Supply chain transparency requires companies to investigate their own supply chains to ensure compliance with internal company procedures, especially in international operations, as well as relevant laws, and to then publish this data to stakeholders and customers or the general public.
This process assists companies in reducing the risk of damage to their reputation, ensures that every element of their operation is aligned with their culture and ethos and assists in attracting new customers who increasingly demand higher standards.
Customers often want to purchase products knowing how workers in the supply chain are treated, what working conditions are like, what ingredients or materials have been used in products and what their environmental impact is. Studies have shown that transparency in supply chains leads to increased customer satisfaction that enables business growth. In the shipping industry, transparency can also improve visibility on rates, location of cargo and compliance with sanctions – all of which can lead to large cost savings. For example, knowing where certain types of cargoes are shipped from at a specific time of the year and by whom, can assist carriers in planning their routes efficiently.
A number of countries have recently introduced legislation which has or will soon come into force to further transparency in shipping supply chains.
This article seeks to provide an update on the latest developments on supply chain transparency including setting out recent notable examples of countries introducing new legislation, as well as recent court rulings.
Upcoming Regulations
Germany
The German Supply Due Diligence Chain Act (Lieferkettensorgfaltspflichtengesetz) approved on 25 June 2021 came into force on 1 January 2023.
This Act binds all companies with at least 3,000 employees which have their statutory seat, central administration, principal place of business and administrative headquarters in Germany. Notably, foreign companies, with a branch in Germany and the same number of employees, are also included. As of 1 January 2024, this threshold will be further lowered to 1,000 employees.
The meaning of supply chain under this Act is wide-ranging, beginning with the extraction of raw materials to delivery to the end customer. The Act therefore applies to a large number of companies and should be considered carefully when operating in Germany.
Companies are required to make “reasonable efforts” meaning that they need to show they have done everything to ensure compliance but need not guarantee that there will be no violations.
The scope of a company’s responsibility will depend on four factors: the nature and extent of the company’s business, its ability to influence the party directly responsible for a violation, the severity, probability and reversibility of a violation, and the nature of the company’s contribution to the violation to prevent human rights and environmental law violations.
The Act introduces certain due diligence obligations of a company’s own business operations, its direct suppliers, and even indirect suppliers. The due diligence obligations include creating a risk management system and appropriate internal responsibilities (for example, appointing a human rights officer), performing regular risk analyses, issuing a policy statement, taking remedial action in the event of a violation, implementation of a complaints procedure, documentation and reporting violations to the German Federal Office for Export Control.
Non-compliance with these obligations can result in the German Federal Office for Export Control imposing a fine of up to €8 million on a company. However, where a company’s annual turnover exceeds €400 million, the fine can be even higher at up to 2 percent of the company’s average annual turnover.
With companies now under an obligation to establish a risk management system to report on the social and environmental impact of their business all the way through their supply chain, this Act is a significant development in ensuring transparency not only with regard to human rights violations but also environmental ones.
Norway
The Norwegian Transparency Act (Åpenhetsloven) which came into force on 1 July 2022, requires companies to implement human rights and fair working conditions throughout their supply chains.
The Act applies to “larger companies” (as defined in section 1-5 of the Accounting Act 1998) or those companies which, on the date of financial statement, satisfy at least two of the following three conditions:
(1) sales revenue of NOK 70 million; (= £5.4 million)
(2) balance sheet total of NOK 35 million; (= £2.7 million)
(3) 50 full-time equivalent employees on average over the financial year.
The Act applies to both companies domiciled in Norway and foreign enterprises that are taxable in Norway pursuant to Norwegian legislation.
To comply with the Act, a company must carry out due diligence as required by the Organization for Economic Cooperation and Development. To carry out due diligence, a company has to embed responsible business conduct into its policies, assess the adverse impact on human rights that it has contributed towards or that are linked with its supply chain, implement measures to prevent further adverse impact on human rights, track the implementation and results of such measures, communicate with the affected parties on how an adverse impact was addressed, and provide remedies where required.
