The Supply Chain Act in procurement: contractual clauses for supply contracts

What contractual clauses does the Supply Chain Act require in procurement?

The starting point is Section 6(4) of the Supply Chain Act (LkSG). According to this, an obligated company must establish appropriate preventive measures in relation to its direct suppliers. For the contract, this means that a coordinated system of regulations is required. The standard components can be directly linked to their legal basis.

The first of these is the human rights and environmental assurance under Section 6(4)(2) of the Supply Chain Act, whereby the supplier undertakes to comply with the expected standards. The reference to the Supplier Code (Section 6(2) and (4)) incorporates the specific expectations into the contract as an adaptable annex. The pass-on and best-efforts clause, also based on Section 6(4)(2), carries these expectations down the supply chain on a risk-based basis. Audit and information rights under Section 6(4)(4) make the undertaking verifiable, whilst the commitment to provide training and support (Section 6(4)(3)) is intended to enable the supplier to actually comply with the agreed standards. The agreement is rounded off by remedial and escalation procedures under Section 7(2) and (3), which govern the response, suspension and termination as a last resort.

Each component has its own legal pitfalls. The undertaking must have verifiable content; the disclosure clause must not create an invalid obligation on the part of third parties; and audit or termination rights must not place the supplier at an unreasonable disadvantage. The following sections show how these points can be effectively integrated. The drafting guidelines are intended as a guide. They do not replace a review of the specific contract and the relevant risk situation.

Who is actually required to include these clauses nowadays?

The LkSG has applied since 2023 to companies with at least 3,000 employees in Germany and, since 2024, to those with at least 1,000 employees, in each case with their registered office, head office or branch in Germany. This directly covers larger Mittelstand enterprises and corporate groups. For smaller suppliers, the Act has an indirect effect, as their obligated customers pass on the requirements contractually. This is why LkSG clauses are now also found in numerous contracts whose parties themselves are not directly subject to the Act.

The legal situation is undergoing radical change in 2026, although this does not render contractual work superfluous. The reporting obligation under Section 10 of the LkSG has been suspended, the BAFA’s digital reporting form has been deactivated since 7 November 2025, and on 26 September 2025, the Federal Ministry for Economic Affairs instructed the authority to pursue only serious infringements for the time being.

The government’s draft bill to amend the LkSG provides for the reporting obligation to be repealed with retroactive effect and for the grounds for fines to be reduced. The substantive due diligence obligations and internal documentation remain unaffected. For procurement, this means that the obligation to contractually bind suppliers continues to apply, even if regulatory oversight is currently more restrained.

At the same time, the European framework is changing. The EU Supply Chain Due Diligence Directive (CSDDD) has been significantly streamlined by the Omnibus Package.

The difference is evident in the key figures. The LkSG is now in force, has been applicable since 2023 and 2024 respectively, and covers companies with 1,000 or more employees in Germany. The CSDDD, by contrast, is a directive that must be transposed into national law by 26 July 2028 and will apply uniformly from 26 July 2029. Its threshold is considerably higher, at 5,000 employees and a turnover of 1.5 billion euros. For the time being, enforcement will remain the responsibility of the BAFA, with its cautious approach; following transposition, the respective national supervisory authority will take over.

Germany intends to replace the LkSG with an implementing act for the CSDDD. This will reduce the number of entities directly subject to the requirements, but contractual safeguards within the supply chain will remain at the heart of any due diligence framework. Contracts that are drafted today in a manner that is proportionate to the risk and well-balanced will therefore remain viable even after the change in the legal framework.

How does one draft an effective human rights clause?

At its heart is the undertaking under Section 6(4)(2) of the LkSG. In this, the direct supplier undertakes to comply with human rights and environmental expectations. To ensure that this undertaking is more than just a platitude, it must be linked to specific, verifiable standards. A blanket statement to the effect that the supplier respects all human rights, on the other hand, remains too vague. It describes neither specific obligations nor a verifiable benchmark and is therefore of little help in the event of a dispute.

In practice, the substantive content is therefore removed from the contract and transferred to a supplier code of conduct, which is incorporated into the contract as an annex. The code sets out the relevant prohibitions and standards, such as the prohibition of child labour and forced labour, requirements regarding health and safety at work and freedom of association, as well as key environmental obligations.

This structure has two advantages. It makes the substance of the undertaking tangible, and it can be adapted if the risk profile or legal situation changes, without the need to renegotiate every contract. The Code should be formulated on a risk-based approach, i.e. it should address the risks relevant to the specific sector and procurement region, rather than simply ticking off a generic list.

An existing Supplier Code of Conduct can be reused, but should be aligned with the LkSG framework. Many older codes merely set out general expectations and contain neither a genuine contractual obligation nor monitoring and remedial mechanisms. For the purposes of the LkSG, the code must be incorporated into the contract as a binding annex and must be integrated with the audit and escalation clauses. A code that is only available on the website does not meet the assurance requirement.

How far down the supply chain may the on-licensing clause extend?

The LkSG expects that requirements should be appropriately extended beyond the immediate supplier into the wider supply chain. This is precisely where the most common error in draft contracts lies. Clauses that simply require the supplier to guarantee compliance with all standards throughout the entire supply chain are impractical for several reasons.

