Siddharth Varadarajan

Journalist | Writer | Analyst

Why India should say no to US demand to dilute its nuclear liability law

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25 January 2015

Why India should say no to US demand to dilute its nuclear liability law

Siddharth Varadarajan

With the issue of nuclear liability emerging as an obstacle in the relationship between India and the US, the Modi government is under pressure to dilute the law in favour of foreign reactor suppliers. Without this, we are told, it will not be possible to operationalise the US-India nuclear agreement and provide the country with the electricity its people need.

In the event of a major nuclear accident in India, one which damages lives and property, what does the law say about how liability is to be apportioned? Under the terms of the Civil Liability for Nuclear Damage Act, 2010, the operator of the nuclear plant is liable regardless of the proximate cause of the accident up to an amount of Rs 1,500 crore. This “no-fault liability” is strict and absolute, and means victims do not have to worry about whose door to knock or against whom to prove a case of culpability.

Having absorbed this blow, however, the operator is entitled under Section 17(b) of the Act to exercise a “right of recourse” if the accident was caused by an act of the supplier or his employee, including the “supply of equipment or material with patent or latent defects or sub-standard services.” This right of recourse is for the maximum amount of Rs 1,500 crore that the operator might have to pay as part of its no-fault liability.

But what happens if the damage caused by a nuclear accident is more than Rs 1,500 crore? The Act makes the Central government liable for damages in excess of that amount but there is a conflict of interest built into the process because it is the Central government itself, acting through a Claims Commissioner it has appointed, which fixes the quantum of damages.

Large claims

The question is this: What happens if the victims suffer losses in excess of Rs 1,500 crore, which the Claims Commissioner or the government refuses to compensate them for? Or if the government, for political reasons, is keen to impose a Bhopal-type settlement for a paltry sum?

Section 46 provides victims with tort remedies: “The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in force, and nothing contained herein shall exempt the operator from any proceeding which might, apart from this Act, be instituted against such operator.”

While an operator may have paid up to Rs 1,500 crore on the basis of no-fault liability, the law does not exempt him from fault liability or criminal proceedings, as the case may be. Indeed, Section 5(2) makes it clear that the amount paid as no-fault liability “shall not have the effect of reducing the amount of his liability in respect of any other claim for damage under any other law…”

Since the liability Act does not derogate from any other law, victims are free to file tort claims against the reactor supplier too if they think the accident was the fault of the supplier and they are confident of providing the courts with evidence of this. In addition, an Indian operator could also file a tort case against his supplier, and so could the government.

Under pressure from GE and Westinghouse, the two American nuclear vendors hoping to sell billions of dollars worth of reactors to India, the Obama administration has demanded that Section 17(b) and Section 46 of the Indian liability law be deleted or amended.

Flawed arguments

The US makes both legal and commercial arguments to press its case. The legal claim is that the Indian law is incompatible with the Convention on Supplementary Compensation for Nuclear Damage (CSC), an international treaty governing nuclear liability that India had agreed to sign. This treaty is based on the concept of “legal channeling”, in which the operator is held strictly liable for a nuclear accident and has only a limited right of recourse against the supplier.

India, however, argues that Section XII(2) of the treaty allows countries to make “provisions outside the scope of … this Convention, provided that such provision shall not involve any further obligation on the part of the other Contracting Parties (..)”, and that this is precisely what India has done.

What about the commercial argument? US companies say that exposing them to damage claims, either by the operator of a nuclear facility or the victims of an accident, would make them unviable commercially since they would be liable for potentially unlimited claims.

Let us parse this argument carefully. On the one hand, suppliers argue that their reactors are so safe that the probability of an accident is virtually zero. On the other, they argue that the damages from an accident are potentially so enormous that they would go bankrupt if they were held liable in any way. The latter statement is true, considering the Fukushima clean up has cost nearly $20 billion already. While this circle should be squared by asking suppliers to put their insurance money where their safety mouth is, all international liability regimes like the compensation treaty and the Paris and Vienna Conventions shift the burden entirely on to the operator.

This is absurd from an economic standpoint. While designing a reactor, how can a supplier decide what the optimum level of safety is if he is not forced to internalise the cost of an accident in some way? Nuclear regulators play an important role in the design and implementation of safety features but can never fully substitute for liability-driven incentives.

Double standards?

The irony is that American nuclear suppliers operate under a domestic liability regime that allows operators to sue them for recovery of damages in the event of an accident. That is how Metropolitan Edison, the operator of the Three Mile Island nuclear plant, sued Babcock Wilcox after the infamous 1979 accident.

