Friday, March 19, 2010

The Civil Nuclear Liability Bill: Its Rationale and Related Issues

The Civil Nuclear Liability Bill (hereafter the 'bill') which the government was planning to introduce in parliament recently but later postponed on second thoughts has turned out to be quite a controversial issue. Reading newspaper articles on the subject, I got the feeling that a lot of people do not really understand it well enough to appreciate the rationale of this legislation. So I am writing this post in part as a '101 for dummies' on the subject and in part to provide my perspective on prominent aspects of the bill.

1. The first question is whether India ought to build a nuclear industry. This is a separate but related issue with many opposing the idea for several reasons (high cost of power, prospect of catastrophic disasters with long term and widespread consequences, etc.). If one believes that answer is no, a lot of the criticism being heard about it make sense. This discussion is beyond the scope of this post and it suffices here to simply note that the government believes that building this industry is in the national interest.

2. If we accept the government's contention, the next question is whether we need to create a statutory arrangement to deal with possible future nuclear accidents. Such occurrences are infrequent but can be very expensive to deal with which raises important issues of who should pay and how much towards cleaning up and compensating victims. Those responsible for the damage may not be able to adequately pay for the effort even if all their assets are utilized. Countries all over the world have devised various systems to deal with these challenges; efforts are also underway to create an international fund to assist in such instances. All of this argues in favor of a statute rather than allow matters to be dealt with by the general tort law. The argument that we did not and do not have such a law until now and therefore do not need one in the future strikes me as absurd; making up an ad hoc arrangement after the fact may not lead to an optimal allocation of resources for any concerned party or ensure speedy and adequate compensation to victims and hardly qualifies as a justification to oppose this bill.

3. That brings us to the next question which is what the principles of such a statute ought to be. To understand that, we need to step back and ask what arrangements are usually made to deal with sudden, unexpected and heavy expenses. The answer is obvious: we take out an insurance policy. Everyone probably knows how the system works. Actuaries calculate the premium to be paid as well as the ceiling limit for coverage based on the size of the covered population, the risk involved, the anticipated size and frequency of claims, etc. Nuclear power plants, faced with a similar prospect, would be expected to do the same thing. In fact, this legislation would require them to do so (bank guarantees and investment in capital markets are alternatives and this bill allows for those options; in practice, however, they are not considered feasible).

4. The general principles of any insurance set-up also applies to the nuclear business but the market conditions are different. Firstly, unlike the automobile or health care sectors, there is only one customer here - the government which operates the nuclear plants (if private players are allowed in at some future point, we would still have a handful of customers as the case is in some other countries). The government does own and operate multiple nuclear plants and if each of them were to operate independently, you could count them as separate entities but given their total number in India, the count would still be small (relative to a country in the West relying on nuclear power). Secondly, what a plant can afford to pay as premium will depend on its revenue which in turn is determined by its electrical output as well as the price charged to its consumers per unit (Note that this is different from what a plant may have to be charged as premium in order to be covered which will depend on the safety features of the reactor, history of its operation, etc.). Higher the policy cap, higher will be the contribution of a plant which in turn will translate into higher cost of electricity for consumers (Prithviraj Chavan mentioned this in his interview). Thirdly, insuring each plant independently will greatly limit the amount covered for obvious reasons: much like providing automobile coverage to a homeless man living in his car, if there is an accident, the plant's chief asset - the reactor itself - is likely to be damaged and potentially useless for compensation purposes. What many countries therefore do is pool the resources of all the nuclear plants so as to create a much larger asset base thereby allowing for higher coverage. That may very well be a system India could adopt as well. However, the total size of the asset pool will continue to be limited by these factors which means the overall insurance limit will still be finite. This is universally the case but in India, it is particularly a concern because existing plants are all small with megawatt outputs and even with the addition of more reactors, neither the number nor the capacity is going to come anywhere close to say what the US (104) or Europe (135) has. (Foreign countries likewise have their own asset pools but efforts to create a common global insurance pool have not been successful so far. This feature is different and separate from national insurance companies purchasing reinsurance in global markets). For that reason, it is important to be wary of comparisons with numbers randomly drawn from the literature about foreign countries.

5. The previous point explains why there is going to be a limit to the insurance capacity of the nuclear market. An important and relevant question that has been raised in this respect is the distinction between plant operators and suppliers. Foreign suppliers provide reactors and other parts whereas the government owned Nuclear Power Corporation of India (NPCIL) is expected to operate the plant. It is alleged that this bill, by channeling all legal liability to operators, intends to protect foreign suppliers at the expense of the national NPCIL which would have to bear the burden of compensating for their liability.

