UK: Nuclear Liability In The UK: Implementation Of The 2004 Protocols

On May 4, 2016, the Nuclear Installations (Liability for Damage) Order 2016 (the "2016 Order") entered into force in the United Kingdom. The 2016 Order, which implements the 2004 Protocols²⁷  to the Paris Convention²⁸ and Brussels Supplementary Convention²⁹  (together, the "Paris/Brussels Conventions") into English law, revises the UK's existing nuclear liability regime to ensure that, in the event of a nuclear incident, higher levels of compensation will be available to a wider group of victims and for broader categories of damage. This article explains the background to the 2016 Order, sets out its primary provisions and discusses its impact on the UK's nuclear liability regime. It also considers additional and ongoing concerns with respect to the risk of exposure to nuclear liability from the perspective of nuclear licensees, their contractors and financial institutions doing business in the UK's nuclear sector.

Overview of the UK's Nuclear Liability Regime

Paris/Brussels Conventions

The UK is a contracting party to the Paris/Brussels Conventions. The Paris/Brussels Conventions, which were developed under the auspices of the OECD, together establish an international regime governing liability in the event of a nuclear incident. The contracting parties to the Paris/Brussels Conventions are primarily OECD member states and include many Western European states.³⁰ Non-OECD member states require the consent of the contracting parties to the Paris Convention in order to join the Paris/Brussels Convention regime.

The Paris Convention sets forth the primary principles of civil liability for nuclear damage.³¹ Meanwhile, the Brussels Supplementary Convention makes available additional public funds if compensation payable under the Paris Convention is insufficient. These funds must be contributed jointly by all contracting parties according to a pre-determined formula.

Together, the Paris/Brussels Conventions regime provides three tiers of funds: (i) operator funds; (ii) state (host country) funds; and (iii) joint funds from contracting parties to the regime.

Joint Protocol

The Joint Protocol Relating to the Application of the Vienna Convention and the Paris Convention (the "Joint Protocol"),³² to which the UK is not a contracting party, links the Paris Convention with the Vienna Convention³³ regime.

The UK has said that it will consider becoming a contracting party to the Joint Protocol in the near future. In the meantime, however, the UK does not have treaty relations with any Vienna Convention countries. Therefore, claims brought in Vienna Convention countries are not covered by the UK's nuclear liability regime.

2004 Protocols

Background to the 2004 Protocols

The UK is a signatory to the 2004 Protocols. However, these are not yet in force and, to enter into force, require ratification by two-thirds of the contracting parties to the Paris/Brussels Conventions.

As envisaged by Council Decision 2004/294/EC of March 8, 2004,³⁴  which authorizes EU member state signatories to ratify the 2004 Protocol to the Paris Convention, these EU member states will ratify the 2004 Protocols simultaneously. Ratification by these EU member states, which is expected to occur in early 2017, will be sufficient to bring the 2004 Protocols into force.

The 2004 Protocols represent the modern iteration of international nuclear liability principles and generally follow the 1997 Vienna Convention (the modern iteration of the Vienna Convention) and the Convention on Supplementary Compensation (the "CSC").³⁵ Their primary effect (which is explored further below) is to broaden the categories of damage and geographic scope of the Paris/Brussels Convention regime and increase the amount of compensation available to victims of a nuclear incident.

Implementation of the 2004 Protocols into UK law

In order to ratify the 2004 Protocols, the UK needed to promulgate implementing legislation. The Paris/Brussels Conventions are primarily implemented in the Nuclear Installations Act 1965 (the "NIA 1965"). The 2016 Order contains the amendments to the NIA 1965 to implement the 2004 Protocols.³⁶

On February 22, 2016, the 2016 Order was laid before the UK's House of Commons. An Explanatory Memorandum, prepared by DECC,³⁷ was also published.³⁸

Most of the provisions of the 2016 Order will come into force upon ratification of the 2004 Protocols.

