Friday, Oct 24, 2014

Balance of responsibility

From a policy perspective, sophisticated parties may agree to cap liability or provide a right of recourse under a contract. (Source: PTI photo) From a policy perspective, sophisticated parties may agree to cap liability or provide a right of recourse under a contract. (Source: PTI photo)
Posted: July 28, 2014 12:00 am

By Tyson R Smith

In 2008, India and the US reached an agreement on nuclear cooperation that was hailed in many quarters — by nuclear suppliers and vendors in the US, India and across the world — as an opportunity to facilitate the rapid expansion of India’s civilian nuclear programme. India envisaged expanding its civilian nuclear programme from its current capacity of 4.8 GW to 30 GW by 2030. To fully engage with international nuclear suppliers, however, India needed to harmonise certain laws, particularly those addressing civil nuclear liability in the case of an accident, with international norms.

Internationally, the fundamental nuclear liability principles include: strict liability, relieving victims of the need to prove fault or negligence; exclusive liability, ensuring that the operator is the only entity liable to compensating for damage (even if caused by a supplier or vendor); financial protection covering the operator’s liability, ensuring that funds are available to compensate victims; limitation of operator liability in time and amount, enabling the operator to set up a cost-effective mechanism to cover the liability amount; a single court for victims’ claims, providing consistent treatment in the recognition and execution of judgments.

India’s nuclear liability law, enacted in 2010, contains elements that address each of the above principles.  However, Section 17(b) grants the operator the right to seek recourse from suppliers and vendors (only after the operator compensates victims) if the accident was the result of a patent or latent defect in equipment or substandard services. This provision is fundamentally different from those in nearly all other jurisdictions. It is a significant difference, at least from the perspective of the international nuclear industry.

From a policy perspective, sophisticated parties may agree to cap liability or provide a right of recourse under a contract. This is a perfectly acceptable mechanism when the only damage is economic harm to one or both of the parties to the contract (such as damage to a reactor in the event of an accident). In that case, there is no need for a legislation. The situation is different when the victim of an accidental release is not in a contractual relationship with either the vendor or the operator but is a member of the public. In that case, the transaction costs are prohibitive — the vendor and operator cannot negotiate with each potentially affected party separately. There is then a need for legislative action (for example, liability caps, financial protection, a single court) to reduce transaction costs to an acceptable level. The legislation should create proper incentives to ensure that the entity with the greatest ability to influence accident risk adopts an optimal activity level. For nuclear power, this full internalisation of continued…

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