NUCLEAR ISSUES Limiting liability

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Volume 28 - Issue 25 :: Dec. 03-16, 2011INDIA'S NATIONAL MAGAZINE
from the publishers of THE HINDU

NUCLEAR ISSUES

Limiting liability

R. RAMACHANDRAN

The Civil Liability for Nuclear Damage Act (2010) comes into force with the notification of the attendant rules for its implementation.

V.V. KRISHNAN 

A VIEW OF the Tarapur Atomic Power Station. It is not clear as yet if suppliers will accept the apparent relief from indefinite liability that the rules have now given them and begin to do business with NPCIL.

THE rules for implementing the Civil Liability for Nuclear Damage Act (2010), which were being awaited for long, particularly by foreign nuclear goods suppliers, were notified on November 11 and made public on November 16. In effect, therefore, the Act came into force as of November 11. The concern of the suppliers related chiefly to Section 17(b) of the Act, which provides for ‘right of recourse' to the nuclear power plant (NPP) operator to move against any supplier of “equipment or material with patent or latent defects or sub-standard devices” if that was determined to be the cause for a nuclear incident and render the supplier liable for nuclear damage (see box).

The right of recourse can be exercised by the operator after paying the compensation for nuclear damage in accordance with Section 6 of the Act so that the affected public is compensated for the damage, including loss of life or property, immediately after the incident. The provision 17(b), however, flies in the face of the standard international practice for nuclear liability which indemnifies the supplier entirely and makes the operator strictly and absolutely liable for the incident or accident irrespective of the cause. The international liability regime that is currently being followed by most of the 30 NPP operating countries, either through international conventions or through domestic laws, do provide for ‘right of recourse' which, however, is much more limited in scope than what the Indian Act seeks to provide.

The international regime promoted by the International Atomic Energy Agency (IAEA), called the Convention on Supplementary Compensation (CSC) (which is yet to come into force and which India has signed and is planning to ratify soon), requires that the domestic nuclear liability law of a country that is not a party to the Paris Convention of 1960 or the Vienna Convention of 1977 should be consistent with certain provisions laid down in the Annex of the CSC, which include operator's ‘right of recourse' (Article 10). But this provides for ‘right of recourse' (see I in box) and channelling liability to the supplier only in cases when it is “expressly provided for in the [operator-supplier commercial] contract” or “if the nuclear incident results from an act or omission done with the intent to cause damage”.

However, the Indian Act goes beyond these by providing for Section 17(b), mentioned above, in addition to Sections 17(a & c), which are in accordance with Article 10 of the CSC Annex (see II in box). Thus, the Indian Act would seem to be not consistent with the international liability regime. However, the CSC (Article XVIII) only requires that while submitting the instruments of ratification, a signatory country has only to declare that its domestic law is consistent with the provisions of the CSC Annex. Only when some party to the convention raises the issue of the Indian Act being inconsistent with the international liability regimes will the IAEA take cognisance of that aspect and set forth measures to resolve it.

Potential supplier countries to India – the United States, France and Russia – have voiced their dissent to this contentious ‘right of recourse' provision in the Indian Act at different times. One of the issues has been the period of applicability of the controversial Section 17(b). Operators have contended that a supplier of equipment or component cannot be held liable under the conditions of 17(b) throughout the lifetime of the reactor during which period many modifications to the NPP – both hardware and software – could be made. And that is why potential suppliers have been keenly awaiting the announcement of rules to operationalise the Act.

Besides 17(b), the other provision in the Act that the suppliers are wary of is Section 46, which allows for tort cases based on other domestic laws to be moved against the operator in addition to the damages that the operator has to bear under the Liability Act. In principle, the proceedings of such a case can bring the supplier of equipment too under its ambit if the operator contends that defective equipment was the cause of the nuclear incident.

Obviously, rules framed to implement an Act have to be in conformity with the provisions of the Act. One thing the nuclear liability rules cannot, therefore, do is to resolve the Act's contradiction with the CSC Annex. So the issue of India's admission to the CSC will depend on how the IAEA will address the issue if the matter is brought up before it by any party. But, notwithstanding the commitment given by Prime Minister Manmohan Singh to President Barack Obama in November 2010, India can choose not to ratify the CSC and yet seek to do nuclear commerce globally. This should be possible given that nuclear supplier countries have been doing business with countries that have not even signed the CSC or are parties to other international conventions. Indeed, only the U.S. has insisted on India ratifying the CSC ( Frontline, December 3, 2010), while France and Russia have only required in their bilateral agreements with India that the Indian law should conform to international standards. The only issue would be if aspects of liability governed by the Indian domestic law are acceptable to them as meeting international norms.