Effect of the 2004 Protocols

The 2004 Protocols have been implemented in UK law in the following way:

• New categories of nuclear damage: Under the Paris Convention and the NIA 1965, an operator is liable for loss of life or personal injury and loss of or damage to property caused by a nuclear incident at its installation or involving nuclear material coming from its installation. The 2004 Protocols contain additional categories of nuclear damage, which are introduced into the NIA 1965 as follows:
• economic loss arising from personal injury or damage to property, although no changes are required under UK law since the NIA 1965 already permits recovery for economic loss;
• costs of measures of reinstatement³⁹  of the impaired environment, unless such impairment is insignificant. To the definition in the 2004 Protocols, the 2016 Order adds the concept of "reasonable measures," meaning that the costs and actual taking of such measures must be reasonable;

• loss of income deriving from a direct economic interest in any use or enjoyment of the environment, incurred as a result of significant impairment of that environment; and
• costs of preventive measures⁴⁰ and further loss or damage caused by such measures. To the definition in the 2004 Protocols, the  2016 Order adds the concept of "reasonable measures" and adds a test to determine when such measures will be reasonable in circumstances of "grave and imminent threat."

• Increased liability caps: The Paris/Brussels Conventions prescribe certain caps on an operator's liability for each incident resulting in nuclear damage arising from that operator's installation. An "operator" under the UK's nuclear liability regime includes every UK nuclear site licensee. Under the 2016 Order:

• the liability of an operator of standard installations⁴¹ is raised from approximately £140 million (€170 million) to €1,200 million per incident; and
• an operator is made liable for both the first and second tier amounts below:

The effect of the changes to the liability caps is effectively to shift greater liability for nuclear damage claims from the UK Government to operators. Notwithstanding this, although now permitted under the Paris/Brussels Convention regime, the UK Government's current position is not to make an operator's liability unlimited. Unlike certain other jurisdictions,⁴² the UK regime will therefore maintain a cap on the operator's liability.

Also, the third tier of funds is only available to Brussels Convention countries and would not be available to non-Brussels Convention countries.

• Extended claims limitation period: The limitation period for bringing a claim with respect to loss of life or personal injury will be extended from 10 years to 30 years. All other claims must continue to be brought within 10 years from the date of the incident.

• Expanded geographical scope: The Paris Convention and the NIA 1965 do not currently apply to any nuclear incidents occurring or damage suffered in a non-contracting state. Under the 2016 Order, the group of potential claimants is expanded to include those located in:

• states that have no nuclear installations on their territory at the time of the nuclear incident; and
• states that have in force, at the time of the nuclear incident, national nuclear liability legislation that: (i) affords equivalent reciprocal benefits; and (ii) is based on principles identical to those contained in the Paris Convention.

This expanded geographical scope does not apply to the 2004 Protocol to amend the Brussels Convention, so claimants from countries captured by the expanded Paris Convention scope are not able to access the additional public funds available under the Brussels Convention.

• Inclusion of disposal sites: The UK's nuclear liability regime is extended to cover installations for the disposal of nuclear substances, with the Secretary of State being empowered to prescribe different liability caps in proportion to the risk associated with different categories of installation. Generally, intermediate risk installations are prescribed a liability cap of €160 million (up from €140 million), with low-risk installations being prescribed a cap of €70 million (up from €10 million).
• Nuclear material shipping: The regime as it applies to shippers of nuclear material is also amended so that:

• liability can only pass from one shipper to another where the receiving shipper has a direct economic interest in the relevant nuclear material; and
• the shipping of nuclear material is deemed a low-risk activity, for which a liability cap of €80 million (up from €10 million) is generally prescribed.

Geographic Coverage Issues Arising From 2004 Protocols

Notwithstanding the expanded geographical coverage under the 2004 Protocols, certain foreign investors and contractors operating in the UK's nuclear sector, their commercial banks and lending institutions should note the following:

Joint Protocol and CSC

As noted above, as the UK is not yet a contracting party to the Joint Protocol, there is no nuclear liability treaty relationship between the UK and Vienna Convention countries. Further, the UK is not, and is unlikely to become, a contracting party to the CSC, and therefore there is no nuclear liability treaty relationship between the UK and CSC countries (including the US and Japan). Accordingly, there is a risk of claims being brought in Vienna Convention and CSC countries for nuclear damage suffered in the UK.

Ireland

Because Ireland is not a contracting party to any international treaty concerning civil liability for nuclear damage, it is a "non-contracting state" under the Paris Convention. The Paris Convention and the NIA 1965 do not currently apply to any nuclear incidents occurring or damage suffered in a non-contracting state. However, assuming the 2004 Protocols are ratified and implemented pursuant to the 2016 Order, as Ireland does not have any operating nuclear installations, the Paris Convention and the NIA 1965 will apply to nuclear damage suffered in Ireland. As a consequence, the protections in the UK's nuclear liability regime will extend to foreign-owned licensees and contractors operating in the UK's nuclear market.

