September 23, 2014
During Prime Minister Modi’s forthcoming visit to US, one of the topics that is likely to be high on the agenda will be the still incomplete US-India nuclear cooperation by way of sales of nuclear reactors to India because of the Indian Civil Liability for Nuclear Damage Act, 2010 (CLNDA).
However, the provisions of the CLNDA have stalled not only sales of nuclear reactors from US to India but from other major nuclear suppliers – Russia and France – as well. Even though the NSG exemption for nuclear commerce was granted more than six years ago, and India had signed the nuclear cooperation agreements with these countries nearly six years ago, it has not been able to finalise even a single commercial contract for the import of a reactors from any of these countries. The only nuclear cooperation that India has been able to conclude with any of the countries with whom it has nuclear cooperation agreements is in respect of nuclear fuel which would not have any implication for application of CLNDA.
However, it is a fact that India, because of the CLNDA, has had to either default on its obligations under the various international agreements or attempt, unsuccessfully so far, to dilute its provisions.
This backgrounder will proceed in the following manner:
First the section of CLNDA standing in the way of reactors transfers will be discussed.
Second, the provisions dealing with nuclear liability in the various relevant cooperation agreements that India has signed with other countries as well as Indian suppliers of nuclear equipment to the indigenous PHWR program will be analysed. It will also discuss the manner in which India has either not acted upon the agreement or is attempting to dilute its provisions will be discussed.
Finally, various alternatives for resolving this contentious issue with or without amendment to CLNDA will be discussed.
The Civil Liability for Nuclear Damage Act, 2010.
The bill was introduced in the Parliament on May 7, 2010 and passed by Lok Sabha on August 25, 2010, the Rajya Sabha on August 30, 2010 and received the president’s assent on September 21, 2010.
The provision of this Act which has so far stood in the way of reactor transfers from abroad, and reportedly hesitation on the part of the Indian supplier to the indigenous nuclear program, has been the section on Right of Recourse (Section 17 of the Act) and in particular Sec. 17(b) according to which,
“The operator of the nuclear installation, after paying the compensation for nuclear damage in accordance with section 6, shall have a right of recourse where-the nuclear incident has resulted is a consequence of an act of supplier or his employee, which includes supply of equipment or material with patent or latent defects or sub-standard services.”
This section has been held to be against the letter and spirit of the three major international conventions on nuclear liability- the Paris Convention, the Vienna Convention, and the Convention on Supplementary Compensation (CSC) in addition to being not part of any other country’s nuclear liability laws- as also against the provisions of the various bilateral agreements.
The various bilateral agreements with liability provisions
There are two relevant agreements with the Russian federation on nuclear cooperation.
The first is the “Agreement Between The Government of The Republic of India and The Government of The Russian Federation on Cooperation in the Construction of Additional Nuclear Power Plants at Kudankulam Site as well in the Construction of Russian Designed Nuclear Power Plants at New Sites in the Republic of India” which was signed on December 5, 2008.
According to Section 13.1 of this Agreement,
“The Indian Side and its authorized organization at any time and at all stages of the construction and operation of the NPP power units to be constructed under the present Agreement shall be the Operator of power units of the NPP at Kudankulam Site and be fully responsible for any damage both within and outside the territory of the Republic of India caused to any person and property as a result of a nuclear incident occurring at NPP and also in relation with a nuclear incident during the transportation, handling or storage outside the NPPs of nuclear fuel and any contaminated materials or any part of NPP equipment both within and outside the territory of the Republic of India.”
And according to Section 15 of the Agreement,
“In case of termination of the present Agreement, the terms and provisions contained in this Agreement applicable to the implementation, completion and lifetime operation of units' 3-4-5-6, including in particular the supply obligations stipulated in Article 4 of the present Agreement shall remain in force except in case of material violation of Article 12 of the present Agreement.”
The second agreement is “Agreement between the Government of the Republic of India and the Government of the Russian Federation on Cooperation in the Use of Atomic Energy for Peaceful Purposes.” which was signed on March 12, 2010 and ratified on September 20, 2010.