6. To answer that, let me repeat that anyone facing a big liability of this nature is going to have to purchase insurance be it the supplier or the plant operator. Foreign suppliers have only a limited ability to purchase insurance outside India. This is again for obvious reasons: (1) much like the functioning of an automobile depends on how well its owner has maintained it and how carefully it has been driven, the safety of a reactor or any part will depend on the plant operator as well (2) since foreign insurers or for that matter, any insurer has never been involved here, India is an unknown market with uncertain risk involved. But since the supplier's product is known to them, they can still get limited coverage in certain instances as for eg., the ANI insures up to a maximum limit of $50 million (with the limitation that any payment under such a policy further reduces this limit) for prescribed markets (presently excluding India but that could change if this bill passes). It does not follow that availability of a foreign insurer implies efficiency of the arrangement - a national insurer with better knowledge of local conditions may be able to offer a better deal than a foreign company without the same exposure.

7. Secondly, any insurance premium paid by either the supplier or the operator adds to the overall cost of business which translates into a higher price paid by either the government of India to set up the plant or the general public which buys the electricity. Suppliers and operators taking out separate policies therefore offers no intrinsic advantage to a third party (i.e. the disaster victims) if they are both going to be drawn from the same pool and indeed might be disadvantageous owing to the higher cost of claims processing particularly if there is overlap in coverage; alternatively, if they were to be insured through separate pools, risk and assets would also get distributed reducing the coverage limit for each of them. Channeling of all liability to a common source thus makes practical sense. From the same standpoint, it would also make better sense to have legal channeling (i.e. parties other than the operator cannot be sued) rather than economic channeling (i.e. all parties can be taken to court but compensation is ultimately collected from a common source) so as to minimize cost of litigation which is what this bill provides for (with the exception of cl.17(b) which I discuss below).

8. The criticism of this arrangement is that suppliers are being subsidized (some argue that it is only a 'potential subsidy') and are being let off easy without their true costs being internalized. Perverse economics leads to a moral hazard as for eg., there is no incentive to develop a safer reactor in the event of a catastrophe. That is true and the problem is usually sought to be dealt with through regulation but just as with the recent banking crisis, the entire approach can be an ideological flash point and usually yields very different responses from people across the political spectrum.

9. A policy maker would have to take into account other practical considerations as well. Firstly, a nuclear disaster is a big affair and can easily lead to immediate bankruptcy of the supplier under a general tortious liability system. But even seizure and liquidation of the entire assets of a supplier may not be sufficient to meet the needs of victims though it could, to some extent, reduce the burden on other parties. Secondly, as the government argues, that daunting prospect could keep suppliers from entering the Indian market; the counterpoint being made is that this holds only for American suppliers which are private entities and not to state administered French or Russian firms, a charge the government rejects saying those countries too have been equally insistent about the need for liability protection.

10. My view is that the government claim is valid. Nuclear reactors are manufactured by large firms and are an important source of business to any country; so it is natural to expect any government to defend their interests. If the US government is willing to protect private shareholders from the possibility of lawsuits and liquidation, France and Russia can a fortiore be expected to do the same to protect state property and tax payer money. As Chavan pointed out, France and Russia did not mind either a law or a treaty arrangement. We do not know what the recent Indo-Russian agreement contains since the content has not been made public. Furthermore, even if a liability arrangement has not already been entered into, it would be naive to expect French or Russian companies to simply roll over, accept huge liabilities and fork over any compensation we demand. Their governments will surely step in and ask for an agreement in line with international practice which almost universally shields suppliers from liabilities and India, faced with pressure from a 'friendly' government with veto power in the U.N.Security Council, will have limited room to maneuver. Rather than go for bilateral treaty arrangements which may be uneven and contain clauses hidden from the public, it might make things more straightforward and transparent to have a uniform law applying to all parties. This legislation would achieve that.

