On 23 February 2022, following the earlier recommendation for a directive by the European Parliament, the EU Commission presented its (long overdue) proposal for a Corporate Sustainability Due Diligence Directive that aims to regulate corporate conduct in order to prevent and remedy human rights violations and environmental harm related thereto. Given the numerous legislative initiatives, proposals and debates at the national level, the Commission concludes that the proposal answers to a ‘clear request by Union Citizens (…) to address these and other adverse impacts’ [p. 1]. Albeit an idealistic starting-point, the need to address adverse impacts is not necessarily the legal basis on which the EU acts. Concerns about the freedom of establishment and the internal market caused by diverging national practices prompts the need for harmonization according to the Commission (articles 50(1) and (2)(g) and 114 TFEU) [p. 10].
In this respect, the proposal not only aims to harmonize due diligence standards, but also aims to harmonize enforcement of remedies for people that have been adversely impacted by corporate conduct. Over the years, private law claims have been brought in different European jurisdictions, often the home countries of a parent company, for harm suffered elsewhere along the supply chain in the so-called host country, where a subsidiary or supplier is for example located. Arguably these cases have led to a progressive and grassroots development of the law and the crystallization of the responsibility of companies. Legal outcomes have differed, however, depending on the national rules in place, and the Commission fears that such ‘fragmentation would lead to distortions of competition in the internal market’ [p. 13].
This blogpost highlights some aspects of the proposed rules on civil liability and provides some initial thoughts on whether the proposed Directive will be a leap forward for the further development of civil liability standards or whether it might stifle progress.
Scope of the proposal
First, it is worth noting that as many have discussed and critiqued already, the general scope of the proposal is limited. In general only large companies (over 500 employees and a worldwide net turnover of EUR 15 million) will be subject to the Directive. In addition, companies with over 250 employees and a net worldwide turnover of EUR 40 million, of which at least 50% was earned in one of a number of designated high risk sectors, will be subject to the Directive [article 2]. However, the companies fulfilling these criteria only amount to a mere 1% of all companies active on the European market according to the Commission, while others arrive at an even lower estimation. The Commission explains that the regulatory burden of having to comply with the Directive is too high for the other 99% of companies made up of SMEs [p. 14]. At the same time the Commission stresses that SMEs may still be confronted with the Directive in an indirect way when they form part of the value chain of the large companies, potentially causing some wider effects [see also consideration 47].
In respect of civil liability standards, the proposal also purports to ‘be without prejudice to Union or national rules on civil liability related to adverse human rights impacts or to adverse environmental impacts that provide for liability in situations not covered by or providing for stricter liability than this Directive’ [consideration 59] and ‘should not prevent Member States from imposing further, more stringent obligations on companies or from otherwise taking further measures having the same objectives as that Directive’ [consideration 62], the essence of which is reiterated in article 22 section 4 of the proposal itself. All this seems to suggest, albeit the phrasing is somewhat ambiguous in relation to the goal of harmonization, that Member States could choose to apply similar laws even to SMEs. If so, this means that the Directive creates minimum standards offering possibilities for the enhancement of legal protection. Of course in practice, Member States might be unwilling to go beyond those minimum requirements.
Keeping the limitations on the scope of the proposal in mind and the questions that it of course raises about the ultimate effectiveness of the Directive to create widespread change in corporate behaviour, a nuanced view on the possibilities of the further development of the civil litigation practice is thus appropriate.
Cause of action
In order to unpack the rules on civil liability proposed by article 22, its layered structure requires careful reading. Indeed, article 22 proposes a cause of action on the basis of damage that resulted from a company failing to fulfilling its due diligence obligations, those specifically laid down in articles 7 (the obligation to take measures to prevent adverse impacts) and 8 (the obligation to remediate adverse impacts) of the proposal. On the basis of the wording and structure of article 22, arguably there will be at least three key questions for determining whether a company incurs liability on that basis: 1) what entities within the value chain should be taken into account when performing the due diligence actions, 2) what actions by the company will suffice to fulfil the specific due diligence obligations laid down in articles 7 and 8, and 3) whether there is a causal link between any insufficiency of the actions and the actual adverse impact and damage.
With regards to the first question, it is important to understand that a company, in principle, needs to perform due diligence in relation to their subsidiaries, and their direct and indirect ‘established business relations’. The definition of business relation includes a wide range of actors such as contractors, subcontractors, but also de facto relations that perform some part of the business process and entities to which the company provides finance for example [article 3 (e)]. Based on this, on the one hand, companies can thus incur secondary liability far down their supply chain. On the other hand, the scope of liability for the acts of other parties is limited because the business relation needs to be established. According to article 3 (f) a business relation is established in case ‘whether direct or indirect, which is, or which is expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain’.
The reason for this limitation is that it should be possible for ‘companies to properly identify the adverse impacts in their value chain and to make it possible for them to exercise appropriate leverage’ [consideration 20], which indeed has some practical logic. At the same time, given the ambition of the proposal, companies should not generally be able to evade liability by only working with one-off partners since these may still cause significant harm. So to what extent the definition of ‘established business relationship’ will limit the scope of civil liability, such that it misses its goal, will arguably depend to some extent on a objectified and case by case interpretation of the words ‘or is expected to be lasting in view of the intensity’. Perhaps, if in practice the leverage is there, companies should not be able to say that it is only a one-off relationship, evading any responsibility.