The Price-Anderson Act in the US sets a cap on the total liability for an accident with the government committed to stepping in after that. However, the federal government can subsequently move to recover those monies from the operator, who in turn can act against his supplier, thus creating a post-accident litigation scenario that is not very different from that allowed by Sections 17 (b) and 46 of the Indian liability law.

Last October, in Cooper vs TEPCO, a California court allowed US sailors affected by the Fukushima nuclear accident of 2011 to sue the operator, TEPCO, as well as its suppliers — General Electric, EBASCO, Toshiba and Hitachi — who were, according to the plaintiffs, “responsible in part for the design, procurement, maintenance, management, or servicing” of the facility. [Hyperlink: Japan was not a party to the CSC or any other international liability convention at the time but has since begun the process of ratifying the CSC. However, the question to be asked is if US suppliers were willing to be exposed to the risk of “unlimited” tort claims in a US court from a nuclear accident occurring in Japan, why do they regard tort claims in an Indian court as a potential deal-breaker? Is it that they don’t trust the Indian legal system and its Supreme Court?

What makes the Obama administration’s demand that India insulate reactor suppliers from liability claims especially ironic is that the White House has just proposed draft rules that will make US suppliers pick up the tab for any money the US government is obliged to pay as supplementary compensation for a nuclear accident in another CSC member.

One of the main advantages of the CSC is that member states pool resources so as to ensure adequate compensation in the event of a catastrophic accident in one member state’s territory. The US wants to collect the compensation for which it is liable from American nuclear suppliers where the amount due from each firm is based on “the likelihood [that] a nuclear supplier’s goods or services would contribute to, and the nuclear supplier would be potentially liable for claims for damage resulting from, a nuclear incident at a covered installation resulting in a call for funds under the convention — for purposes of calculating the retrospective risk premium.”

The US nuclear industry is up in arms over this proposal but the question India needs to put to the US is this:  If it sees merit in holding suppliers liable for accidents in other CSC states, why is Washington objecting to an Indian law that gives Indian operators a right of recourse against the same suppliers in the event of an accident in India?

Suppliers’ liability

The principle of “legal channeling” was meant to provide prompt and non-litigious compensation to victims and it is excellent that the Indian liability law incorporates this concept in line with the requirements of the CSC. In return for this burden on the operator, the government places a cap on the liability involved.

You cannot, after all, have unlimited liability on a no-fault basis. But the capped, legal channeling of non-fault liability should not automatically mean the end of fault-liability for those whose actions might have contributed to a nuclear accident. To do would compromise the rights of the victims or place an unfair burden on taxpayers if the government ends up bearing the cost of rehabilitation.

Suppliers exposed to the risk of damage claims can take out insurance, just as operators do. US lobbyists say this would lead to duplication of insurance and that legal channeling increases the insurability of risk. “This insurance argument is wrong,” argues Michael Faure, one of Europe’s leading experts on environmental law. “Let us assume that parties other than the [operator] would be held liable [for an accident]; they could obviously purchase liability insurance as well. Otherwise, as with exclusive channeling, the insurer of the channeled operator would have to cover accidents … not … caused by his insured but [which] are allocated to him because of the channeling. Channeling thus creates a greater risk exposure for the operator and therefore creates higher uncertainty for the insurer.” (Michael Faure, ‘The view from law and economics’ in Tort Law and Liability Insurance ed. Gerhard Wagner, Springer Wien 2005)

Even if the insurance costs were to increase thanks to the Indian liability provisions, they would at least reflect a better internalisation of risk and a more realistic cost of nuclear power per se. This in turn will help policymakers settle upon an optimal energy mix for India.

The only justification for diluting the law or reading it down to exclude a potential tortfeasor would be to subsidise the nuclear power industry. At a time when research in the field of solar, wind and other forms of non-conventional energy require massive public finding, subsidising the generation of nuclear power makes absolutely no economic, or ecological, sense.

Some of the provisions of the Indian liability law and its rules could do with recasting, so as to limit the liability of small suppliers and those domestic vendors who produce equipment to specifications provided by the Department of Atomic Energy or Nuclear Power Corporation of India Ltd. All of these domestic vendors, like Larsen & Toubro or Godrej Boyce, were exposed to tort claims under normal statute prior to the Nuclear Liability Act but did not see this as an impediment to doing business with the DAE. In legal terms, their situation has not changed but they have begun to feel more vulnerable now that nuclear liability has emerged as a controversial subject.

Siddharth Varadarajan is a Senior Fellow at the Centre for Public Affairs and Critical Theory, Shiv Nadar University.

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This entry was posted on January 25, 2015 by in Nuclear Issues.

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