Swiss Referendum on Implementing Supply Chain Liability

a post by guest blogger Penelope Bergkamp

Following a clear trend, Switzerland is now also considering proposals to hold  Swiss companies liable for environmental damage and human rights violations in their supply chains. Possibly inspired by the French Corporate Duty of Vigilance Law, the Swiss Coalition for Corporate Justice (SCCJ) launched the Responsible Business Initiative (“RBI”) in 2015. The RBI involves a citizens’ petition to amend the Swiss Federal Constitution to impose “appropriate due diligence” obligations on Swiss companies in  accordance with  their responsibilities under the UN Guiding Principles, along with liability for breaches by their subsidiaries. In response to the RBI, the Swiss Senate adopted a somewhat narrower, less ambitious proposal. Pursuant to Article 139 of the Federal Constitution, the Swiss people will be asked to vote on the RBI in a popular referendum

This post discusses the RBI and highlights the key differences between the RBI and the Senate proposal. First, the background to the RBI proposal is briefly reviewed. I will then turn to the procedural and substantive provisions of the RBI. Finally, the international private law aspects of the proposal will be analyzed.

 Background

In the year after its launch, the RBI gained the support of more than 100,000 signatories and, consequently, was submitted for review to the Federal Council and the Swiss Parliament, which includes the National Council (the lower house) and the Council of States (the upper house or “Senate”). The  Federal Council recommended that  the RBI be rejected, but the Council of States adopted a Counter-Proposal to the initiative. The Counter-Proposal aims primarily to limit and clarify the scope of the RBI.

In the course of this year, one of two things can happen. The Swiss National Council could accept the Counter-Proposal, in which case the Parliament will issue a Draft Bill and the Swiss people will be asked to cast their vote on the RBI and the Counter-Proposal (Article 139b Federal Constitution). Alternatively, the National Council could reject the Counter-Proposal, in which case the Swiss people will be asked to vote only on the RBI.

 Procedural and substantive requirements

Both the RBI and the Counter-Proposal suggest that the Swiss legislature impose on all large companies and SMEs operating in high-risk areas: (i) human rights due diligence obligations, (ii) effective sanctions for non-compliance, and (iii) liability for human rights abuses in their supply chains. As noted above, the Counter-Proposal has a narrower scope than the RBI.

 Scope of application

The law would apply to companies domiciled in Switzerland. While the Counter-Proposal targets only companies that have their ‘registered office’ (statutory seat) in Switzerland, the RBI also covers companies with their central administration or their principal place of business in Switzerland. Thus, a law based on the RBI would apply also to branches of foreign companies and to other un-incorporated entities.

Both proposals would limit the scope of the law to large companies and exempt SME’s, but only the Counter-Proposal sets forth a threshold. Under a law based on the Counter-Proposal, only companies required by Swiss law to conduct audits (cf. article 727 Code of Obligations) would be subject to the requirements. However, even SME’s that are not required to conduct audits would be covered if they operate in “high risk sectors”. No further definition of high risk sectors has been provided, but conflict minerals would come to mind.

Parent company liability

The RBI provides that Swiss companies “are also liable for damage caused by companies under their control where they have, in the course of business, committed violations of internationally recognized human rights or international environmental standards.” This provision raises a series of issues.

First, what are the “internationally recognized human rights violations” and “international environmental standards” to which reference is made. The RBI does not clarify this issue; the relevant international treaties are likely sources of inspiration. Under the Counter-Proposal, liability would attach only to “serious” human rights violations, i.e. only death and serious bodily injury, thus limiting the bite of the law and excluding all environmental damage.

Second, it is not clear whether liability under this law would be strict (‘no-fault’) or require a showing of fault. The Counter-Proposal attempts to clarify this issue by referring to Article 55 of the Swiss Code of Obligations regarding employer liability. Under this statute, a parent company is not liable when it can demonstrate that “it carried out appropriate due diligence to prevent the damage from occurring” or that “the damage would have occurred even if all due care had been taken”. This provision does not impose strict liability; rather, it entails fault liability with reversal of the burden of proof of due care and causation. To avoid liability, the company has to prove it met its duty to prevent the loss at issue. It will be up to a court in a specific case to find a prevention duty raising the specter of judges construing onerous duties with the benefit of hindsight.