According to Article 3.2 of this Agreement,
“Cooperation in areas under this Agreement shall be implemented by the Partíes through development and execution of programs and projects, and conclusion of contracts between the Indian and the Russian organizations, authorized by the Parties' competent authorities. The scope of agreed cooperation, rights and obligations of the participants of the agreements (contracts), financial and other terms and conditions shall be specified in contracts in accordance with respective legislations of the Republic of India and the Russian Federation.” and Further according to Article 8,
“Liability for nuclear damage that may arise from the implementation of cooperation under the Agreement shall be determined in appropriate agreements (contracts) concluded in accordance with paragraph 3.2 of the Agreement and international commitments and legislation of the Republic of India or the Russian Federation as the case may be.”
Thus in case of Russia, India had explicitly absolved the Russian supplier of any liability whatsoever in case of a nuclear incident at any site hosting a Russian reactor. Not only that even if the 2008 agreement was terminated the assurance of no liability was promised in case of the four additional reactors at Kudankulam. However, recent reports indicate that India would like Russia to accept the application of the Indian CLNDA in case of Kudankulam 3 and 4, which is one of the reasons why no contract has been signed by NPCIL for further reactors at Kudankulam. It is ironical that India would like to apply retrospectively a law passed after an agreement was signed when in earlier times, India had objected strongly to an retrospective application of an US law in mid-70s when US stopped supplying nuclear fuel for Tarapur after India’s peaceful nuclear test in 1974, even though the India-US agreement on Tarapur had no clause even referencing a nuclear test by India.
India had signed civil nuclear cooperation, “Cooperation Agreement between the Government of the Republic of India and the Government of the French Republic on the Development of the Peaceful Uses of Nuclear Energy” with France on September 30, 2008 soon after the NSG had given an exemption to India on September 6, 2008.
Article VIII of this agreement dealt with nuclear liability, which stated inter-alia
1. The Parties or persons designated by the Parties with implementing this Agreement shall deal with liability issues, including civil nuclear liability, in specific agreements.
The Parties agree that, for the purpose of compensating for damage caused by a nuclear incident involving material, nuclear material, nuclear equipment, facilities and technology referred to in Article IX each Party shall create a civil nuclear liability regime based upon established international principles.
The Right of recourse clause present in CLNDA is not present in either any of the international conventions or any of the other nuclear liability laws in countries not signatory to any of the three conventions-Paris, Vienna or CSC. It is also not in line with the recommendations for a nuclear liability law suggested by the IAEA (Chapter 11, Handbook of Nuclear Law, IAEA, 2003) either. Hence the CLNDA is not a “civil nuclear liability regime based upon established international principles’ as required by the India-France agreement on civil nuclear cooperation.
The India-US “AGREEMENT FOR COOPERA TION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF INDIA CONCERNING PEACEFUL USES OF NUCLEAR ENERGY” which was signed on October 10, 2008 does not have any explicit reference to civil nuclear liability. However, through exchanges of bilateral assurances and Joint statements by the respective heads of governments, India committed itself to a set of principles in civil nuclear liability.
On September 10, 2008 in a letter to Mr. Burns, the then US Under Secretary of State, Mr. Shivshankar Menon, the then Indian Foreign Secretary, wrote “India also recognizes the importance of establishing an adequate nuclear liability regime and it is the intention of the Indian Government to take all steps necessary to adhere to the Convention on Supplementary Compensation for Nuclear Damage prior to the commencement of international civil nuclear cooperation under the Agreement.”
Subsequently in a Joint Statement issued November 8, 2010 during the visit to India by President Obama the President and Prime Minister Manmohan Singh said “They noted that both countries had enacted domestic legislations and were also signatories to the Convention on Supplementary Compensation. They further noted that India intends to ratify the Convention on Supplementary Compensation within the coming year” Although nearly four (4) years have passed since that Joint Statement, India has still not ratified the CSC.
It is clear, therefore, that both in letter and spirit India has not adhered to its obligations due as result of the international agreements it has signed.
Indian suppliers of nuclear equipment
Not only did the CLNDA went against the foreign suppliers and agreements, it was also contrary to agreements that NPCIL had till then with its suppliers in respect of nuclear liability. As per the standard General Conditions of Contract for Supply of Indigenous Stores (General Conditions of Contract (FORM NO. GCC/Supply-1/Rev.1)),,
“6.7.7 The Purchaser shall indemnify and hold harmless the Contractor in respect of Third Party life and Property damage claims arising out of nuclear event at Purchaser’s Site.”