However, all entities operating in the UK's nuclear program are still at risk of claims being brought in Irish courts where there is no nuclear liability regime or nuclear liability treaty relations with the UK.

Insurance Issues Arising From 2004 Protocols

There has been wide concern as to the cost and availability to nuclear operators of insurance for the higher levels of liability required under the 2016 Order.⁴³

According to a specialist report prepared by INDECS Consulting for DECC:⁴⁴

• coverage is likely to be available for higher liability caps;
• coverage is likely to be available for new categories of damage; and
• for an initial period of two to three years,⁴⁵ coverage is unlikely to be available for the 30-year personal injury claims limitation period.

The Explanatory Memorandum states that the UK Government will, subject to any EU or UK legal requirements such as State aid (see below), consider temporary arrangements to cover any insurance coverage gap on commercial terms.⁴⁶   The 2016 Order contains a provision authorizing the Secretary of State to make such arrangements.⁴⁷   The UK Government is reportedly in discussions with both Nuclear Risk Insurers (the "NRI") (the UK nuclear insurance pool) concerning DECC's provision of reinsurance to the NRI,⁴⁸ and the European Commission regarding the State aid treatment of any UK Government proposal to cover the insurance coverage gap. At this stage, it appears possible that a system can be designed that avoids this reinsurance being classified as State aid.

The UK Government has also stated that it will seek to draw on lessons learned by other contracting parties to the 2004 Protocols.

Potential Impact of "Brexit" on UK's Implementation of 2004 Protocols

Regarding State aid, any dealings with the European Commission will inevitably be impacted by the UK's recent referendum decision to leave the EU (the so-called "Brexit").

State aid is entirely a matter of EU law and is administered by the EU. As a result, Brexit creates greater uncertainty for the future application of the State aid regime in the UK, and by extension, to UK nuclear projects.

There is currently no indication that the UK, which historically has had one of the strongest records of State aid compliance in the EU, will not comply with its existing treaty obligations or that it would retroactively change its approach to past State aid decisions. Further, Brexit is unlikely to affect the implementation of the 2004 Protocols as they should be ratified long before the Brexit process is completed.

Nonetheless, while the future application of the EU's State aid regime to the UK remains unclear, there are already a number of apparent considerations for future projects:

• the European Commission has indicated privately that it will strongly de-prioritize UK-related cases and focus its resources elsewhere. With respect to its proposed provision of reinsurance to the NRI, this may make it difficult for the UK Government and affected UK nuclear projects to engage with the European Commission and put greater pressure on those parties to consider their approach to State aid risks;

• when the UK does leave the EU, there is a wide variety of possible outcomes for the State aid regime. Nuclear projects relying on, inter alia, UK Government reinsurance solutions before this situation has been clarified will need to be structured to protect the enforceability of those terms against any regulatory uncertainty; and

• the UK was a major voice supporting nuclear power in the EU. Post-Brexit, there is potential for less sympathetic treatment of State aid for nuclear projects generally.

Notwithstanding these risks, with respect to the UK Government's reinsurance support specifically, any state support may only be required for a two to three-year period during which the private insurance market cannot provide coverage. Further, if this support is structured sensibly, it may be possible to avoid a State aid review, particularly since the European Commission will have little appetite to challenge the UK Government's State aid analysis.

For further discussion of these and other State aid issues potentially impacting future UK nuclear projects, please see here.

What the 2004 Protocols and 2016 Order Mean for Industry

To prepare for the ratification of the 2004 Protocols, licensees (whether nuclear plant operators, disposal site operators, nuclear material shippers or others) may take particular note of the increased extent and duration of a licensee's potential liabilities.

In order to comply, licensees will need to (and, where relevant, will need to ensure that their contractors and subcontractors) update their insurance and financial security arrangements to cover these increased potential liabilities and obtain approval of these arrangements from the Secretary of State.

For other entities that are not the primary licensees, the 2004 Protocols and 2016 Order warrant attention, particularly for contractors and subcontractors doing business with licensees. For example, in order to avoid "liability gaps," contractors and subcontractors will need to assess whether the nuclear liability indemnities from which they benefit under their existing supply and services contracts require amendment in order to cover the greater liability to which licensees will become subject.

It would be equally prudent for commercial banks and lending institutions to review their lending policies and guidelines against the 2004 Protocols and the 2016 Order to reassess the risks to which they are potentially exposed through nuclear- related business in the UK.

