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Supply chain liability under the law of negligence: What does Jabir and Others v KiK Textilien und Non-Food GmbH mean for European companies with supply chains in the sub-continent and other common law countries?

Last month a court in Dortmund heard arguments in Jabir and others v. KiK Textilien und Non-Food GmbH.  It is a case brought against a German retailer, under English law principles of tort in relation to a fire at the factory of a supplier in Pakistan.  This post explains what the case is about and what it might mean for European companies with suppliers in common law countries like Pakistan and Bangladesh.

Outline of the facts

In 2015 four Pakistani nationals brought claims in Germany against German retailer KiK Textilien und Non-Food GmbH (“KiK”). The claimants seek damages for personal injury and death resulting from a catastrophic fire in 2012 at the Karachi factory of KiK’s supplier, Ali Enterprises (“Ali”).  The fire claimed 260 lives and injured a further 32. KiK was Ali’s main customer at the time, utilising around 75% of the Baldia factory’s production capacity.

In September 2016, the Dortmund court accepted jurisdiction and granted the claimants legal aid. The case is currently pending before the Regional Court (Landgericht) of Dortmund. This is the first case of its kind in Germany, concerning damages claims based on the liability of a transnational company for human rights violations abroad.

German courts bound to apply Pakistani law

Under the Rome II Regulation, the law applicable to compensation claims arising out of a tort or delict is the law of the country in which the damage occurred, i.e. Pakistan.  Pakistani tort law is based on English common law so, if the case proceeds to a trial on the merits, we will have the unusual situation of a German court deciding a case based on the English common law of negligence.  This is all the more remarkable given that the English courts have never before attributed liability to a purchaser company for human rights impacts in its supply chain.

Claimants’ argument: voluntary assumption of responsibility for safe working conditions at supplier’s factory [1]

The law does not necessarily impose a duty on a purchaser company to prevent adverse human rights impacts in its supply chain.  However, a duty can be voluntarily assumed.  In KiK, the claimants contend that KiK owed them a duty of care to procure a healthy and safe working environment and breached this duty by failing to do its share to prevent the fire, and the resulting harm.  The claimants argue that the number of factory workers killed and injured was exacerbated by insufficient fire safety conditions at the premises, including a lack of fire alarms and extinguishers, closed emergency exits and barred windows. According to the claimants, KiK contributed to this situation by failing to enforce adequate health and safety standards at the factory.

According to the claimants, KiK’s position in relation to Ali was similar to that of a parent company. The claimants stress that “corporate structure is in itself not relevant to the assumption of responsibility”; which is consistent with the comments made by the English Court of Appeal in the recent parent company liability case involving Unilever (see our blog post here). On the basis of the principles set out in the English case of Caparo v Dickman [1990] UKHL 2, the claimants argue that the following circumstances evidence the existence of a duty of care:

  • Close integration of Ali into KiK’s supply chain: In its 2010 Sustainability Report[2], KiK stated that they were responsible not only for their direct employees but also for others who are involved in other countries in producing the goods ordered by KiK; KiK declared in this document that it designs processes, sets and enforces standards within its supply chain, and that it would “assume social responsibility above and beyond our core business activities”;
  • Contractual terms and conditions related to safe work environment: Each purchase order constituted a separate contract with Ali and incorporated KiK’s Code of Conduct[3], which required a clean and safe working environment. KiK declared in its 2010 Sustainability Report that the Code of Conduct was intended to have binding force, that “anyone who, through their work, contributes to our success, does so in appropriate conditions and with full access to their rights” and that the instrument to pursue this goal was the Code of Conduct as a “binding basis for all our commercial relationships”. Consequently, Ali was contractually obliged to undertake “convincing efforts” to guarantee work safety standards required by KiK at the Baldia factory.
  • Sufficient potential influence over supplier to enforce the safety standards: KiK had sufficient potential influence over Ali to enforce implementation of the safety standards. KiK could have achieved this by a programme of audits, Corrective Action Plans, or on-site visits by KiK representatives (especially those focusing on corporate social responsibility issues). It could have imposed the ultimate sanction for non-compliance, i.e. termination of the contract. KiK had de facto influence over Ali as the latter was integrated into KiK’s supply chain and the majority of the work at the Baldia factory was ordered by KiK.

The claimants argue that this all meant that: the harm suffered by the victims was sufficiently foreseeable to KiK; that there was sufficient proximity between the claimants and KiK; and that in the circumstances it is fair, just and reasonable to assign a duty of care to Kik.

The claims may be time-barred

The parties are currently debating whether the claims (which were brought two and a half years after the fire) are time-barred. Under Pakistani law the claims would be time-barred as the statute of limitation is two years. In contrast, this defence would not be available under German law, where the statute of limitation is three years. In December 2014, KiK had waived its right to raise the defence of the statute of limitation, but now contests the applicability of this waiver to the claims pending before the Dortmund court. The claimants appear to be arguing that, due to the fact that the waiver was governed by German law, this law also applies to the statute of limitation. In this case, the claims would have been brought before the expiration of the limitation period and the case could proceed to the merits stage.[4] A court hearing on the question of whether the claims are time-barred was held on 29 November 2018, and the Dortmund court is set to issue its decision on this preliminary matter on 10 January 2019.