11. A curious and related aspect first raised by Siddharth Varadarajan is cl.17(b) in the bill which makes a provision for the operator to seek damages from the supplier where "the nuclear incident has resulted from the wilful act or gross negligence on the part of the supplier...". As he notes, this provision is not found in the Convention on Supplementary Compensation for Nuclear Damage (hereafter CSC). The term 'gross negigence' is not defined in this context and will probably end up being determined as a question of fact by the claims commission (since courts of law are excluded under the scheme of the bill) which means that suppliers will probably have to seek insurance as well up to the operator's liability limit. A generally accepted rule is that all parties which may be held liable should be indemnified for that amount (known in legal parlance as the 'congruence principle') to avoid default but the Indian bill only requires that of the operator (cl.8(1)). This provision also deviates from the channeling principle. Further, as he points out, if India joins the CSC, the convention upon coming into force, could allow Indian third parties and the GoI to sue in foreign courts seeking enforcement of damage settlement terms laid down by an Indian court against supplier firms in those member nations though in practice, I doubt that such lawsuits will be successful in the absence of a pre-existing contract to that effect (enforcement is only possible provided the judgment is not contrary to the public policy of the enforcing state, a condition which will be difficult to meet because the CSC itself explicitly holds that the operator alone may be held liable for any such damage). All in all, this is an anomalous inclusion inconsistent with the overall scheme of the bill and it would be better to either define it clearly or remove it altogether. From a political standpoint, the latter option may be difficult to do. Opposition parties which are already up in arms would scream bloody murder if any such move were made.

12. So far, I have explained why caps on the operator and the supplier make sense. That brings us to the third question of total liability. The bill caps the government's own liability at 300 million SDR, the minimum figure mentioned for state liability in the CSC. Soli Sorabjee objected to such an 'inflexible cap' arguing that the extent of damage of any nuclear accident cannot be reliably estimated ex ante and it is better to frame appropriate guidelines and allow the rest to be determined by a judicial forum. There is considerable force in this suggestion. Another question follows from the provisions of the CSC. An important benefit of joining the CSC (assuming this law is an enabling instrument to do that) is that upon coming into force, it will require all contracting states to contribute funds when the compensation amount exceeds 300 million SDR (or a greater amount specified by a state prior to the incident) according to a prescribed formula. If India caps total liability at 300 million SDR, in effect, it rules out the prospect of obtaining assistance from other countries whereas the reverse would not be true. Also, unlike cl.6(2) which allows the government to alter the operator's liability by notification, cl.6(1) has no such provision. Unless someone can explain how this makes sense, I fail to see how this cap is meaningful. The government could do one of several things: (a) remove the cap and do nothing else (b) remove the cap and incorporate a particular amount as a guideline (c) limit the state's compensation to a particular amount while leaving the liability itself uncapped (d) add a proviso allowing the Center to modify the amount. There may also be other alternatives.

13. Lastly, questions have been raised about the constitutionality of some provisions of the bill. It has been alleged that they are inconsistent with art.21 jurisprudence as laid out by the Supreme Court. Evolution of the strict and absolute liability doctrine in the Indian context is briefly explained in this Frontline article. As Chavan explained, these decisions signified improvisations in tort law by the Supreme Court in the absence of specific legislative guidance to deal with novel situations. This bill does incorporate the no-fault liability (while not excluding tort liability which may be pursued separately) and the 'polluter pays' principles. The chief distinguishing element is the liability limits and a constitutional challenge under art. 14 (equal treatment of nuclear disaster vis-a-vis other disaster as pertinent to compensation for third parties) and art.21 (denial of adequate compensation amounting to violation of individual right to life and liberty) will have to be determined afresh in light of the 'reasonable, just and fair' standard enunciated in Maneka Gandhi v. Union of India 1978 AIR 597 as and when a challenge is considered by a superior court. This is a vague and arbitrary standard and the outcome is likely to be determined based on a variety of subjective and political factors. A review of comparative laws and relevant judgments in prominent foreign courts (such as the US Supreme Court's decision in Duke Power Co. v. Carolina Environmental Study Group, 438 U.S. 59 (1978)) could be an important factor in swaying judges. In recent years, the Court has repeatedly stressed the need to balance the case for development with concern for the environment though what that ideal balance is or ought to be remains unclear and very contentious. Making an educated guess, I would predict that protection of suppliers and the cap on operator liability will be upheld. As for total liability, it is harder to say how it will play out. A facial challenge based on hypothetical concerns could yield an outcome different from an applied challenge when faced with the exigencies of a post-incident situation.
14. Cl.35 barring civil courts from jurisdiction over matters pertaining to the Claims commission has rankled many political parties and commentators who have described it as unprecedented. It is quite unusual to see something so dramatic and I am inclined to think that the primary motivation is to reduce delays. As we all know, Indian civil courts have been plagued by the problem of overflowing dockets resulting in lengthy delays in case resolution. Creating specialized tribunals and limiting the appeals process are two ways to deal with this problem. Usually, the downside would be that denying multiple levels of review increases the chances of error and removing the supervision of the highest court could end up creating bad law for the country. In India's specific case, I am not sure either of these necessarily holds true. A specialized forum devoting all its time to one kind of cases will likely have more time to deal with them and more importantly, far more experience dealing with the issue than a High Court or Supreme Court which deal with a variety of issues. Routine matters of claims resolution are no doubt different from questions pertaining to statutory interpretation which ought to normally belong in the domain of the superior courts but in our system, absent judicial reform, there are probably not a lot of advantages to this demarcation either. All of this is nevertheless largely theoretical; the reality is that the Supreme Court is extremely aggressive in defending its prerogative of judicial review which it sees as near absolute. In the 2007 case I.R.Coelho v. State of Tamil Nadu and Ors., the court did not hesitate to effectively nullify a provision incorporated through the First Amendment in 1951; only last month, in The State of West Bengal and Ors. v. The Committee for Protection of Democratic Respondents Rights, a challenge to the jurisdictional authority of High Courts in calling for CBI investigations failed despite clear statutory language and an explicitly circumscribed constitutional mandate. The odds are therefore excellent that even if the final version of this bill contains this provision, it will be struck down if and when challenged in court.
14. In conclusion, overall, the proposed bill is not just consistent with international practice but also delineates a pragmatic approach taking into account domestic limitations. Specific provisions such as the total liability cap under cl.6(1) and operators' right to recourse against suppliers under cl.17(b) may be disputed and should be reconsidered. Amounts prescribed for the liability caps are debatable too. Others such as cl.35 which may not pass judicial muster are preferably redrafted or dropped. More issues may well come up as the debate goes forward.


