# 10 / 2016
08.10.2016

Solutions rather than Litigation

SMEs are also affected

The name of the Initiative suggests that it is only directed against large group companies. This is wrong for three reasons.

  1. All companies, also small to medium-sized enterprises (SMEs), would be affected by the Initiative. It is true that the text of the Initiative says that the legislator would take into consideration the needs of small and medium-sized enterprises when regulating due diligence obligations. But SMEs are clearly also included in the liability obligations. For example, a Swiss SME might have an important supplier abroad that is dependent on it. The provisions of the Initiative would then apply directly to the SME.
     
  2. The proposed relief should not detract from the fact that in practice it is destined to be dead letter. The broad wording of the duties of care ensures that smaller companies cannot afford to apply a less stringent liability standard than that of large companies, when considering the risk.
     
  3. Even more comprehensive are the indirect consequences for SMEs that act as suppliers of international companies. A multinational company would have to pass the obligations it is subject to on to its suppliers in other countries and in Switzerland. This is because the Initiative stipulates a far-reaching duty of care that not only extends to the company itself but also to all its business partners in the value chain. A large company would hedge its liability risk with "back-to-back" contracts. This ensures that the statutory "liability for consequences" is passed on to the supplier by way of contract. For SMEs the Initiative entails higher risk and a significantly higher administrative outlay. Numerous additional attestations of conformity would have to be provided, and clients would most probably have to monitor the new duties of care more strictly.

Figure 1

The responsible business initiative obliges both large as well as small to medium enterprises, since every company would pass on all obligations it is subject to – nationally and internationally – to its suppliers to limit its own liability risk. Thus the statutory liability is contractually transferred to the supplier.

Example 1: Company K obtains goods in Switzerland from Supplier 1 (S1). Supplier 1 in turn has a supplier (S2) in another country. K has no direct influence on the procurement procedures of S1. Based on the Initiative a claimant would now be able to sue K directly in Switzerland. To protect itself from this risk, K would pass on liability to S1 with a "back-to-back" contract. S1 would do the same in its relationship with S2, so that the latter legally assumes the entire liability of K, which is measured according to Swiss standards (court costs, lawyers' costs, and compensation). It is even questionable whether S2 can accept liability to such a degree.

Example 2: S2 is a small independent family firm with local production that solely supplies S1. The family at S2 works hard and similarly requires their staff to work with them under precarious working conditions. S1 has repeatedly asked S2 to improve the hazardous conditions, but it cannot do anything but threaten S2 that it would no longer procure the goods from them. K determines that procuring the goods from S2 has become too risky due to the associated liability risk, and decides to buy up S1 and S2, integrating the two suppliers inside the group (horizontal integration). The family receives compensation and the enterprise S2 becomes part of a large group company. As a result, monitoring throughout the whole supply chain is ensured in line with the spirit of the Initiative, but at the cost of ending the existence of small family-owned enterprises.