Compensation for human rights violations in supply chains | In Principle

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Compensation for human rights violations in supply chains

Businesses are to be held legally accountable for failing to exercise due diligence to prevent human rights violations from occurring in their supply chains. On 23 February 2022, the European Commission published a long-awaited draft Directive on Corporate Sustainability Due Diligence.

The purpose of the proposed directive is to introduce in EU member states harmonised rules requiring businesses to ensure that their supply chains are free of human rights violations and environmentally damaging activities.

According to the draft directive, member states will have to oblige businesses under their jurisdiction to exercise due diligence in addressing human rights violations in their supply chains. A failure of care by a business covered by the directive would give rise to specific legal liability, including liability for damages to victims of violations.

The idea is that the victims of actions violating human rights or harming the environment could pursue claims not only against the direct perpetrators, who often operate in countries not providing effective protection to victims, but also against businesses cooperating with the perpetrators in the supply chain, even when they did not benefit directly from the violations but failed to exercise due care to prevent them.

The duty to exercise diligence to proactively prevent human rights violations and environmentally harmful activities in supply chains would first be imposed only on the largest companies, and smaller businesses operating in high-risk sectors such as the apparel industry, agriculture, food production, or extraction and processing of raw materials and minerals.

However, the directive is a manifestation of a strong trend towards creation of supranational regulations obliging companies not only to respect but also to actively protect human rights and the environment and to provide effective extraterritorial protection to victims of violations. In this area, the European Union wants to play a leading role, and some EU member states have already adopted their own legislation toward this end.

The issues to be regulated by the directive constitute an extremely complex subject touching on problems at the intersection of law and politics, business competitiveness and international economic competition. The directive may also require an overhaul of traditional concepts of legal liability or the development of new contractual arrangements within supply chains.

Stanisław Drozd, Dispute Resolution & Arbitration practice, Wardyński & Partners