Hindu Fundamentalist said...

the liability cap appears to be an incentive to make nuclear power an economic viability.
nuclear plant failure is usually a catastrophic disaster and so the insurance costs are enormously high. one attempt is to find an insurance model. the model however should not be based on limiting the payouts and liability. it must consider all the relevant costs including compensation and legal claims. what we get is the total financial incentive the government is willing to commit for nuclear power.
one question that immediately comes to my mind is, could we use this amount in alternative clean technologies like solar power.
my objection is that any sort of liability cap is unfair. it puts civilians at disadvantage. it gives unfair financial benefit to the suppliers and operators. it is a disincentive for technological innovation. and it inhibits search for viable better alternatives.

Sudhir said...

Pilid - you just blew me off Pilid! What a piece man..hats off!

This one qualifies not just as 101, but is good enough for 101 through 401. Really awesome piece. 99% of the MSM journos (so called intellectuals) can come no close to writing like this.

Also, wanted to mention that apart from the liability cap that is low, another very point that MSM is missing is the 10 year limit to file cases to claim the damages. It is common sense that the effects of radiation are felt way beyond 10 years, so this limit surely seems to be fishy. As always, government doesn't come clean on this too.

That said, please accept my congratulations again for this piece. Really, may your tribe grow.

- Sudhir

Xinhua Ram said...

Pilid is in a class of his own. This blog is playing to its potential now and is already getting noticed - something it richly deserves.

Pilid said...


Unfairness of the total liability cap is what Soli Sorabjee and others have been suggesting. If victims end up with a paltry sum because the overall amount is capped, it does not do them justice. The fact that population density in India is higher than in the West is something to be kept in mind. As I mentioned, there is a case to reconsider that provision. However, that does not change the presently limited ability of the nuclear industry to compensate. A subsidy for the industry would help it grow and as it becomes bigger, the case to continue to subsidize it gets weaker and it will make sense to shift the burden to the operators/suppliers. This is what the US and other countries have been doing.

The debate about which sources of power are ideal to be harnessed is a separate and big question. Solar power is not cheap either and many economists have not favored it compared to others but this is a debatable issue - economic models give very different results depending on what factors you take into account, which country they are conducted in, how the estimates are arrived at, etc.


