themselves directly subject to the LkSG. This can be seen, for example, in the handling of questionnaires or supplier codes of conduct to be signed.

This article is part of a series ("The 1x1 of the supply chain due diligence law"), which takes a closer look at the LkSG and its concrete requirements.

Increased approaches by (large) contracting partners

The approaches currently being made by various (large) contracting partners of small and medium-sized enterprises at the moment is a typical and regularly occurring situation. Many companies, which are already subject to the regulations of the LkSG, are trying to implement the now envisaged regulations as extensively and rapidly as possible. This means that in particular companies that are not directly subject to the requirements of the LkSG (as so-called "direct suppliers" in the sense of section 2 para. 7 LkSG) are confronted with requests for information and/or contractual adjustments (in particular with the acceptance of a supplier code of conduct).

The background to these enquiries are the following regulations of the LkSG:

Section 5 of the LkSG stipulates that a company that is subject to this law must carry out an appropriate risk analysis "in order to determine the human rights and environmental risks in its own business area as well as those of its direct suppliers". According to section 5 para. 4 of the LkSG, a corresponding risk analysis must be carried out once a year and on an ad hoc basis. In order to obtain the necessary information, some companies now choose the path of extensive questionnaires, which are submitted to their direct suppliers to be answered. The corresponding documents can vary greatly in terms of the type and scope of the questions and therefore require more or less effort to answer.

However, it should be noted at this point that a legal obligation to answer these questionnaires does only exist if this has been contractually agreed. If this has not (yet) been done, it is merely a contractual concession so that the contractual partner can fulfil its obligations under the LkSG. Often, however, companies feel "forced" to answer the respective questions, especially in order not to jeopardise contractual relationships.

Section 6 para. 4 LkSG then stipulates that a company subject to the law - should they have identified a risk - must anchor appropriate preventive measures vis-à-vis a direct supplier. Even though the preventive measures mentioned in the law are only listed as examples (cf. the wording: "in particular"), they are of enormous relevance for practice. For the present constellation, this applies in particular to section 6 para. 4 no. 2 to 4 LkSG, according to which the following measures in particular belong as proposed preventive measures:

"the contractual commitment of a direct supplier to comply with the human rights and environmental expectations required by the company's management and to address them appropriately along the supply chain" (No. 2) - so-called "pass-on clauses"

"the implementation of training and education to enforce the direct supplier's contractual assurances under number 2" (No. 3)

"the agreement of appropriate contractual monitoring mechanisms and their risk-based implementation in order to verify compliance with the human rights strategy by the direct supplier" (No. 4).

For companies that are not directly subject to the LkSG, but nevertheless have contractual relationships with corresponding companies as direct suppliers, this means that the above-mentioned procedures must be increasingly expected. From case to case, the documents submitted in this context may also provide for further obligations, such as the reporting of compliance violations via a defined reporting channel and/or active cooperation in taking preventive and remedial measures. Predefined training concepts can also be included in corresponding regulations.

In contrast to the "mere" presentation of a catalogue of questions, a large number of companies subject to the LkSG will be particularly interested in the contractual agreement of these specific points, since this procedure can implement the obligations provided for in the LkSG in a documented manner. However, it should also be noted at this point that in principle - apart from economic factors - there is no legal obligation to agree to corresponding contractual adjustments.

Possible procedures for small and medium-sized enterprises

As soon as a company is confronted with the above-mentioned measures (in particular the signing of a prefabricated Code of Conduct), the question inevitably arises as to how to proceed. Ultimately, there are two conceivable possibilities. While on the one hand a simple acceptance of the contracting partner's requirements can be considered, alternatively own documents can be provided which - especially with regard to the respective contracting partner - implement the requirements of the LkSG.

From our point of view, it is often advisable to have a separate "LkSG concept" available which comprehensively covers the above-mentioned constellations. In particular, affected companies should provide documents for the following scenarios:

Scenario 1: Reaction to a desired contractual adjustment / the signing of a Code of Conduct

Scenario 2: Reaction to a request for information (e.g. in the form of a questionnaire)

Scenario 3: Documents that adequately address the legal positions of the LkSG along its own supply chain:

If and as soon as a company has all of the above scenarios "under control", it can react quickly and easily to requests of any kind and along its own supply chain. This approach offers several advantages, especially since the type and scope of the contractual regulations as well as the concrete procedure can at least be co-determined.

In order to avoid a negative decision on the side of the (large) contractual partners, the following considerations should be taken into account: While those documents that are used to comply with the requirements of the LkSG (for the contractual partner) should be as close as possible to the requirements of the LkSG, those documents that are passed on along the own supply chain (e.g. to other subcontractors) can be shorter overall.

In all documents and scenarios, however, the principle of the greatest possible flexibility must be taken into account. For example, stricter contractual regulations can be provided for certain "high-risk suppliers", while other suppliers can simply be required to comply with the human rights and environmental legal positions of the LkSG. It should be noted again at this point that the (large) contractual partners are only obliged under the provisions of the LkSG to ensure that their direct suppliers "adequately" address the relevant requirements along their own supply chain.

Practical advice

According to our assessment, the requirements imposed by the LkSG should not be underestimated. This also applies to "direct suppliers" who, for example, are confronted with so-called "transfer clauses" and must in fact - although in a "slimmed down" form - also implement the requirements of the LkSG.

In order to be prepared for the scenarios outlined above, companies should have various documents of their own ready so that they can be taken "out of the drawer" without much effort when contacted by a (large) contractual partner.

In this context, it should be noted in particular that a new wave of such enquiries is to be expected from 1 January 2024 at the latest. From this date, companies that employ "only" 1,000 employees on a regular basis in Germany will also be subject to the requirements of the LkSG.

We would be happy to approach you with an offer tailored to your company and provide you with the respective documents - either as a "package solution" or separately - at a reasonable all-inclusive price.