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Liability Legislation for Indian Nuclear Energy Business is Enacted

Both Houses of India’s Parliament have passed the Civil Liability for Nuclear Damage (CLND) bill, which establishes and allocates liability on diverse stakeholders participating in the nuclear power industry. Previously, I observed that key contentious issues had to be resolved in order to move forward with the bill, including a stronger compensation regime; broadening the “actors” beyond operators of the facility who would be liable for compensation; and extending the statute of limitations.

After intense debates, backroom negotiations between the two main political parties and important redrafting, the following five points are noteworthy:

  1. The overall maximum amount of liability in respect to each nuclear incident is assessed at Special Drawing Rights 300 million (21 billion rupees), except where the government changes the maximum amount through a notification.
  2. The operator of a nuclear plant of 10 MW and above is liable for compensation up to 15 billion rupees.
  3. The central government is liable for damage in respect of a nuclear incident where the liability exceeds the amount of liability of an operator.
  4. The period over which victims can claim damages for injuries is 20 years.
  5. Even if an operator does not have a contractual right for recourse vis-à-vis a supplier, the CLND bill provides for recourse to compensation if the nuclear incident has occurred due to a supplier’s actions. In other words, supplier’s liability is part of the legislation.

In the run up to the voting on the CLND bill, a fair amount of discussion focused on the fifth point above. There was strong representation from the industry that supplier’s liability will make India an outlier in the nuclear power sector, and consequently Indian operators will find it difficult to source equipment and service vendors from abroad and domestically. Several observations are pertinent in this context.

First, even if the supplier’s liability clause (# 17b in the bill) were not included, the operator through an apposite contract could hold a supplier liable. Regardless of the lack of precedent, good housekeeping on the part of the operators to protect their investors’ interests should include channelizing some liability to vendors; after all, this is generally the case in the energy sector. (It is instructive that in South Korea there is right of recourse to suppliers unless excluded by contract.)

Second, it is important to conceptually assess the industry position against supplier’s liability. The primary reason why the subject of liability is important in the nuclear business is the potential for a large negative externality, regardless of the cause, if matters go awry—a ceiling on damages is needed precisely because they can be astronomical. Therefore, liability clauses that impart responsibility on a stakeholder who is best placed to assume a specific risk is optimal. In this sense, the CLPD bill distinguishes between a broad operational risk and a (relatively) narrow supplier-related risk. To further underscore this point, it is noteworthy that an operator does not bear risk on account of natural disasters, act of war, terrorism etc.—past experience suggests that in these instances it is usually left to the government to bell the cat!

Lastly, the world is on the verge of a nuclear energy renaissance, hence suppliers’ order books will witness robust growth, and thus it may be beneficial to “sharpen” incentives against cutting corners by suppliers (regardless of how small the possibility is due to adverse reputation effects). In fact, inclusion of supplier’s liability is a model that other countries may emulate in due course as it is not without merit, irrespective of industry clamour against it in the Indian context.