The Act does not specify any extinction period for the ‘right of recourse' provision under its Section 17 (see II in box). It is open-ended and would seem to be applicable for the whole lifetime of the NPP or the equipment in question, and for an unspecified extent of liability. In fact, this was the perception of people who argued for and succeeded in the inclusion of 17(b) in the Act.

But the rules that have now been announced change that. They cap both the time period for which the operator can exercise the right of recourse and the extent of financial liability of the supplier (see III in box). Firstly, the rules require that the operator shall include such a right of recourse provision in the commercial contract (emphasis added). Since, in case of a nuclear incident, the extent of the operator's liability is, vide Section 6(2) of the Act, Rs.1,500 crore, Rule 24(1) requires that the liability channelled to the supplier cannot be less than the lesser of the operator's liability (Rs.1,500 crore) and the value of the contract. That is, if the value of the contract is more than Rs.1,500 crore, the extent of the supplier's liability will be at least Rs.1,500 crore. But if the value of the contract is less than Rs.1,500 crore, the supplier's exposure will only be equal to the value of the contract.

As for the cap on the time period for right of course, it would be either the initial licence period issued by the Atomic Energy Regulatory Board (AERB) under the Atomic Energy (Radiation Protection) Rules (2004) or the product liability period, whichever is longer. The italicised phrases, however, need explanation. Rule 9 of the Radiation Protection Rules (2004) specifies the period of validity of the licence issued for a nuclear reactor thus: “Every licence issued shall, unless otherwise specified, be valid for a period of five years from the date of issue of such licence” (emphasis added).

From the above, it is clear that, in principle, the licence period can be anything less than or more than five years. But, if unspecified, it will be five years by default. Indeed, it has been a codified practice of the AERB that the initial ‘operating' licence is for a five-year period. At the end of five years, a review of all aspects of the power plant operation is done and licence is renewed for another five-year period. At the end of 10 years, an elaborate and comprehensive review of the working of the plant is carried out before a renewal of licence for another five years.

But starting the operation of a nuclear reactor does not happen with the press of a button or the single throw of a switch. The commissioning of an NPP is a long-drawn process (which is completed over several months). It goes through the following distinct phases, each of them involving elaborate tests and simulations under the supervision of AERB and other experts. The operator, Nuclear Power Corporation of India Ltd (NPCIL), is given due authorisation or consent, which is equivalent to a licence though not termed so, for each one of these phases. These are for much shorter durations, varying from a month to six months or even more.

After the full loading of the fuel, authorisation for starting Phase A operations is given. This involves initiation of fission and gradual ‘approach to criticality'. Once criticality is achieved, the AERB gives its authorisation for Phase B, which involves operation of the NPP in low power over a length of time when various nuclear physics checks and safety checks are performed in the presence of experts. After satisfactory low power operation, yet another authorisation (Phase C) is given for gradually increasing the reactor's output to full power. Its performance, in particular its stability, is observed for 100 full power reactor days. Only after this the actual licence for commercial operation, including grid connectivity, is given, and this constitutes the initial operating licence with a validity of five years. Build-up of radioactivity begins once fission is initiated (Phase A), and there is the likelihood of a nuclear incident involving radioactivity during all the three phases of testing. While the operator's liability is clear in all of them, how will the operator's right to recourse clause be interpreted as the different stages of authorisations are for different and shorter durations?

From the perspective of liability and in the wake of the new rules for the operator's right of recourse, the AERB, according to reliable Department of Atomic Energy (DAE) sources, is now seized of this ambiguity in the licensing process and will evolve a new definition for initial operating licence that will include the initial start-up process as well. Any future operating licence that will be issued to NPCIL will be in accordance with the amended operating licence definition. Given that the progress to commissioning can even take up to six months, effectively, the period for the operator's right of recourse should technically be five years plus that initial build-up period.

The other phrase that needs similar elaboration is ‘product liability', a term akin to ‘warranty period' but something more than that. The Liability Rules define ‘product liability period' as the “period for which the supplier has undertaken liability for patent or latent defects or sub-standard services under a contract”. Thus this part of the rule actually has relevance to the controversial Section 17(b) of the Act and the product liability period refers to that of the product implicated, or sought to be implicated, in an incident though the announced rules do not explicitly include any clause for implementing 17(b) itself. The document on ‘General Conditions of Contract (GCC) for Supply of Indigenous Stores' of NPCIL specifies the ‘product liability period'. It must be pointed out that this document is specific only to indigenous suppliers because NPCIL has hitherto not dealt directly with foreign suppliers of products and equipment.

