The European Commission’s Corporate Sustainability Due Diligence proposal. Some thoughts on the conflict of laws.

I have reported on conflict of laws (jurisdictional and applicable law) angles to the EP’s draft proposals on Corporate Sustainability Due Diligence before. As I discuss in those posts (more analysis is on NOVA’s site here), many of the suggested routes created more difficulties than they solved. In the eventual February proposal (with 71 recitals: that is poor legislative drafting), the conflict of laws ambitions are much reduced. Leigh Day have a good summary of the issues here. Thank you Jorian Hamster for poking me to put my thoughts to paper.

The jurisdictional ambition is now merely expressed in terms of regulatory scope. On p.15 under the proportionality assessment, the proposal justifies its public international scope using the effects doctrine:

The EU turnover criterion for third-country companies creates a link to the EU. Including only turnover generated in the Union is justified since such a threshold, appropriately calibrated, creates a territorial connection between the third-country companies and the Union by the effects that the activities of these companies may have on the EU internal market, which is sufficient for the Union law to apply to third-country companies.

Proposed A2(1) focuses on ‘EU corporations’ (“companies which are formed in accordance with the legislation of a Member State) and proposed A2(2) looks at non-EU corporations (“companies which are formed in accordance with the legislation of a third country”), each with relevant thresholds distinguishing between quantitative (turnover) and qualitative (risk sectors: textiles, agriculture, extractive industries) criteria.

I am not sure why the lex incorporationis is preferred as the trigger criterion. Domicile as defined in Brussels Ia‘s Article 63 could be more attractive, seeing as it captures corporations with statutory seat outside of the EU but with their central administration or principal place of business here.

‘Turnover generated in the EU’ is bound to provoke some discussions however experience from in particular competition law should be able to help here.

The most obvious anchor point for applicable law is proposed A22. This sets out the requirement for Member States to define rules governing the civil liability of the company for damages arising due to its failure to comply with the due diligence requirements, and then suggests in (5)

Member States shall ensure that the liability provided for in provisions of national law transposing this Article is of overriding mandatory application in cases where the law applicable to claims to that effect is not the law of a Member State.

The intention of this Article is to make the national civil liability rules which Member States are due to ensure in follow-up of the future Directive, so-called ‘overriding mandatory law’ aka ‘lois de police’ aka ‘lois d’application immédiate’ under A16 Rome II. The challenge for the EU to harmonise private law, such as civil liability rules, shows in this formulation. The EC makes recourse to a Directive, not a Regulation, since (p.17)

The proposed instrument is a Directive, since Article 50 TFEU is the legal basis for company law legislation regarding the protection of the interests of companies’ members and others with a view to making such protection equivalent throughout the Union. Article 50 TFEU requires the European Parliament and the Council to act by means of directives.

Hence rather than formulating the future Directive’s liability provisions itself as of overriding EU law nature (a possibility expressly foreseen in Rome I’s rules on applicable law for contracts, but not impossible I believe within Rome II), the Directive will oblige Member States to ensure the lois de police character of their future rules implementing the Directive.

I understand the difficulty yet I think the proposal could shortcut the discussion (and avoid difficulties in case a Member State fails to declare the lois de police nature) by declaring

‘Member States’ provisions of national liability law transposing this Article are of overriding mandatory application in cases where the law applicable to claims to that effect is not the law of a Member State.’

(the latter, in my proposal struck through part I believe is simply redundant).

In claims based on tortious liability, the Directive is most likely to be used to help establish fault (by action or omission). The remainder of the action (solidarity between various tortfeasors, damage calculation etc) will remain subject to the lex causae otherwise applicable. In claims based on unjust enrichment (a business and human rights route much worth exploring for supply chain cases) the Directive will most likely remain of smaller use seeing as these claims do not aim to establish liability, however the  paper trail which the Directive will ensure, may be of documentary use here, too.

Geert.

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