Firstly, the BAFA makes it clear in its guidance on cooperation within the supply chain that a blanket transfer of due diligence obligations is not permitted. A mere assurance by the supplier that it will comply with the standards throughout the entire chain generally does not make an effective and proportionate contribution to the contracting party’s own risk management. It merely shifts responsibility on paper, rather than actually reducing the risk. Secondly, a contract cannot directly bind indirect suppliers, as contracts to the detriment of third parties are, in principle, invalid. A contracting party can legally bind only itself.

A viable solution is therefore a best-efforts and pass-on clause which obliges the direct supplier to pass on the agreed expectations to its own upstream suppliers and to use reasonable means to ensure their compliance. The supplier is then not liable for the outcome across the entire chain, but rather to make an effort, commensurate with the extent of their influence, to pass on the expectations in a cascading manner. This structure reflects the framework of the law, which also distinguishes between reasonableness and scope of influence, and does not place an unreasonable burden on the supplier by requiring a guarantee that it cannot fulfil.

What audit and information rights should be included in the supply contract?

A commitment without monitoring is ineffective. Section 6(4)(4) of the LkSG therefore expressly requires the agreement of appropriate contractual monitoring mechanisms and their risk-based implementation. The contract must provide the purchaser with the tools to verify compliance.

Several arrangements are common and recognised, and these can be combined. The supplier first grants rights to information and disclosure, for example regarding the provision of evidence and the provision of self-disclosure. In addition, there are on-site inspection rights, which are exercised by the purchaser itself or by a third party commissioned by the purchaser. Finally, suitable certification or audit systems are recognised, provided they ensure independent and appropriate controls.

The emphasis is on proportionality: the frequency of checks should be based on the level of risk, not on a maximum requirement. A right to audit that permits unprompted, unlimited and, for the supplier, unpredictable inspections at any time is disproportionate and, at the same time, open to challenge if it is set out in pre-formulated terms and conditions.

In practice, it has proved effective to link the right to audit to specific triggers, such as concrete indications of a breach, a substantiated complaint or a regular, risk-based interval. In addition, notice periods, the handling of confidential information and the allocation of costs should be regulated. The delegation of audit authority down the supply chain also follows the principle of due diligence: the direct supplier undertakes to agree on corresponding control rights with its own upstream suppliers, insofar as this is possible and reasonable for it to do so.

Termination and suspension: what is permissible as a last resort?

The law sets out a clear sequence for dealing with breaches. Section 7 of the LkSG follows the principle of ‘rectification before termination’. If the customer identifies a breach, a remedial plan must first be drawn up and implemented in collaboration with the supplier. Under Section 7(3) of the LkSG, terminating the business relationship is expressly permitted only as a last resort. It is only permissible if the breach is deemed to be very serious, the measures agreed in the plan have failed to remedy the situation by the deadline, no less severe measure is available, and increasing one’s own influence offers no prospect of success.

The contract should reflect this statutory escalation process, not circumvent it. A clause granting the purchaser an immediate right of extraordinary termination for even the slightest breach is consistent neither with the purpose of the law nor with practical considerations. A tiered approach is advisable.

The first stage comprises obligations to give notice and to remedy the breach, with a reasonable grace period. As an intermediate stage, the contract may provide for a right to temporarily suspend delivery or acceptance, prior to final termination. Only at the final stage does the right to terminate the contract for cause apply, which is based on the conditions set out in Section 7(3), i.e. a serious breach that persists despite attempts at rectification.

This structure protects both parties. The purchaser has enforceable remedies at its disposal without being forced into an ‘all-or-nothing’ situation every time an incident occurs. The supplier is given the opportunity to rectify the situation before the relationship ends, which is also the aim of the law: to remedy shortcomings rather than simply dismissing suppliers and shifting the risk to a less visible part of the supply chain.

Where does Section 307 of the German Civil Code (BGB) draw the line for compliance clauses?

Compliance clauses are almost always set out as pre-formulated contractual terms and are therefore subject to the review of standard terms and conditions. Under Section 307 of the German Civil Code (BGB), clauses are invalid if they place the contracting party at an unreasonable disadvantage contrary to the principles of good faith. This scrutiny also applies in commercial transactions, albeit to a different standard than that applied to consumers. Anyone who excessively shifts the duty of care onto the supplier risks the key clause being rendered ineffective in the event of a dispute.

Three scenarios are particularly critical. Firstly, complete shifting of liability: a clause that imposes on the supplier, on a blanket basis, the duty of care that is legally assigned to the purchaser places the supplier at an unreasonable disadvantage and may be invalid.

Secondly, comprehensive indemnity and liability clauses: a supplier is required to indemnify the purchaser against all claims and damages arising from the entire supply chain, regardless of fault or ability to influence events. Such sweeping indemnities at the supplier’s expense are regularly open to challenge in pre-formulated terms and conditions.

Thirdly, non-transparent clauses: Section 307 requires that terms and conditions be clear and comprehensible. A reference to extensive, vague lists of expectations, the content of which the supplier cannot fully grasp, contravenes the requirement for transparency.

This gives rise to a twofold requirement for the drafting of contracts. The clauses must be appropriate in terms of content – that is, they must align the burdens with the actual degree of influence and fault – and they must be transparent. The supplier code should therefore, where possible, be incorporated as a negotiated individual agreement, as the content review for individually agreed provisions does not apply in the same way.

Another point of contention is the other party’s terms and conditions of purchase or sale. If the supplier’s general terms and conditions contain a defence clause, the binding nature of one’s own compliance regulations may be jeopardised. It is more robust to agree on core human rights obligations explicitly and in writing, rather than leaving their validity to be determined by a subsequent dispute over general terms and conditions.