Last, without going into detail about the due diligence obligations themselves, a question can be raised in relation to the second and third question more generally. The Annex to the proposal refers to a non-limitative list of adverse environmental impacts and adverse human rights impacts that should be identified and addressed by companies through their due diligence process as specified in the proposal. These also include human rights violations that would amount to international crimes, given that, for example, the Genocide Convention is also included in the Annex. It will be interesting to see to what extent the developments in the interpretation of these international standards by international bodies (such as the ICJ or criminal tribunals) will be of influence on the interpretation of the due diligence standards? Vice versa, could, given the standard setting capabilities of the European Union, a narrow interpretation of these international rules and standards in the enforcement of the proposed directive, be of influence on the development of these standards at the international level?
Defences against liability
As for indirect established business relationships, more caveats exist in the form of a statutory defence [article 22 (2)]. In short, a company can deflect liability in case it has secured contractual assurances from its (direct) business relations that they will comply with the company’s code of conduct, and if necessary the company’s prevention plan, also offering consecutive contractual assurances down the supply chain. In addition, a company should have in place measures to verify compliance with these assurances. These may also be based on existing industry initiatives, or be executed by independent third party verification.
Whether or not this defence will result in a stark limitation of the scope of civil liability, as has been argued, will depend on the application and assessment of the second part of the provision. Namely, even if the company has implemented the abovementioned measures, this will not suffice as a defence if it was unreasonable to expect that the actions taken would be adequate to prevent adverse impacts. If truly interpreted in context, the defence will thus only hold if the contractual assurances could actually be trusted. Much will of course depend on the further development of the parameters for determining this.
International private law aspects
On the basis of the Rome II Regulation, the general rule is that a tort claim should apply the law of the country where the damage occurred. If applied, this would limit the scope of civil liability, or at least the feasibility of enforcing it across borders. Based on section 5 of article 22, the scope of liability is explicitly not restricted to conduct within national borders, however, nor to the territory of Member States. The section lays down that Member States should ensure that the national law implementing the civil liability regime on the basis of article 22 should become of overriding mandatory application. This wording is based on the exception in Rome II that the law of the country where the damage occurred shall not be applied in case this would contradict national rules of overriding mandatory application.
The importance of national (procedural) rules
As an interim conclusion, it becomes clear that the rules in article 22 of the proposal could in theory allow for companies to incur liability for acts far down their supply chain regarding both business relations and geography, if they had leverage there and it was reasonable for them to take measures. Notwithstanding these material and geographical possibilities to further deliberate the appropriate scope of civil liability, much will depend on the level of scrutiny when assessing the conditions for liability. Indeed, the exact meaning of these conditions will have to take shape in practice, for which private law litigation will likely prove to be essential. As such, the importance of the procedural possibilities to litigate these claims cannot be underestimated. Many of the procedural rules are essential for creating the space for the parties involved to actually further deliberate the appropriate scope of civil liability in a balanced manner and on equal footing.
A repeated criticism in relation thereto, is that the burden of proof still fully rests with the plaintiffs, while especially in transnational situations the gathering of evidence in cases against a multinational corporation may be extremely difficult (see also more generally here). Indeed, based on article 22 of the proposal, a key issue will be whether it is possible to prove that a company did not fulfil its due diligence obligations, as well as the causal link between the due diligence obligations and the adverse impact and damage. To do so, information that is oftentimes controlled by the company is needed, since it is the companies that perform the due diligence and store the information related thereto. Whereas, for example, the Damages Directive for anti-trust litigation or the Enforcement Directive related to patent breaches include explicit rules on the disclosure of information, the Sustainability proposal does not provide for specific rules in this respect. Critics have argued that the proposal should have included an even more far-reaching tool to accommodate plaintiffs by shifting the burden of proof.
Whether a shift in the burden of proof is the holy grail, should, as I argue in the starting points of my PhD project, still be researched further. Interestingly, the proposal does actually allow for national considerations by stating: ‘The liability regime does not regulate who should prove that the company’s action was reasonably adequate under the circumstances of the case, therefore this question is left to national law’ [consideration 58]. Civil procedure, and the borderline rules on evidence, constitute an intricate system of rules aimed at finding a fair balance in the litigation process. Simply implementing one or two rules into the system for a specific type of case, may therefore not suffice. Given these considerations, the importance of national civil procedure, a thorough understanding of its content and how it can take into account the specific national, transnational and international features of these cases can therefore not be underestimated in order to establish a truly meaningful practice.
A leap forward?
As was said at the start of this blogpost, until now, private law claims against multinational companies for adverse human rights and environmental impact have been based on innovative and grassroots litigation strategies. Affected people, together with NGOs, have asked judges for further development and crystallization of existing standards in relation to corporate conduct within a globalised world. Arguably, one could say that these cases have created a space to deliberate the scope and standards of liability for multinational companies in light of evolving business practices. The proposal for a Directive by the Commission is a new milestone in this development. At the same time, as discussed in this blogpost, different risks exist on how these rules will actually play out in practice. And given the standard setting capabilities of the European Union a narrow interpretation of the rules and standards may even influence the direction of human rights and environmental protection against corporate conduct at the international level since the proposal clearly seeks a connection with international standards [see the annex to the proposal and consideration 5 and further]. Notwithstanding these risks, the proposed Directive might also offer clear points of reference for a leap forward in holding corporations accountable for adverse impacts of their business activities.