Thanks for all the appreciation. Excellent question regarding the 10-year limitation. This is consistent with the CSC (see art.9, Annex). This is again a number and so can be revisited - states have extinction periods as long as 30 years so long as an arrangement exists to adjudicate the claim and provide compensation. Raising that period could have consequences: longer extinction period means insurance cost will go up for the operator which in turn will be passed on to the tax payer/consumer which is something to be remembered. This is all the more so because many of these problems may not be known to science until they start to occur for the first time. So, one solution may be to get the operator to set aside a certain amount if the cap amount has not been exceeded to pay for it and the tax payer could cover any shortfall which occurs. Alternatively, the tax payer could cover all compensation beyond a prescribed period. From the victims' standpoint, a causal link to the disaster event may be harder to show when the damage suffered is not direct.


Thanks for all your your encouraging support.

Id Lee said...

Thanks Pilid for the effort.

Sudhir said...

Thanks for the clarification Pilid. So in layman terms, say if the limit was up to 20 years, the cap on the operator might go upto say 4000 crores, but the supplier limit will stay at Rs. 500 crores right?If so, isn't that an unfair ratio (say the accident happened due to a faulty part of the supplier and not because of the wrong way of operating it)

Also, even if the cap on the money limit increases, that doesn't necessarily mean that the 10 year limit will be increased to, correct?

Please correct me if I am wrong..

Pilid said...


The system is designed to protect the assets of both operators and suppliers. So from a third party standpoint, you can treat them as a single entity for compensation purpose. Suppliers have no direct liability to third parties at all (i.e. victims) but they have been made accountable to the operators. If operators' cap goes up to a particular amount, since they have the right to recourse against the suppliers, the latter too would have to insure themselves up to that amount (as I explained in the post, the fact that this is not mandatory in the bill makes this provision something of an anomaly) or they would need some sort of contractual arrangement with the operator to take care of the compensation in such an eventuality. So if operators' cap is raised, suppliers' cap would effectively go up as well.

But you are asking what happens if the time limit is extended to 20 years. The answer is that insurance becomes more expensive, so for the same premium paid, the total cap will require to be reduced. Alternatively, a higher premium may have to be coughed up to keep the cap at 500 crores in which case, either the initial cost of the reactor/plant or the price of electricity paid for by the taxpayer or consumer (as the case may be) will go up.

The cap amount and time limit are legally separate entities but as explained above, the latter has an monetary impact on the former.

Sudhir said...

got it! Thanks Pilid.

Thyagarajan said...


Excellent article as usual. As pointed out by many there are two main issues, which are seen as seriously affecting the interests of the Country. One is on the limits on the payout/damages and the other is the seemingly smaller duration of the time limit of 10 years. Your article also pushes one to take an objective view of the bill without getting lost in the smaller, even if essential details.

In my view the larger issue would be the attitude of this government, which last year, was trying to steal the show and make it appear like a spectacular victory for their party and the Government, against the onslaught of the combined opposition parties. Whatever the merits of the Nuclear bill, the ruling party had not been transparent in trying to take atleast the like minded parties into confidence in overcoming their resistance. They were playing the political game to suit their narrow interests. That being so it cannot today cry foul that the opposition is mindlessly rejecting their proposals.the government cannot alternatively elect to be brusque when it suits them and then become transparent, when being brusque affects their chances of passing the bill into legislation. The opposition have their own turf to protect and is not there merely to allow the ruling party to enjoy their powers.


Pilid said...

Id Lee,

Thanks for your support.


My grouse is that the opposition is not being constructive. Sure, we had this problem during the NDA regime as well but the system becomes dysfunctional if parties hold such an attitude. It is fine to debate these questions and offer amendments but it does not make sense to try to scuttle the entire bill when the opposition has not really offered a workable alternative.

Venkat Ramanan said...

Good article Pilid... excellent explanation!!

We have become so suspicious of Congress and UPA that we are not able to identify any of the positive things they may intend to do!!

Thanks for highlighting the importance of this liability bill...

Pilid said...

Venkat Ramanan,

Thanks for your appreciation and support.

dove said...

1) Insurance costs per wattage compared to other costs, is it a major part or negligible ?

2) Why not 300 million or original cost paid for the equipment, whichever is higher ?

3) France & Russia hasn't _yet_ asked for liability limitation. Why run after US until they actually do ? Why the hurry now when there are options still ?

4) Why not delay and use this to get US concessions on other matters ? Eg: no new arms to pak etc ?

5) Option for criminal charges if deliberate neglect or supply of sub-standard equipment can be proven.

6) Indian wattage in planned to increase dramatically over the decade. Its a lucrative enough market for world to let us into the club. No need to go soft now.

joel said...

Hi Mr. pilid
excellent article with explanations... thank u