A supplier's deal?

The rush to ratify the Convention on Supplementary Compensation seems to arise from U.S. interests and pressure.

IN the Singh-Obama Joint Statement of November 8, issued at the conclusion of United States President Barack Obama's visit to India, there is a curious bit concerning civil nuclear liability in the paragraph relating to the implementation of the civil nuclear agreement between the two countries. It says: [The two leaders] noted that both countries had enacted domestic legislations and were also signatories to the Convention on Supplementary Compensation (CSC). They further noted that India intends to ratify the CSC within the coming year and is committed to ensure a level playing field for U.S. companies seeking to enter the Indian nuclear energy sector, consistent with India's national and international legal obligations (emphasis added throughout).

Why would India give such an urgent deadline for ratification of the Convention when there is no such imperative for enabling nuclear commerce with other countries? Domestic legislation on civil nuclear liability, which conforms to international standards, is sufficient for this purpose. This is clear from the fact that, of the 30 countries that operate nuclear power plants (NPPs) on their soil, only 14 have signed the Convention and only four have ratified it (before India signed it on October 27) in the 13 years since it was opened for signature, and the Convention is yet to come into force. Interestingly, even the U.S., which was the prime mover of the Convention at the International Atomic Energy Agency (IAEA), took 11 years to ratify it after having signed it on the very same day, September 29, 1997, that it was opened for signature. Pertinently, potential nuclear suppliers to India, including American companies, have been doing business with countries that have not even signed the Convention.

Also, according to reliable sources, the Department of Atomic Energy (DAE) is still grappling with the implications of the much debated and controversial Article 17(b) under the Right of Recourse provisions in India's The Civil Liability for Nuclear Damage Act of 2010 (see box). There are other more pertinent issues with regard to some provisions of the CSC in relation to U.S. domestic law, which impinge upon the operator's right to recourse and need serious internal consideration and analysis before India decides to ratify. As will be argued below, even if India signed the CSC, it would be prudent not to ratify it in a hurry before debate and discussion within the government.

For the Convention to enter into force, a minimum of five states with a minimum combined installed nuclear capacity of 400 gigawatt (thermal) should have submitted instruments of ratification. The combined installed capacity of the four member-countries Argentina, Morocco, Romania and the U.S. so far is only about 320 GWth. Though one more contracting party, besides India, with a reasonably large installed capacity, like Japan, will enable the CSC to come into force, it is not likely to happen in the near future given the history.

From the Indian perspective, the following consideration is also important. The rationale for becoming a party to the CSC is that it enables a country to draw from an international fund created from contributions of the Convention members if the damage from an accident exceeds the liability limit set by the national legislation. If the CSC does come into force in the near future, say, with India and Japan acceding to it, the total available Convention fund works out to about $154 m (about Rs.682 crore), of which only 50 per cent is available for damages within the territory of a Contracting Party. Moreover, this is available only if the damages exceed the maximum liability provided for in the national law, which in the case of the Indian Act in its present form is about Rs.2,100 crore. The question is whether this additional Contracting Parties' contribution of about Rs.350 crore is significant enough for India to ignore the provisions of concern in the CSC mentioned above.

It would, therefore, seem that the rush to ratify the Convention arises from U.S. interests and pressure and the corresponding remark was included in the Joint Statement on demand from the U.S. The fact that India rushed to sign the CSC shortly before Obama's arrival on October 27 is another indication that there was sustained U.S. pressure on India to sign the Convention.

Indeed, the U.S. insistence on India signing the CSC has been in evidence ever since the Nuclear Suppliers Group (NSG) approved the India-specific waiver on September 6, 2008. Within days of the waiver, Foreign Secretary Shiv Shankar Menon wrote a letter to William Burns, Under Secretary in the U.S. Department of State, the key person in the negotiations on the nuclear deal, on September 10, 2008, which said: [I]t 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 [123] Agreement. The letter also committed two sites to U.S.-built NPPs capable of generating a minimum of 10,000 megawatt electrical (MWe).

There has also been a constant refrain by U.S. companies and insistence by the U.S. government that India should not only enact suitable legislation on nuclear liability but also become a party to the CSC. Even after the passage of the domestic legislation on August 25, there have been comments by U.S. analysts and statements from U.S. companies that the Indian law does not conform to international norms in not entirely indemnifying nuclear suppliers from damages and thus makes them vulnerable to litigation.

There are three international conventions that define the nuclear liability regime: the Paris Convention of 1960 of the Organisation for Economic Co-operation and Development (OECD) together with the Brussels Supplementary Convention (BSC) of 1963, the Vienna Convention of 1977 of the IAEA, and the stand-alone CSC of the IAEA, which is yet to come into force. All of them are premised on a set of common principles that include strict and absolute liability of the NPP operator. However, all of them have a provision for the operator's right of recourse so that suppliers of equipment and materials are not entirely free of any liability in case a nuclear accident is the result of a wilful act or gross negligence on the part of the supplier.