Comment

The KiK case presents the unusual situation in which a German court is being asked to decide a case on common law principles, in circumstances where there is no firm precedent for a duty of care. More broadly, it is also the first time that a German court will consider the liability of transnational companies for human rights violations regarding damages claims. While the claimants seek to import the common law approach, it is possible that German law could influence the court.

It is notable that no provisions of German law explicitly prescribe responsibility for a supplier or subsidiary in this context. Nevertheless, there have been attempts to establish responsibility by reference to other concepts under German law. For instance, it could be considered if a decision of the Regional Court of Munich[5] regarding §§ 91, 93 AktG (German Stock Corporation Act) which states that members of the management board have to apply the diligence of a responsible and conscientious manager could potentially be relevant here. In this case, which concerned the management board’s liability for bribery, the court defined the due diligence standard applicable to the management board. It held that the implementation of an inadequate compliance system and insufficient monitoring by the management board constituted a breach of duty under § 93 AktG. Some commentators argue that this decision may have general implications for the responsibility of a management board concerning CSR or human rights violation.[6]  Others have pointed out that KiK’s Code of Conduct could be considered to contain elements of a third-party beneficiary contract (Vertrag zugunsten Dritter) for the benefit of workers employed by KiK’s suppliers. As a result, these workers would be entitled to contractual claims against KiK.[7]

The German government[8] amongst other EU member states followed the EU Commission’s call to develop a national action plan for the implementation of the UN Guiding Principles on Business and Human Rights. The German plan relies on companies’ voluntary commitment in regard to transparency and reporting requirements and the implementation of mechanisms to prevent and redress human rights violations. The progress is to be reviewed in 2020 and legislative measures might be taken if the number companies that have committed voluntarily will be considered insufficient.  The KiK case is an illustration of how voluntary commitments such as codes of conduct may crystallise into “hard” legal commitments.

Absent compulsory due diligence and reporting requirements, there appears to be a “Catch 22” for European transnational companies with operations or suppliers in common law countries such as Pakistan, Bangladesh, India and Anglophone Africa – by fulfilling the responsibility to respect under the UN Guiding Principles and implementing group human rights policies, there is an increased likelihood that a duty of care will arise.

As a matter of policy, it is hoped that legislators and judges address this Catch-22 and develop law which consolidates upon the existing consensus around the UNGPs and encourages businesses to fulfill the responsibility to respect.  In the meantime, businesses should be alive to the fact that a duty to prevent human rights impacts in their overseas supply chains and operations may exist and ensure that they discharge any such duty by rigorously implementing their existing policies and procedures.

Prepared by Lucja Nowak and Jonas Poell, Munich office and Peter Hood and Julianne-Hughes Jennett from the Business and Human Rights practice in London. Many thanks to Josephine Becker for her assistance in preparing this post. 

 


[1]  Claimants’ arguments summarised here are based on the claimants’ legal opinion prepared by Professor Sheldon Leader, Professor Jane Wright and Dr Anil Yilmaz of the School of Law, University of Essex, which is available at: https://www.ecchr.eu/fileadmin/Juristische_Dokumente/Legal_Opion_Essex_Jabir_et_al_v_KiK_2015.pdf.

[2]  Available at http://www.kik-textilien.com/unternehmen/fileadmin/user_upload_de/Tschechien/NHB_E_online.pdf.

[3]  According to the KiK Sustainability Report 2010 the Code of Conduct is aligned with SAI’s (Social Accountability International) SA8000 Standard and comparable with the BSCI (Business Social Compliance Initiative) Code of Conduct. Therefore, KiK’s Code of Conduct can be seen as an example for many other Codes of Conduct used by other companies.

[4]  “KIK-Opfern droht Niederlage”, Frankfurter Rundschau, 6 June 2018, available at:  http://www.fr.de/wirtschaft/menschenrechte-kik-opfern-droht-niederlage-a-1519085.

[5]  LG München I, Urteil vom 10.12.2013, 5 HK O 1387/10, NZG 2014, 345.

[6] Saage-Maaß/Leifker, “Haftungsrisiken deutscher Unternehmen und ihres Managements für Menschenrechtsverletzungen im Ausland”, BB 2015, 2499, 2502; Spießhofer, “Wirtschaft und Menschenrechte – rechtliche Aspekte der Corporate Social Responsibility”, NJW 2014, 2473.

[7] Heinlein, “Zivilrechtliche Verantwortung transnationaler Unternehmen für sichere und gesunde Arbeitsbedingungen in den Betrieben ihrer Lieferanten”, NZA 2018, 276, 279.

[8]  Published 21 December 2016, available at https://www.auswaertiges-amt.de/blob/610714/fb740510e8c2fa83dc507afad0b2d7ad/nap-wirtschaft-menschenrechte-engl-data.pd .