EU Due Diligence Directive: Liability Shift for Corporates

Introduction

The recent provisional political agreement in the European Union on the Corporate Sustainability Due Diligence Directive (CSDDD) marks a pivotal shift in corporate accountability. The Directive, once adopted and transposed, will impose binding human rights and environmental due diligence obligations on large companies and certain SMEs in high-risk sectors. Its legal importance lies in moving corporate responsibility from soft-law standards — such as the UN Guiding Principles on Business and Human Rights — to enforceable obligations with civil liability, supervisory enforcement and potential director-level consequences. This development will materially affect corporate compliance frameworks, board duties and cross-border litigation risk for multinational groups operating within or trading with the EU.

Legal Background

The CSDDD builds on the EU’s Non-Financial Reporting Directive (now superseded by the Corporate Sustainability Reporting Directive — CSRD) and the evolving international expectations set out in the UNGPs. Key elements of the draft Directive include mandatory due diligence across companies’ value chains, obligations to prevent, mitigate and bring to an end adverse human rights and environmental impacts, and new civil liability regimes allowing victims to seek remedies in EU courts.

Under UK corporate law principles such as s.172 of the Companies Act 2006, directors must have regard to long-term consequences of decisions and stakeholder interests; however, s.172 is a fiduciary, internal duty not normally creating third-party claims. The CSDDD’s proposed private cause of action departs from this by enabling liability for failures in diligence. Jurisprudence from UK courts is instructive: in Vedanta v Lungowe [2019] UKSC 20, the Supreme Court allowed claims against a parent company in English courts for environmental harm in a subsidiary’s operations, indicating potential parent company accountability. Similarly, Chandler v Cape plc [2012] EWCA Civ 525 established limited circumstances where a parent may owe a duty of care to workers of a subsidiary. More recently, cases such as Okpabi v Royal Dutch Shell (reported at final appeal in various domestic courts) underscore courts’ willingness to scrutinise multinationals’ control and responsibility over foreign operations.

Critical Analysis

The Directive’s mandatory due diligence creates a layered legal regime with compliance, supervisory and civil enforcement arms. From a compliance perspective, firms will need to map complex global supply chains, implement prevention and remediation measures and integrate due diligence into corporate governance. This will raise issues around foreseeability, causation and proportionality — core elements in both tort and regulatory liability.

On civil liability, the Directive contemplates direct claims against companies for inadequate due diligence or for failing to prevent harms by business partners. This potentially narrows the evidential gap plaintiffs face when pursuing cross-border harms: rather than proving direct causation by a parent/contracting company, claimants may rely on statutory breaches of due diligence duties. Courts will need to reconcile these statutory obligations with common law principles of duty, breach and causation. Vedanta v Lungowe is a persuasive precedent: English courts recognised jurisdiction and the possibility of parent liability where the parent exercised a sufficient degree of control or influence. The CSDDD, however, extends liability beyond control to encompass failure to identify and mitigate risks throughout the value chain.

Directors’ duties are another pressure point. The Directive’s governance provisions push boards to integrate due diligence into strategy and risk oversight. While s.172 of the Companies Act 2006 already requires consideration of stakeholder impacts, the CSDDD’s prescriptive duties — backed by fines and civil remedies — may create an enforceable standard of care against which directors’ decisions are judged. This intersects with existing case law on director culpability and could prompt derivative actions or claims alleging failure to implement legally mandated due diligence systems.

Enforcement will test jurisdictional boundaries. Victims outside the EU may bring claims in EU states; defendants will likely challenge forum and applicable law. The Directive’s drafting on jurisdiction and applicable law will be key. Likewise, compliance costs and contractual ripples (e.g., flow-down obligations to suppliers) may provoke contractual renegotiation and raise competition and trade law considerations.

Opinion & Outlook

The CSDDD represents a significant recalibration of corporate responsibility: from voluntary norms to enforceable duties. Practically, large corporates should treat the Directive as a de facto expansion of liability risk and revamp governance, contract management and remediation processes now. Boards must demand robust due diligence reporting and ensure adequate resources are committed to upstream and downstream risk mitigation.

From a jurisprudential perspective, the Directive will likely accelerate litigation trends seen in Vedanta and similar cases by lowering barriers for victims to proceed in EU courts. Legislatures and courts will confront tensions between statutory duties and common law causation principles; expect litigation to clarify the scope of remedies and the interplay with national corporate law doctrines. Policymakers should also consider supervisory capacity and the risk of forum shopping; harmonised enforcement guidance will reduce uncertainty.

For the UK and other non-EU jurisdictions, the Directive raises questions about competitive effects and regulatory divergence post-Brexit. The UK may prudently consider targeted reforms (for example, stronger mandatory reporting or supply-chain diligence standards) to avoid becoming a forum for regulatory arbitrage while protecting domestic firms from uneven compliance burdens.

Conclusion

The EU’s CSDDD, now at a decisive political stage, signals a material shift toward enforceable corporate accountability for human rights and environmental harms. Drawing on precedents such as Vedanta v Lungowe and Chandler v Cape plc, courts and businesses will have to navigate new statutory duties alongside established common law principles. Corporates should proactively strengthen governance and supply-chain oversight; legal practitioners should prepare for a surge of strategic litigation that will define the contours of cross-border corporate liability for years to come.