Adoption of the Corporate Sustainability Due Diligence Directive

After tough negotiations and despite Germany’s abstention, the EU member states agreed on a compromise text for the CS3D in March. Compared to previous drafts, the compromise text was weakened in significant points.

In particular, the thresholds for companies falling within the scope were raised by increasing the number of employees from 500 to 1,000 and the net turnover from €150 million to €450 million (global net turnover for EU companies / net turnover generated in the EU for non-EU companies). More than two years after the European Commission presented its first proposal, the European Parliament finally approved the compromise on 24 April, 2024. Following publication in the Official Journal of the European Union, the directive must be transposed into German law by summer 2026.

While the German LkSG refers to a company’s supply chain, the CS3D relates to the so-called chain of activities, comprising all upstream direct and indirect suppliers as well as limited downstream activities. Furthermore, the CS3D requires companies to take action with regard to indirect suppliers regardless of the cause. This means that indirect suppliers must be taken into account from the outset, for example in risk analysis and prevention measures.

In addition to supply chain-related due diligence obligations, the CS3D stipulates that companies must draw up and implement a transition plan for climate change mitigation in order to best implement the 1.5°C target of the Paris Climate Agreement.

In the event of violations, companies can be sanctioned with turnover-related fines. The newly introduced civil liability of companies for breaches of their due diligence obligations is particularly interesting.

Civil liability under the CS3D

In contrast to the German LkSG, the civil liability clause has also prevailed in the directive that has just been adopted. In future, companies will be liable for damages caused by intentional or negligent non-compliance with the obligations arising from the CS3D. This applies to both preventive as well as remedial measures for identified risks or injuries.

Any natural or legal person may be claimant. The prerequisite for civil liability of the company under the CS3D is, in any case, the occurrence of damage to a legal interest protected under national law, such as health. Through implementation in national law, the member states must ensure that companies are held liable even if the damage has occurred in a third country whose law would in principle take precedence (implementation as a so-called overriding mandatory provision).

Furthermore, the damage must have been caused by the respective violation committed by the company. The causality requirement in particular might help to limit possible claims for damages, as companies shall not be liable for any damage caused solely by a business partner within the chain of activity. As CS3D does not stipulate a reversal of the burden of proof, the implementation by lawmakers and the application by the courts will be decisive.

In respect of the amount, the claim for damages aims to provide full compensation, but is also limited to this. Overcompensation, e.g. through the granting of punitive damages, is not envisaged.

Joint and several liability of business partners

The regulation under European law is intended to ensure that every (co-)responsible party within the value chain can be held liable. Thus, the liability of a company does not exclude the liability of any business partners. Rather, subsidiaries or direct and indirect business partners in the chain of activities can be held liable jointly and severally.

Extensive procedural simplifications

While, the most recent negotiations on the CS3D have resulted in a weakening of the envisaged corporate liability in some respects, provisions have also been introduced to simplify the judicial enforcement of any claims. The CS3D provides for a disclosure procedure in which the court can order the disclosure of certain evidence by the company concerned. In addition, as under the German LkSG, trade unions and NGOs can be authorized by allegedly injured parties to take legal action on their behalf.

As things stand at present, the CS3D does not form part of the canon of EU directives and regulations that can be enforced by means of representative action for the protection of the collective interests of consumers. As the German legislator has decided against including a restriction to certain legal norms in the implementation of the Directive on representative actions for the protection of the collective interests of consumers, associations qualified to bring an action in Germany could attempt to enforce civil law claims for breach of the CS3D by way of representative action even without explicit authorization of individual affected parties.

Furthermore, when implementing the requirements of EU law, the member states must ensure that national regulations do not unduly hamper the bringing of actions for damages. Therefore, the limitation period for bringing an action for damages must be at least five years and may under no circumstances be shorter than the limitation period for general civil liability under national law. In addition, the national implementation must ensure that plaintiffs can also assert claims for injunctive measures, particularly in urgent legal protection.

Next Steps

Due to the implementation of the CS3D, the German LkSG will have to be adapted accordingly. In addition to the introduction of the liability regulations described above, it is to be expected that the LkSG duties of care will be further developed and differentiated in accordance with the detailed requirements of the CS3D.

In order to minimize regulatory risks and avoid civil liability, companies that have already taken first steps should revise and adapt the due diligence processes they have implemented. In the increasingly dense ESG regulatory framework of the CS3D, the Deforestation Regulation, the import ban on goods from forced labour, the Battery Regulation and CSRD, having clear, consistent and linked compliance and reporting processes is essential for robust ESG compliance.