So what are the options available to get out from these constraints? The objections of suppliers to Sec. 17(b) are not difficult to comprehend. Nuclear reactors have long operating life- 40 years or more- and while nuclear incidents of very severe nature are rare, and in incidents like that of Fukushima can result in damages amounting to US $ 1 billion or more, commercial firms would be loath to agree to compensate for unspecified- and unlimited- damages extending over an unspecified period of time. Any proposed, and acceptable, solution to all parties must exclude such an option.
The obvious way out would be to amend the CLNDA to remove Sec. 17(b). However, this is likely to be difficult since, the present ruling party BJP was one of the prime and major initiator and supporter of this section during the very contentious debate that took place in Lok Sabha during the debate preceding the enactment of the Act. In addition, the debate in the parliament was influenced very strongly by the verdict on the Bhopal gas Tragedy that was delivered during the course of the progress of the CLNDA bill. With the Bhopal gas tragedy still in public mind and with BJP now commanding a majority in Lok Sabha, it is extremely unlikely that any amendment proposing deletion of Sec. 17(b) would be able to get past the house.
So any proposed solution will have to take into account the presence of Sec. 17(b) in the CLNDA.
The government realizing the difficulties with the CLNDA in its present form and taking into account the possible concerns of suppliers both foreign and domestics, formulated the rules for implementing the CLNDA in manner which addressed some of the major concerns of the suppliers and in particular, reduced substantially both the suppliers liability and the time period through which such a Right of Recourse can be enforced. The Civil Liability for Nuclear Damage Rules 2011 came into force on November 11, 2011. According to Section 24 of the Rules which dealt with the Right of Recourse,
“24. Right of recourse- (1) A contract referred to in clause (a) of section 17 of the Act shall include a provision a for right of recourse for not less than the extent of the operator's liability under sub-section(2) of section 6 of the Act or the value of the contract itself whichever Ìs less
(2) The provision for right of recourse referred to in sub-rule (1) shall be for the duration of initial license issued under the Atomic Energy (Radiation Protection) Rules, 2004 or the product liability period, whichever is longer
Explanation 1 – For the purposes of this rule, the expressions,-
"product liability period" means the period for which the supplier has undertaken liability for patent or latent defects or substandard services under a contract;
"supplier” shall include a person who-
manufactures and supplies either directly or through an agent a system, equipment or component or builds a structure on the basis of functional specification; or
provides build to print or detailed design specifications to a vendor for manufacturing a system, equipment or component or building a structure and, is responsible to the operator for design and quality assurance; or
provides quality assurance or design services.
Explanation 2.- For the removal of doubts it is clarified that an operator's claim under this rule shall in no case exceed the actual amount of compensation paid by him up to the date of filing such claim.”
As a consequence of these rules, the liability of the suppliers, irrespective of total damage, was limited to the maximum liability of the operator, namely rupees one thousand five hundred (1500) crores (equivalent to US $ 250 million) under Sec. 6(2) of CLNDA, although this section does provide for enhancement of the maximum liability. Thus there is no issue of unlimited liability.
As for the period through which this Right of recourse can be exercised, according to Section 9 of the Atomic Energy (radiation Protection) Rules, 2004,
“9. Period of validity of Licence:- Every licence issued under rule 3 shall, unless otherwise specified, be valid for a period of five years from the date of issue of such licence.”
Thus the burden on the supplier, in terms of both the monetary obligation and the time period, was reduced substantially by the government, making it easier to enable both the supplier and the operator to enter into commercial contracts.
What then are the options available under these rules?
Since both the liability and the time period have been reduced substantially and the chances of a major incident in a new nuclear plant in the period of five years immediately following the commissioning of the plant has never happened so far in more than tens of thousands of years of reactor operation worldwide, suppliers can with a high degree of confidence can enter into a reactors sales contract. If they still feel uneasy, they can front load the maximum liability on the contract price, which may add about ten (10 %) to nuclear power plant price of about $ 2.5 billion for a 1000 MWe plant. Or the operator and supplier can split the amount of liability, adding only US $ 125 to the power plant cost.