For a country that is not a party to the Paris or the Vienna Convention to become a party to the CSC, it should enact national legislation that is consistent with the provisions laid down in the Annex of the CSC. However, after India's signature to the CSC, the Indian Act is now deemed to be so despite the argument that its Article 17(b) after revision goes beyond the corresponding provision (Article 10) in the CSC Annex (see box). However, it must be noted that the CSC requires a country only to declare to the IAEA that its domestic legislation is in conformity with the CSC Annex, and there is no clause-by-clause scrutiny of the text. Any issue of non-conformity can be raised only by a Contracting Party, and not by the IAEA, which can happen only after the Convention enters into force. It should also be pointed out that Article 10 of the Annex says: National law may provide that the operator shall have a right of recourse. So the domestic law of a Contracting Party may not provide for right of recourse, as is the case with the U.S. law, which we will discuss shortly.

The U.S. insistence on India being a party to the CSC is contrary to the position of Russia and France, the other potential suppliers of nuclear equipment and materials to India. While the Indo-French Agreement of 2008 requires India only to create a civil nuclear liability regime based on established international principles, which would include provision for right of recourse' as well, the India-Russia Inter-Governmental Agreement (IGA) of 2008 stipulates (Article 13.1) only strict and absolute liability of the NPP operator with no provision therein for the operator's recourse in case of a supplier's fault. A later proposal by the Nuclear Power Corporation of India Ltd (NPCIL) to include the right of recourse provision in the commercial contract with Atomstroyexport of Russia was apparently rejected by the latter, which stated that all contracts have to conform to the IGA. The constant insistence on a level playing field for U.S. companies, and its mention in the joint statement along with the remark on nuclear liability, suggests that the U.S. wants a level playing field vis--vis Russia in this regard.

In a recent paper, G. Balachandran of the Institute for Defence Studies and Analysis (IDSA) argued how, contrary to the general perception, a combination of CSC and provisions of the American law effectively negates the possibility of using the Right of Recourse provision of the Indian Act. Article XIII.6 of the CSC says: A judgment shall, upon being presented for enforcement in accordance with the formalities required by the law of the Contracting Party where enforcement is sought, be enforceable as if it were a judgment of a court of that Contracting Party. The merits of the claim on which the judgment has been given shall not be subject to further proceedings. It has been argued by some Indian analysts that since the U.S. is a party to the CSC this provision can be invoked, and any judgment against a U.S. supplier in an Indian court would be deemed legally enforceable in the U.S. and the operator would be able to recover damages from the supplier.

Catch in CSC article

But there is a catch in Article XIII.5 of the CSC that seems to have been missed by the analysts. This clause says: A judgment that is no longer subject to ordinary forms of review entered by a court of a Contracting Party having jurisdiction shall be recognised except (c) where the judgment is contrary to the public policy of the Contracting Party within the territory of which recognition is sought. Now what is the applicable U.S. law in this context? U.S. domestic civil nuclear liability is articulated by the Price-Anderson Act (PAA) of 1957, which does not provide for the operator's right of recourse. The CSC-implementing U.S. legislation is part (Sec. 934) of the Energy Independence and Security Act, which was passed in December 2007. It clearly states: This section does not provide an operator of a covered installation any right of recourse under the Convention. This, therefore, means that if an Indian operator wins a case against a supplier in Indian courts, this cannot be enforced in the U.S. under the CSC as this judgment would be deemed contrary to U.S. public policy. So any claims of damages by an operator against a U.S. supplier under the Right to Recourse provisions of the Indian Act cannot be enforced.

How about Article 17 (a), which we have not addressed so far? The issue here is whether a commercial contract, which expressly provides for the operator's right of recourse, would be acceptable to the U.S. entity entering into a contract. Secondly, would the U.S. authorities permit such a contract even if it were acceptable to the U.S. party to the contract when U.S. law does not provide for the operator's right of recourse?

In the hearings on accession to the Convention in the Senate Foreign Relations Committee on July 28, 2006, Senator Richard Lugar submitted a report. While discussing the operator's right to recourse provision of the CSC, he said: U.S. law does not provide a right to recourse to a nuclear operator unless explicitly provided in a private contract between the operator and the other party to the contract. However, this remark was made before the CSC-implementing legislation was passed by the U.S. Congress. The final law, however, does not provide any caveat as Lugar did for the operator's right to recourse. So it is not clear whether a private commercial contract between the NPCIL and a U.S. supplier that explicitly provides for the right to recourse is a channel that is open for the operator to sue the supplier in case of an accident caused by the supplier's fault.

The above analysis suggests that the rationale for the U.S.' sustained insistence on India signing the CSC was to ensure that the operator had no right to recourse for damage claims from American supplier companies. Unfortunately, the Indian authorities and the legal department do not seem to have given sufficient thought to the conflicting provisions of the CSC and the U.S. law that effectively forecloses the right to recourse option for the operator. Indeed, the Lugar report at the Senate hearings said: [The Convention] would be beneficial to U.S. interests in several ways. It would limit the liability now facing U.S. suppliers of nuclear technology with respect to their activities in foreign markets, levelling the playing field for them and bring more predictability to the market.

By giving in to U.S. demands, the Indian government is all set to ratify the CSC, which, as argued, would be inimical to Indian interests. It would be wise, therefore, to keep the CSC ratification in abeyance until there is some clarity on the issues concerning the operator's right of recourse.