Third, when should companies be deemed to be “under control” of a parent company? The RBI distinguishes three different types of control by a parent company: (1) legal control exercised by the owner (shareholder) of a company or through contracts, (2) de facto control, or (3) economic leverage. While the first type of control is relatively ‘hard’, de facto control and in particular economic leverage are fluffy concepts that are subject to substantial degrees of judicial discretion. As the RBI explains, if a company is the sole customer of a supplier, there can be a relationship of control; this may be true also if the company is merely a substantial customer of the supplier. To avoid the draconian implications of the RBI’s open regime, the Counter-Proposal limits the scope of liability to legal subsidiaries, thus excluding liability for companies that are under de facto control or economically dependent.

International private law aspects

A law based on the RBI will apply “irrespective of the law applicable under private international law.” This provision is intended to make sure that, even where foreign law applies, the Swiss supply chain law governs.

In tort cases, based on the lex loci delicti conflict of law rule (Art 133 (2) Code of International Private Law), Swiss courts often have to apply foreign law. The generic rule quoted above does not exclude the applicability of the foreign law to important elements of a case. For instance, under the lex loci delicti conflict of law rule, the types of compensable (or cognizable) harm would have to be determined by foreign law. Likewise, the assessment or valuation of damages and the applicable causal theory could also be deemed to be elements to be decided under the applicable foreign law.

According to lex loci delicti, a judge could refer to foreign law in order to determine the amount of damages, but what if the foreign law concerned does not recognize a type of damage that is recognized as compensable under Swiss law? Or foreign law assesses the damage materially differently? When “the content of the foreign law cannot be established,”  Article 16 (2) CIPL refers the court to Swiss law. The key question thus becomes when it can be said that “the foreign law cannot be established.” If no relevant rule can be found under the foreign law, does this mean that the content of the foreign law cannot be established? What if there is only a court judgment on point? Under Swiss international private law, a court may not consider Swiss law applicable if the applicable foreign law is merely inadequate (M. Bogdan, p. 167). As a general rule, gaps in local law should be filled in by applying the general rules or principles of local law per analogy.

The applicability of foreign law may thus indirectly reduce the threat of supply chain liability. Standards for damage assessment in Russia, for instance, are relatively weak, resulting in low amounts of compensations (S. Avdasheva, p. 247). Where the potential exposure is low, the costs of potential liability under the Swiss supply chain liability law may be outweighed by the costs of human rights and environmental due diligence. Applying foreign law to damage caused by a subsidiary or company under control could therefore render supply chain liability biteless. But since a law based on the RBI would apply “irrespective” of the applicable foreign law, a court would appear to have broad discretion to apply Swiss law, rather than foreign law, to define the liability of Swiss companies.

The Counter-Proposal omits the provision on the law applicable under private international law, which does not imply that the issues discussed above would thereby be resolved. It would, however, mean that these issues would have to be resolved under the unmodified Swiss international private law.

Conclusion

The RBI involves an interesting attempt to create supply chain liability under Swiss law. A law based on the RBI would likely be both broad and vague and, thus, leave it to the courts to draw the boundaries of supply chain liability on a case-by-case basis. Being more pragmatic, the Swiss Senate attempts to avoid the most problematic aspects of the RBI, and limit and clarify its scope. Its Counter-Proposal would create more legal certainty and predictability for companies regarding their potential liability exposure.

Although the Counter-Proposal already tackles some of the issues raised by the RBI, draft legislation could further define the scope of supply chain liability under Swiss law. The drafting of such legislation will start after the Swiss referendum on the RBI. As discussed above, the issue of the law governing the issues of damage and damage assessment will be critical. Whatever may happen, supply chain liability in Switzerland will likely become a major concern for international corporations.

Penelope Bergkamp
Student Master of Laws, KU Leuven

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