Another option would be for the operator to forego the Right of Recourse in the contract. This option can be examined under two situations. The first is with respect to a contract with Russia and the second with respect to all parties, domestic and foreign.
In reply to a question in Rajya Sabha on December 13, 2012, the Government had replied that “As regards Russia, Atomstroyexport (ASE), the authorised organisation of Russian Federation, in their commercial offer to Nuclear Power Corporation of India Limited (NPCIL) in respect of Kudankulam Units 3&4 had stated that NPCIL being operator is fully responsible for any damage caused to any person and property as a result of a nuclear incident occurring at NPP. Further, ASE had mentioned that their plea was based on the principle of continuity of cooperation in construction of KKNPP in accordance with the agreement between the USSR and Republic of India dated 20th November 1988, supplement thereto dated 21st June, 1998 and in line with the provisions of Intergovernmental Agreement dated 5th December, 2008.”
According to reports, the Centre, had sought the AG's (Attorney General) opinion on legality of a MEA (ministry of External Affairs) proposal before the Cabinet Committee on Security, which read, "Authorize Nuclear Power Corporation of India Ltd not to exercise operators' right to recourse under Section 17 of the Civil Liability for Nuclear Damages Act, 2010." The MES in its note is reported to have stated that “We consider the section 17 of CLNDA is a kind of enabling provision; it gives a specific right to operator but does not place any mandatory obligation or requirement to exercise the right of recourse against supplier. In the absence of a mandatory obligatory, the operator could choose not to exercise that right. It is a statutory right and not a fundamental right under the Constitution.”
In giving his opinion, the then AG, the late Mr. Vahanvati has said that "The views of the MEA cannot be said to be legally wrong but a question may arise about the advisability of such a waiver, particularly when NPCIL is a public sector undertaking and the failure to provide for and have recourse against supplier would ultimately impact public funds." And also that “I am formulating an answer to this question purely from the point of view of legality and not a policy issue. To approach this point of view of law, legality and not policy it appears that as a matter of legal permissibility, it can be done.”
However, Mr. Vahanvati had raised a question about the advisability of such a waiver especially when NPCIL is a PSU, since "Non-recourse or limited recourse may entail a burden on the tax payer, particularly when the nuclear programme is being implemented through a PSU and having regard to the provisions of Section 7, where the ultimate liability is that of the central government."
Now coming to the issue of waiving the Right of Recourse with respect to countries other tha Russia, the government had reportedly asked, "Would it be prudent to waive the right to recourse in regard to Russia only when Section 17 is applicable to all nuclear installations, keeping in view the provisions of Inter-Governmental Agreement with Russia? No such provision exists in the existing IGA with other countries." To which the AG had replied that “this again is not an issue of law but one of propriety and prudence. The ultimate test would be whether there is no choice available commercially and whether there is no option to agree to waiver, as demanded. As far as the other countries are concerned, I do not agree with the MEA view that there could be no objection to the international law angle and a third state cannot be demanding similar rights as a matter of right. The fact is that no other bilateral agreement has such a provision.”
It would appear, therefore, that according to one official legal opinion there should be no bar to NPCIL agreeing to forego the Right of Recourse but not the others. It should, however, be mentioned that some other eminent jurists have suggested that it would not be consistent with the CLNDA.
A fourth option would be for the operator not only to take an insurance or financial security required under section 8 of CLNDA for the amount of the liability of the operator as specified in section 6(2) of CLNDA but also a similar cover on behalf of the supplier. In such a case, if and when, a nuclear incident places a demand for damages on the operator which is covered by the insurance taken by the operator, if the Right of recourse is exercised by the operator on the supplier, the supplier can meet such demand from this insurance cover it also has. Such an insurance cover taken by the operator on behalf of the supplier, for a limited period (of maximum duration) would hardly make a difference to the final cost of the NPP purchased by the operator. This option may, however, may not be suitable in case of Indian suppliers, since there are numerous indigenous suppliers of nuclear equipment, systems and services to NPCIL, whereas in case of foreign suppliers of NPPs, the contract will be only with one party.
