Nuclear damage: Should suppliers be liable?

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By : Business Standard
Last Updated: Tue, Aug 31, 2010 20:21 hrs

Nilendra Kumar
Director, Amity Law School

The nuclear damage Bill has crafted a pragmatic provision to bind operator and supplier under contractual liabilities, but suppliers may find it tough to obtain insurance to back such contracts

Even the most stringent safety standards cannot completely eliminate the possible of nuclear accidents. The Civil Liability for Nuclear Damage Bill is a significant step needed to activate the 2008 Indo-US civilian nuclear agreement.

The amendment to Section 17 is a reasonable and logical step towards introducing suppliers’ liability. The original Bill had not crafted any mechanism that could provide a right of recourse to an operator against the supplier. Nor did the Bill give any right to the victims of a nuclear accident to take suppliers to court to demand compensation. The amendment to Section 17 has set right these inadequacies to a major extent. It is only the operator (read government) who can take recourse to claim compensation from the suppliers. The revised Bill equips an operator with the right to demand money from the supplier who is responsible for causing the loss, for which the insurer (operator) would have already made an indemnity payment. Such a recourse can be taken against the supplier in the case of any defect or fault in service or equipment.

The earlier controversial text that would have permitted a liability claim only if there was a proof of wilful intent to cause damage has been recast. The provision of "prompt compensation to the victims of a nuclear incident through a no fault liability regime, chanelling liability to the operator", as inserted in the preamble, is a pragmatic step. The revised text squarely underlines the lawmaker’s resolve to provide solace to victims of a nuclear disaster. A suitable mechanism has been introduced to bind the operator and supplier under contractual liabilities.

Another noteworthy change is the addition of clause 4(4). It provides for strict liability for the operator to be based on the no-fault principle.

The Atomic Energy Act, 1962 does not allow any non-governmental agency to generate nuclear power. The operation of a nuclear plant would require hiring services and equipment from a large number of suppliers. Under such a scheme, the government as the operator would perforce have to rely upon one or more suppliers to set up and run a power plant. Suppose the equipment or service provided by the supplier is defective and causes a nuclear incident. The Bill provides that the operator can call upon the supplier to make good the loss only after he has paid the compensation for nuclear damage. Hence, the loss and injury to the victim are required to be taken care of first. What does this imply? Any direct or indirect defects or infirmities that could lead to an act triggering a nuclear incident will afford the operator the right to stake a claim against the supplier. Since the operator can only exercise his right of recourse after he has paid compensation, he would like to discharge his obligation as early as posible so that he can then confront the supplier with his claim.

The supplier’s liability will be activated in all cases in which the nuclear incident can be attributed to an act of supplier. The liability will also come into play when the impugned act is committed by an employee of a supplier. In this manner, the legal doctrine of vicarious liability would stand duly enforced under which a master is answerable for the wrongdoing of his servant. Not only a deliberate act but even a wilful omission would vest a right to recourse in an operator.

There, however, remains one area of ambiguity. On the one hand, the operator has been defined to mean the central government. On the other hand, based on the explanation offered in clause 4(4), a transporter, consignor and consignee would be deemed to acquire the status of an operator. This may give rise to situations in which private companies can acquire the status of operator. This goes against the declared position that it is only the central government or its public sector undertakings that would operate nuclear power plants.

In any case, once the Bill is enacted, it will provide a suitable compensation mechanism for the victims in case of a nuclear incident. It will help draw international investment and technological co-operation for India’s nuclear power generation programme.

The author is former judge advocate general (Army)

G D Mittal
Team Leader, Nuclear Public Relations, PM Dimensions

The question is very interesting and in the past few days, some opinions have been expressed in the media. To start with, the article "Moral hazard of indemnifying suppliers" in The Hindu (August 20, Suvrat Raju and M V Ramana) came out very strongly in favour of the suppliers being included in the Civil Liability for Nuclear Damage Bill. But there are two other opinions from the real stakeholders in the nuclear business. First, Sudhinder Thakur (executive director, corporate planning and corporate communications, Nuclear Power Corporation of India Ltd.) wrote, "Undoubtedly, the government has powers to make laws, but in the process of making such laws we should not defeat the purpose for which the laws are made since with the current formulation of 17b, no manufacturer, Indian or foreign, would be able to serve the nuclear power industry."

Thakur added that in the process of setting up nuclear power plants a large number of suppliers contribute in varying degrees and they, in turn, have many sub-suppliers. All these suppliers provide material according to the specifications of the operator and their obligations in terms of latent or patent defects are incorporated in the respective contracts. "No supplier, Indian or foreign, would be willing to take the liability on account of recourse of the operator for the period of some 80-odd years after the contract is executed. Under the circumstances, the provisions of 17b are neither practical nor implementable," he concluded.

He welcomed the move to pass the civil nuclear liability Bill to provide prompt compensation to victims of an unlikely nuclear accident. "In this respect it is a welcome move and has become a pre-requisite for the rapid expansion of nuclear power in the country," Thakur said.

The other view is of A M Naik, chairman and managing director of Larsen & Toubro. He pointed out that typically, 300 to 400 suppliers and service providers (including small and medium enterprises) are engaged for each nuclear plant. The Bill has introduced clause 17, under which after settling the civil nuclear liability claims, the operator shall have a right to recourse against the suppliers. Naik pointed out that this clause on suppliers’ liability beyond their terms of supply — that is for 60 years of plant life plus 20 years of the claim liability period — is neither practical nor justifiable. "Any clauses requiring a unreasonably high liability would deter participation from major suppliers," he said.

Naik also pointed out that since all suppliers are commercial organisations, they would not be in a position to accept contracts with unlimited liability. In the case of unreasonably high liability, most suppliers would not be in a position to obtain insurance coverage to back these orders and, therefore, will not be able to contribute to the programme. Alternatively, suppliers would have to pay extremely high premiums for insurance coverage during the life of the plant. The costs of this insurance coverage would be transferred to the plant operator and ultimately to the consumers. All this, put together, would deter large-scale participation in the programme by the Indian nuclear industry.

It is also worth highlighting that the nuclear industry is highly disciplined and maintains the highest standards and precautions in the design, construction, operation and maintenance of nuclear power plants. In particular, the Indian nuclear industry’s track record is unblemished and there is no reason to believe that it would be otherwise in the future.

There are always apprehensions in the beginning but when things start moving according to the law, all the stakeholders would be happy to get the right business. Over time, as agreements are signed between operators and suppliers, the law could be suitably amended to account for possible problems in implementation that may crop up.

Now, the Bill has already been passed by both Houses of Parliament. The draft had been prepared by the best brains in the nuclear industry. While passing the Bill, it is unique that the government and the main opposition party shared the same thoughts. It is now the duty of all stakeholders to align themselves and follow the law in letter and spirit.

The views expressed here of the author and not of any organisation/company in which he was/is working or was/is associated with