‘Patent defect' refers to a defect that is manifest or recognisable on inspection of the product, and there is a corresponding ‘patent defect liability period'. Under the NPCIL contract conditions, this is 12 months from the date of acceptance of the product or 18 months from the date of its receipt at the site, whichever is earlier. ‘Latent defect', on the other hand, means a defect within the material or arising out of design deficiency, which does not manifest itself and/or was not reasonably discoverable during the ‘patent defect liability period'. The supplier's ‘latent defect liability period', according to the GCC, is “limited to a period of five years from the end of ‘patent defect liability period' of the respective plant and equipment including spares”. In effect, therefore, the ‘product liability period', under NPCIL's terms, will be the sum of these two periods and is, therefore, six and a half years from the date of arrival of the product at the site or six years from the date of its acceptance.

From the perspective of nuclear liability during a nuclear incident, this would seem to be irrelevant as regards most products. This is because the clock starts ticking from the time they arrive on the site. Given that the NPP construction period itself can take up to five years or more, the product liability period for most products will expire before the initial operating licence period begins. That is, if a particular product is identified to be the single causative agent for a nuclear incident – which would rarely be the case because a nuclear incident is usually is a combination of several products and operating conditions – the liability period for that product (and hence for the supplier) would in nearly all cases have expired by then unless the incident occurs during the testing phases unless, of course, a product or component is changed before the expiry of the initial licence period. In such a case, the product liability period can extend beyond the initial licence period and, therefore, would have some relevance if it is involved in any incident.

One of the curious things in the ongoing debates on channelling of nuclear liability to suppliers, which should affect Indian suppliers as well, was the inexplicable silence of Indian suppliers on the issue as compared with their foreign counterparts. But Section 6.7 of the GCC, which provides for ‘Indemnity against Loss/Damage', gives an explanation for this. Subsection 6.7.7 states: “The Purchaser [NPCIL] shall indemnify and hold harmless the Contractor [supplier] in respect of Third Party life and Property damage claims arising out of nuclear event at Purchaser's Site.” This implies that in contracts with domestic suppliers, NPCIL has hitherto provided indemnity to them in case of an event at an NPP. That is, the GCC followed by NPCIL all along has been consistent with strict and absolute liability of the operator.

In fact, the GCC provides for this indemnity to the supplier even in cases of tort proceedings against the operator under other laws unless the contract explicitly provides for it. Section 9.1(a) of the GCC says: “Except in cases of criminal negligence or wilful misconduct, the Contractor shall not be liable to the Purchaser, whether in contract, tort, or otherwise, for any indirect or consequential loss or damage, loss of use, loss of production, or loss of profits or interest costs, provided that this exclusion shall not apply to any obligation of the Contractor to pay liquidated damages and/or any other penalties/recovery etc. specifically provided for in the Contract, to the Purchaser.” This again would seem to be consistent with the prevalent international norms for right of recourse. In the wake of the Liability Act and the attendant rules, it remains to be seen whether NPCIL chooses to amend these provisions under the GCC for domestic suppliers.

But, more pertinently, what will be the nature of the GCC that NPCIL would draw up for future contracts that it is likely to enter into directly with foreign suppliers? Will such a differential dispensation in commercial contracts with domestic and foreign suppliers be acceptable to the latter?

In queries to the different potential nuclear suppliers to India, such as Areva, GE and Westinghouse, all of them have said that they are still studying the rules and do not wish to make any comments. While the opposition parties have expressed their strong opposition to the rules by saying that the government has succumbed to suppliers' pressures, it is not clear as yet if these suppliers will accept the apparent relief from indefinite liability that the rules have now given them and begin to do business with NPCIL. If they do, the obvious impact of the rules is that there will be loading of cost of insuring for an amount equal to the extent of liability that the supplier is now exposed to for the initial five-year period, thus increasing project costs.

As for Parliament's assent to the rules, according to Section 48 of the Act, the rules made will remain before both Houses of Parliament, while in session, for a total period of 30 days which may be comprised in one session or in two or more successive sessions. For any amendment recommended by Parliament to become effective, both Houses will have to agree to the change(s). The winter session for the year will last for a month from November 22 to December 21. With the opposition having already publicly voiced their dissent to the rules, the issue is bound to occupy a substantial fraction of the session period with acrimonious debates.