The interplay of the new CS3D with EU private international law: what lies ahead for businesses

On 14 May 2024 the Corporate Social Due Diligence Directive (“CS3D” or “Directive”) was finally approved by the Council of the European Union, following the European Parliament approval of 24 April 2024. After its forthcoming publication in the EU Official Journal, member states, including Italy, will have two years to implement the Directive into their domestic law systems.

In-scope companies and phased implementation of the Directive

Despite a scaled-back scope, with higher company size thresholds compared to the February 2022 EU Commission proposal, the April-May 2024 CS3D still represents a paradigm shift in corporate responsibility, mandating in-scope companies to actively manage human rights and environmental impacts across their supply chains.  

National implementation of the Directive will significantly impact legal systems across the EU, especially in countries like Italy that, unlike others (such as France and Germany), lack similar legislation. Also for this reason, the CS3D adopts a staggered implementation approach: larger companies will be the first to comply by 2027, followed by progressively smaller companies over the following 2 years. Ultimately, CS3D will impact EU companies with over 1000 employees and revenue in the EU greater than €450 million. It will also apply to companies with a franchising or licensing business model, as well as to non-EU companies with operations in the Union, that meet specific thresholds.

Civil liability for non-compliance with CS3D obligations

Companies subject to the CS3D will face a new set of legal obligations, including (i) conducting regular due diligence to identify potential human rights and environmental violations within their supply chains, (ii) implementing preventive measures to mitigate identified risks and (iii) establishing a transition plan for climate change mitigation, aligned with the Paris Agreement's 1.5°C target.

Failure to comply with the obligations set forth by the Directive may open the door to (in tort) civil liability lawsuits from legal entities or individuals harmed by a company's non-compliance, unless the damage is caused only by said company’s business partners in its chain of activities (Art. 29 of the Directive).

Civil liability is a cornerstone innovation of the Directive. The CS3D mandates that national laws implementing Art. 29 must be overriding, meaning that they apply in all cases and without exceptions. This ensures that provisions on civil liability will prevail, regardless of any (hypothetical) different provision in the relevant foreign law governing the claim.

The CS3D emphasis on civil liability, when read in conjunction with the relevant EU private international law rules governing jurisdiction and applicable law in tort claims, brings new factors for companies to consider:

• According to Art. 7, n. 2, of the Brussels I-bis EU Regulation (n. 1215/2012), which regulates jurisdiction for tort cases, civil liability may be claimed, inter alia, before the courts of the member states wherever the “harmful event occurred or may occur”. This rule has been interpreted by the Court of Justice of the European Union in the Bier case as referring to both the place where the harmful event occurred and the place where the damage deriving from the event took place.
• A similar consideration applies with respect to applicable law, which, according to the general rule of Rome II EU Regulation (n. 864/2007) is one of the place(s) where the damage occurs (lex loci damni, which is different from the place where the event giving rise to the damage – the so called loci commissi delicti – occurred).

Against the above background, companies that will navigate the new regulatory environment set forth by CS3D might be exposed to unpredictable scenarios (and potential forum shopping).

Stakeholders claiming harm from non-compliance could sue in any member state where they (allegedly) suffered damage, on the basis of the law in force in that member state. Additionally, class actions could be potentially started in a member state (and based on its national law – possibly the most favourable to the plaintiffs’ case) even if only one of the class members suffered damages in said member state (this scenario may take place due to the provision of Art. 8 of the Brussels I-bis EU Regulation, concerning the case of claims against more than one defendant).

Looking ahead

National legislations implementing the CS3D will reshape the ESG legal landscape across EU, demanding a significant shift in how companies approach corporate responsibility.

In this context, the possibility of lawsuits in multiple jurisdictions based on different national laws adds another layer of complexity for businesses that will navigate this new regulatory environment.

To stay ahead of the curve, companies should prioritize compliance with CS3D provisions. This involve (i) implementing (or strengthening) due diligence practices to identify and address potential human rights and environmental risks throughout the supply chain, (ii) developing (or enhancing) expertise in ESG principles and supply chain investigations, and (iii) fostering a culture of sustainability within the supply chain. These measures will not only reduce the risk of non-compliance and reputational damage but also minimize civil liability exposure and, accordingly, the geographical unpredictability related to potential litigation.

Authored by Alessandro Borrello, Giovanni Zarra, and Roberto Isibor.