Companies are required to publish an account of their due diligence on their website each year by 30 June. Moreover, members of the public have a right to request information about a company’s due diligence efforts, to which companies are required to respond within three weeks which has been introduced to ensure a higher level of accountability.
The Norwegian Consumer Authority is responsible for the enforcement of the Norwegian Transparency Act and in cases of violation, has the authority to issue orders and fines, including prohibition orders, enforcement penalties and infringement penalties.
By placing human rights due diligence on a regulatory footing, this Act seeks to make Norwegian supply chains transparent and more robust. With more than 7,190 shipping companies registered in Norway, plus foreign shipping companies actively operating in Norway who pay tax in Norway, it will apply to a large number of companies.
United States
The Ocean Shipping Reform Act 2022 (OSRA) came into force on 16 June 2022. This Act changes the protocols for detention and demurrage (D&D) costs, forbids carriers from unreasonably declining US exports and establishes quarterly reporting requirements on import and export tonnage.
During the pandemic, supply chain issues worsened with port congestions and increased D&D charges. OSRA addresses shippers’ concerns about D&D charges, allowing shippers to challenge them and shifting the burden of proving their reasonableness to carriers or marine terminal operators. It also enables the Federal Maritime Commission’s (FMC) to investigate carriers’ business practices, refusal in transportation service or any unfair or discriminatory methods against US shippers.
This Act is a stellar practical example of increasing transparency on D&D costs and allocation of cargo slots, which can lead to reduced prices for customers by offsetting rising shipping costs but it is yet to be seen whether it will lead to shippers questioning charges which are to be ordinarily paid.
Recent Case Law
MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406
The Court of Appeal held by majority that a ship owner could not rely on a force majeure provision in a contract of affreightment. This was because a proposal by the charterer (to make payments in an alternative currency, and compensate the ship owner for any additional costs) would “overcome” the state of affairs caused by the imposition of US sanctions.
Notwithstanding the contract requiring payment in USD, the purpose of providing the ship owner with the right amount of USD at a certain time was achievable by way of the charterer’s offer of non-contractual performance (i.e. payment denominated in EUR instead of USD).
Supply chains in shipping are rarely a single-country domain and are often multi-lateral in nature. The current global trends towards increased protectionism and trade sanctions stand to affect payments and deliveries throughout a supply chain and often result in the cancellation of current or upcoming transactions. By upholding the contract’s underlying purpose and accepting non-contractual performance, this case shows the court’s aim to make supply chains stronger and more flexible.
Transparent supply chains have the potential to aid companies to identify any potential or actual breaches of sanctions, thereby preventing incurring huge fines, criminal charges and reputational damage.
Begum v Maran (UK) Ltd [2021] EWCA Civ 326
Mr Mollah had fallen to his death whilst working on the demolition of a defunct oil tanker in a shipyard in Bangladesh. His widow brought a claim against Maran (UK) Ltd (“Maran”) for Maran’s breach of a duty of care towards Mr Mollah. The defendant was acting as agent for ship owner, Centaurus Maritime Enterprise (“CSME”), who had sold the vessel to another demolition contractor.
The Court held that this case fell within a recognised exception to the general rule that a defendant was not liable for harm caused by the actions of a third party. That exception arose where the defendant was responsible for creating a state of danger, which resulted in the third party causing the injury (“the creation of danger exception”).
In this case, the exception was triggered on the factual assumption that the defendant had arguably played an active role by sending the vessel to Bangladesh and knowingly exposing workers such as the deceased to the significant dangers.
This case is an important reminder that a UK company’s duty of care could extend to third parties in that company’s supply chain. Since companies can be held responsible for actions of third parties, having transparency over operations within the supply chain is essential to identify potential exposure within the supply chain.
Conclusion
The regulations introduced by some countries and the case law discussed above certainly show a move towards more transparency in shipping supply chains. Nevertheless, the cost of creating risk management systems, the difficulty in obtaining accurate and timely information from various parties within the supply chain and the need to maintain a level of confidentiality for business purposes creates challenges for compliance. The impact of these regulations in creating transparent and more efficient shipping supply chains remains to be seen over the coming months.