A fifth solution is suggested by the remark of the AG in discussing the waiver of Right of Recourse by NPCIL namely that NPCIL is a PSU and the waiver of Right of Recourse by NPCIL would entail a burden on the tax payer and especially when the ultimate liability is that of the Central government according to provisions of section 7 of CLNDA. This handicap would be absent when the operator is not a PSU but a private entity. There is involvement of public funds when a private entity is required to pay for the damages as a result of a nuclear incident and therefore, there is no bar on a private entity waiving the Right of Recourse. Therefore, the government should seriously consider the issue of allowing private ownership of nuclear NPPs, even allowing for the possibility of allowing FDI.
The sixth solution would be to factor in (i) the limits placed on exercise of Right of Recourse in Civil Liability for Nuclear Damage Rules 2011 and (ii) the extremely low probability of any nuclear incident in the first few years of the life on nuclear power plant by having a clause on nuclear liability in the techno-commercial contract which states that ““Liability for nuclear damage that may arise from the implementation of cooperation under the Agreement shall be determined in accordance with the national legislation of the two countries and their international agreements and commitments. In case of any dispute arising from the interpretation of this clause, the matter will be resolved through international arbitration the arbitrators being assigned either by the Director General of IAEA or the International Court of Justice” or something similar to it. The Russian and French Agreements for cooperation would sustain their case for the non-application of the Right of Recourse.
As for US, India’s accession to CSC would automatically protect the US suppliers from any liability. US is also a party to CSC and the US legislation for the implementation of CSC specifically states that it does not provide for an operator of a nuclear installation covered by CSC any right of recourse under the CSC. This implies that even if the operator has a written contractual provision with the supplier explicitly providing for such a right of recourse, it would not be admissible under US laws!
It has been held by some Indian commentators that while under the CSC and the proposed Indian law, victims of a nuclear accident in India would not have the right to approach an American court or even an Indian court directly, a claim against a U.S. supplier under the right of recourse can be pressed by the operator before an Indian judge and that Article XIII.6 of the CSC, to which the U.S. is now a party, says the judgment of a court in the country where the accident occurs shall be legally enforceable by any other contracting party “as if it were a judgment of a court” of its own. Thus, if an Indian court were to accept that a particular nuclear accident were caused by negligence on the part of an American supplier, the U.S. authorities would be obligated to help the operator recover the money already paid out in compensation to the victims from the U.S. companies concerned. Unfortunately the above reasoning is only partly true since Art. XIII.5 of CSC also states that “A judgment that is no longer subject to ordinary forms of review entered by a court of a Contracting Party having jurisdiction shall be recognized except: (c) where the judgment is contrary to the public policy of the Contracting Party within the territory of which recognition is sought, or is not in accord with fundamental standards of justice.” And as the US CSC implementing legislation states that as a matter of law, and hence public policy, there is no provision for the operator for any right of recourse, even if an Indian operator were to get a favourable judgment it cannot be enforced in the US under the CSC.
The last option would be for the CLNDA to be declared unconstitutional by the Indian Supreme Court. There is pending at the moment, two suits before the Supreme Court challenging the constitutional validity of the CLNDA. In May 2013, while disposing of Civil Appeal 4440 of 2013 along with Civil Appeal Nos. 4441/4442/4443 of 2013, the Court observed “ The constitutional validity of the said Act is under challenge before this Court in Writ Petition (Civil) No. 464 of 2011. Various prayers have been made in the above mentioned writ petition, but this Court issued the notice only with regard to the prayer clause no. (e), i.e. to declare the act as unconstitutional and void ab initio.” That writ petition has not yet been decided. It is quite possible, that till the constitutionality of the CLNDA is decided, there can be no final agreement on either the liability or the Right of Recourse, none of the solutions mentioned above except, perhaps, the sixth one, can really be a workable option which bypasses section 17(2) of the CLNDA. Indeed, declaration by Supreme Court that the CLNDA is unconstitutional may be the best option. In such a case, without any CLNDAS in place, status quo ante will prevail. NPCIL can enter into contracts with Indian suppliers, as it has been doing for so many years, absolving them of any liability for civil damage. They can probably enter into such contracts with foreign suppliers as well. In the absence of a domestic CLNDA, India can accede to the Vienna Convention and hence CSC. That will solve everybody’s problem!