How Omnibus Risks Opening a Major Gap in the Enforcement of the Corporate Sustainability Due Diligence Directive
The author of this post is Rob Rooman, PhD Researcher at KULeuven.
Ever since its adoption, the future of Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence (hereinafter, the CS3D) has been unsure.
The Directive in general is facing significant political resistance, and has seen its transposition deadline delayed. Furthermore, the European Commission in February proposed its Omnibus Simplification Package, aiming to simplifying the EU’s ESG regulations in order not to disadvantage EU companies in terms of competitiveness. In the CS3D, this is concretized for example by restricting due diligence obligations to direct business partners and not indirect business partners, or increasing the scope of maximum harmonization.
Amendments to Article 29
I will not dive into the amendments to the due diligence obligations. Rather, I will focus on the consequences of Omnibus on the civil liability regime laid down in Article 29 (for a more extensive analysis of that Article, see for example Bueno and Oehm). This liability regime should ensure private enforcement of the Directive by ensuring that claimants who have sustained damages arising out of adverse impact on human rights and environment caused by corporate activity, can hold the parent company accountable. In short, the proposal removes most of Article 29, leaving only the principle of full compensation according to national law intact, together with additional rules, for example on access to justice (although possibility for claimants to authorize organizations to bring representative actions has disappeared too). The Commission has done so to ensure respect for the different national liability regimes of the Member States, and to avoid the litigation risks of a harmonized civil liability regime.
By removing Article 29(1), which set out the liability conditions, the Commission leaves it up to national law to decide on what conditions a company will be liable for infringing the CS3D. This means that the conditions of the liability will depend on the state in which the claim is brought, aligning with the Commission’s goal to ensure respect for different regimes.
No Overriding Mandatory Application? The Risk of a New Enforcement Gap
However, the Commission has also proposed to remove Article 29(7), which designates the liability rules to be of overriding mandatory application. This allows the Member States not only to decide on the conditions of liability, but also to decide whether or not to include an express characterization as overriding mandatory provisions (OMP’s) in the implementation of the CS3D (which, as said by Pannebakker, they might not be eager to do). If they refrain from doing that, courts will be forced to apply the normal conflict of laws rules set out in the Rome II Regulation, with the general rule pointing towards the country in which the damage has arisen (aka lex loci damni, and in such claims most likely third state law). Alternatively, the national judiciary might attempt to apply the Directive with national liability rules as OMP’s in accordance with the CJEU case law on Article 16 Rome II, but that would then lead to the necessary unpredictability and litigation.
From an enforcement point of view, this risks opening a major enforcement gap at the stage of applicable law. With the already existing enforcement gap at the stage of jurisdiction (as explained by Sommerfeld and Michaels on this blog), this could effectively put the application of the Directive’s liability rules to death.
With one of the Commission’s objectives being the avoidance of litigation risks, it is ironic that on the contrary, Omnibus actually seems to make it harder to manage those. Whether or not the company will be liable under the CS3D will depend not only on the conditions of CS3D liability in the laws of the Member State of the seized court, but also on what law those courts will apply. As noticed by Geert Van Calster, this may lead to a wide variety of possible results, and the law applicable to CS3D liability claims may now very well be the law of any country in the world where damage has arisen. In the recent study by the JARO Institute on Sustainability and Digitalization, approximately half (53%) of the surveyed businesses expect more liability risks now that the CS3D might not be of overriding mandatory application. In addition, timely clarity on the content of the rules is much needed, so that businesses can prepare accordingly. The survey shows that nearly half of the participating businesses are delaying investments due to the current state of unclarity following Omnibus.
In its opinion, the European Economic and Social Committee advises against removing the harmonized rules on liability and their application as OMP’s, as this leads to fragmentation on the internal market, and to a decrease in access to justice. With respect to the latter, Omnibus indeed proposed to remove one of the access to justice measures in Paragraph 3, i.e. on representative actions. Regarding the other four (on costs, statutes of limitations, disclosure and injunctive measures), it is of note that two of those (rules on costs and disclosure) are likely categorized as matters of procedural law. They are excluded from Rome II’s scope (Article 1(3)) and most probably subject to lex fori. EU courts will therefore always be able to apply their own laws (including the transposed CS3D) to those matters, irrespective of the law applicable.
How to Proceed
In any case, to avoid unwanted and unnecessary unpredictability, and to ensure the effective application of the Directive, even in its ‘simplified’ version, it is strongly recommended to include an express reference to OMP’s in the CS3D. This would at least harmonize the fact that if an EU court has jurisdiction to hear a CS3D liability claim, it in fact applies that Directive together with its national liability rules. Whether or not, and with what result the company will be liable in the end will then still depend on the different national liability regimes of the Member States, but at least the application of the CS3D is guaranteed.
Thank you for this post.
It is my understanding that, would a European forum have jurisdiction, we would therefore come back to a traditional reasoning : taking into consideration of CS3D thanks to article 17 of Rome II, and designation of the law of the damage for the compensation regime (article 4 Rome II) to the extent that it allows a form of compensation (otherwise article 26 Rome II could intervene).
Why would it be inappropriate?
Thank you, Augustin, for your thoughtful point, and thank you, Rob, for this insightful post.
I agree that the removal of Article 29(7) of the CS3D would create new challenges in terms of legal certainty and enforcement. As Augustin notes, in the absence of an express OMP clause, we might indeed return to the traditional Rome II reasoning: taking the CS3D into account via Article 17, designating the law of the place of damage under Article 4. There is nothing inherently inappropriate in this approach: it reflects the ordinary functioning of Rome II.
