France Adopts a New Law Requiring Companies to Diligence their Supply Chains in Relation to Human Rights, Environmental, and Health and Safety Issues

by Latham & Watkins LLP
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On March 27, 2017, the French Parliament adopted a Law On The Duty Of Vigilance For Parent And Subcontracting Companies. The law amends the Commerce Code and requires companies to establish and implement a plan for diligencing human rights, environmental, and health and safety issues in their supply chains.

The law is limited in scope. It applies to any company (an SA or SAS) that, at the end of two consecutive financial years, employs (i) at least five thousand employees within the company and its direct or indirect subsidiaries whose head offices are located in French territory, or that has (ii) at least ten thousand employees within its direct or indirect subsidiaries whose head offices are located in French territory or abroad.

Records suggest that some 243 entities employ more than 5000 employees in France (based on 2015 figures). Out of this number, it is estimated that only about 117 of them will be subject to the new requirements. The remainder, for now, fall outside of the scope of this new requirement (as they are partnerships or public bodies) Although some commentators had hoped for more companies to be included, it is likely that in due course this new law will be extended to others.

Pursuant to Article L. 225-102-4 I § 3 of the Commerce Code, “The plan shall include reasonable measures allowing for the identification of risks and for the prevention of the severe violation of human rights and fundamental freedoms, serious health and safety breaches against persons and severe environmental harm, resulting directly or indirectly from the operations of the company and of the companies it controls within the meaning of Article L. 233-16 II of the Commerce Code”. The approach is all the more ambitious and burdensome in that the law requires the plan to also cover as well “the operations of the subcontractors or suppliers with whom the company and its subsidiaries maintain an established commercial relationship, when such operations derive from this relationship”.

Interestingly, the plan is to be devised in association with the company’s stakeholders, and where appropriate, within multi-party initiatives at sector or territorial level.

The plan is to include: (1°) a mapping that identifies, analyses and ranks risks, (2°) procedures to regularly assess, in accordance with the risk mapping, the situation of subsidiaries, subcontractors or suppliers with whom the company maintains an established commercial relationship, (3°) appropriate action to mitigate risks or prevent serious violations, (4°) an alert mechanism that collects reporting of existing or actual risks, developed in working partnership with the trade union representatives of the company concerned, and (5°) a monitoring scheme to follow up on the measures implemented and an assessment of their efficiency.

The plan and a report into its implementation shall be publicly disclosed and included in the relevant company’s annual report (which already includes an environmental and social report) referred to in Article L. 225-102 of the Code. The obligation to establish a plan applies for the financial year during which the law has been published (2017). However, the above obligation to prepare a report shall apply from the first financial year after the publication of the law (2018).

As regards sanctions, it should be noted that failure on the part of a company to comply with the above obligations within three months from receiving a formal notice, may result in the competent jurisdiction issuing an order for the company to comply or face financial sanction. Furthermore, Article L. 225-102-5 also provides that the party responsible for any failure to comply with these new duties shall be liable and obliged to compensate for the harm that due diligence would have helped to avoid. As voted by Parliament, the bill provided for a civil fine of €10-million to force compliance, on the one hand, and for maximum damages of €10-million (potentially increased threefold in case of gross negligence), on the other. However, on March 23, 2017, prior to the promulgation of the law, the Constitutional Court deemed that the provisions setting out the basis on which such civil fines and damages could be imposed lacked clarity and violated the Constitution. Consequently, a ceiling is no longer provided and it will therefore be up to the courts to determine the exact level of such fine and damages.

Finally, it is worth noting that unlike a majority of French statutes, this law does not require any supplemental decree provisions to be enforceable and is therefore immediately effective.

This post was prepared with the assistance of David Desforges of Desforges Law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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