At the same time, I wonder whether this fallback reasoning will be sufficient to avoid the ‘new enforcement gap’ that Rob highlights. While the CS3D, via the Omnibus (as seems), will no longer oblige Member States to ensure that transposed provisions at stake are of overriding mandatory application in cases governed by non-EU Member State law, national courts might still be able – and perhaps feel compelled – to give such effect through interpretation. This could happen via Article 16 Rome II or through Article 26 Rome II relying upon national constitutional principles or public policy exceptions where human rights and environmental protection are concerned. In other words, even without an express OMP clause, courts might find legitimate interpretative paths to safeguard the CS3D’s objectives, though of course in a non-guaranteed and potentially divergent manner across Member States.
Moreover, one can hope that, over time, courts and practitioners will develop a shared approach to applying the transposed CS3D rules in cross-border cases, fostering a de facto convergence that helps reduce inconsistencies. But this would offer far less certainty than a clear OMP designation and would depend on a patchwork of judicial solutions rather than a uniform legislative framework, with all the limitations that entails.
Finally, I wonder whether the intense focus on the legal characterisation of the liability rules as overriding mandatory might risk overshadowing another crucial – and perhaps fundamental – issue: the actual effectiveness of national liability regimes in delivering remedies (i.e. the overall private enforcement system). Even where the applicable law points to the law of the forum or where these rules are applied even as overriding mandatory provisions, there remains the question of whether national legal frameworks are truly equipped to offer effective judicial protection to those harmed by corporate misconduct. The removal places even greater importance on the capacity of domestic laws to fulfil the CS3D’s ambitions. I think that equal attention should be paid to how national systems structure liability, access to evidence, remedies and procedural safeguards in line with the CS3D’s goals.
Thank you Augustin and Marco for your interesting comments. As Marco highlights, that would not necessarily be inappropriate (although it has been noted that the rules laid down in the Rome II Regulation might not be adapted to or offer sufficient protection in the business and human rights context).
My primary point was that the Regulation itself cannot guarantee the application of the Directive to such liability claims, which from a legislative point of view should be the goal when adopting such rules. Considering the CS3D’s standard when applying the normally applicable law via Article 17 might indeed help with holding a business accountable under the lex loci damni, but does not offer the same legal protection as having a harmonized set of liability rules applied by every EU court. In addition, it is also a matter of legal certainty: a clear OMP designation by the legislator (certainly combined with harmonized liability rules) does have the advantage of having a clear and uniform standard apply. As Marco rightly notes, this is already partly lost due to the removal by Omnibus of the harmonized conditions for liability, and it is a very pertinent question to what extent national liability rules will grant sufficient access to compensation for claimants. This also leads to a different applicable standard depending on the forum, which could potentially lead to an uneven playing field within the internal market depending on, for example, the domicile of the company. However, with an express characterization, the standard set out by the CS3D is at least guaranteed, together with the principle of full compensation even though it will be up to national law to decide under what exact conditions infringements will lead to liability (e.g. causation, quantification and qualification of damages etc).
With no express characterization of the Directive as OMP’s, it will indeed be the national judiciary that could try to either disapply certain rules of the normally applicable law on the basis of Article 26, or to apply the CS3D anyway as OMP’s on the basis of Article 16 (and the corresponding CJEU case law). As said in the post, this will probably lead 1) to diverging solutions in Member States, where some courts will and some courts will not apply the Directive as OMP’s, and 2) to an inevitable amount of litigation before Member State courts on whether the courts can apply the Directive over and above the normally applicable law. I believe that, even if this would guarantee the application of the Directive to such liability claims (which I do not think is the case), it would do so in an unnecessarily unpredictable path.
Thank you very much, both of you, for taking the time to answer, and for those insightful observations.
My main point is that the real issue here is less the OMP characterisation than the absence of harmonised liability rules. I understand there was a form of balance there: the EU created a specific regime of liability that was presumed to be more appropriate than the one offered by foreign law. But even back then, I still do not think OMP was a good characterisation. It seems to me it would have been more appropriate to state that, on the one hand, for the scope covered by the directive, the relevant connecting factor regarding liability is the event giving rise to the damage (fait générateur), i.e. the law that created the ex-ante obligations of vigilance, and that, on the other hand, the transposed law constitutes part of the ordre public international (to make sure article 26 Rome II intervenes). This way, a single and predictable law is applicable to the entirety of the category, regardless of the EU court that is seised, and third state companies subjected to the directive would be bound anyway.
If I were to discuss the characterisation of OMP in the new context of Omnibus – rather than exception d’ordre public international, but I will have to give it more thoughts –, I would probably submit this.
First, I am not sure it really fits the notion: the CSDDD already defines the international scope of its rule of conducts, and it has no issue binding actors that are not established in the EU, nor does it bother creating duties linked to activities carried out of the EU – to some extent, it is its very purpose. It does it so well that the persons subjected to it fought against the directive, with the success we know. Furthermore, there is a form of subversion: OMP is fundamentally a defense mechanism of the forum regarding its internal order; here it would be used to give no effect to the foreign applicable law regarding a tort that occurred on its territory.
Second, because, I do not think the result it achieves is very convincing. CSDDD already dictates the relevant rules of conduct thanks to article 17 Rome II. I understand that the main result of the OMP characterisation is to give no voice to foreign law as to the compensation regime. This is quite paradoxical as, because of the omnibus directive, national law might not be well equipped to answer those questions.
In this context, should we rush to evict the entirety of the law of the damage? It seems to me there are good reasons the notion of damage was elected as a connecting factor: it allows the country that suffers the tort to rule on the satisfactory conduct to have on its territory, and on the appropriate compensation regime. To the extent that it does have a compensation regime, why should we, a priori, gives no space to the law of the country that actually suffered from corporate misconduct and is not necessarily deprived of a pertinent regime?