Footnotes

27 The Protocol of February 12, 2004 to amend the Paris Convention and the Protocol of February 12, 2004 to amend the Brussels Supplementary Convention.

28 The Convention on Third Party Liability in the Field of Nuclear Energy of July 29, 1960, as amended by the Additional Protocol of January 28, 1964 and by the Protocol of November 16, 1982.

29 The Convention of January 31, 1963 Supplementary to the Paris Convention, as amended by the Additional Protocol of January 28, 1964 and by the Protocol of November 16, 1982.

30 To date, the Paris Convention has been ratified by Belgium, Denmark, Finland, France, Germany, Greece, Italy, the Netherlands, Norway, Portugal, Slovenia, Spain, Sweden, Switzerland, Turkey and the UK. All these countries except Greece, Portugal and Turkey have also ratified the Brussels Supplementary Convention. Notable exceptions include Austria, Luxemburg and Ireland.

31 Namely: (i) strict (i.e. no-fault) liability of the operator of the nuclear installation that causes the damage; (ii) exclusive liability of the operator (the "operator channeling principle"); (iii) limitation of the operator's liability in amount, time and types of damage; (iv) obligations on the operator to procure insurance or other financial security to cover its liabilities; (v) ensuring that victims in all contracting states have equal access to compensation; and (vi) exclusive jurisdiction of the competent courts. 32 The Joint Protocol relating to the Application of the Vienna Convention and Paris Convention of 1988.

33 The Vienna Convention on Civil Liability for Nuclear Damage of 1963, as amended by the Protocol of 1997.

34  http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32004D0294

35 The Convention on Supplementary Compensation for Nuclear Damage, adopted on September 12, 1997.

36 The Paris/Brussels Conventions are also implemented through a number of statutory instruments made under the NIA 1965, namely: (i) The Nuclear Installations (Prescribed Sites) Regulations 1983; (ii) The Nuclear Installations (Insurance Certificate) Regulations 1965; and (iii) The Nuclear Installations (Excepted Matter) Regulations 1978. In June 2016, the UK's Department of Energy and Climate Change ("DECC") issued a consultation document regarding certain changes required to those regulations by the 2004 Protocols. A copy of the consultation document is available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/531883/Nuclear_prescribed_sites_and_transport_consultation_paper.pdf.

37 Following recent ministerial and departmental changes, DECC has been merged into the Department for Business, Energy & Industrial Strategy.

38 http://www.legislation.gov.uk/uksi/2016/562/pdfs/uksiem_20160562_en.pdf.

39 Meaning a measure relating to a significant impairment of the environment for the purpose of: (a) reinstating or restoring what has been destroyed or damaged in the environment; or (b) establishing the equivalent of what has been destroyed or damaged in the environment (Section 11A, NIA 1965 (as amended by the 2016 Order)).

40 Meaning a measure taken in order to minimize or prevent: (a) injury to a person or damage to property constituting a breach of a duty imposed by sections 7, 7B, 8, 9 or 10 of the NIA 1965; or (b) significant impairment of the environment occasioning costs or losses in respect of which a claim under sections 11 A(1) or 11 A(G) or paragraph 1 of Schedule 1A of the NIA 1965 may be made (Section 11H(7), NIA 1965 (as amended by the 2016 Order)).

41 Meaning high-risk installations such as power plants and spent nuclear fuel processing facilities.

42 For example, Germany, which prescribes uncapped operator liability, albeit with a lower level of compulsory insurance per operator.

43 Indeed, according to DECC's Impact Assessment dated March 2012, updated December 2015 (http://www.legislation.gov.uk/ukia/2016/119/pdfs/ukia_20160119_en.pdf ), the anticipated increase in insurance to cover the increased liabilities under the 2016 Order is estimated to be 2-10 times current costs, with a non-weighted average of 7.5 times.

44 Report to DECC on the commercial insurability of the increased liabilities following implementation of the Paris and Brussels Conventions in the UK, October 2011 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/427940/INDECS__report_- _DECC_Nuclear_Liabilities_-_Report_Final_October_2011.pdf.

45 I.e., until the insurance market has responded to the 2004 Protocols and developed the necessary products.

46 See http://www.legislation.gov.uk/uksi/2016/562/pdfs/uksiem_20160562_en.pdf, paragraph 7.34.

47 Section 20A, NIA 1965 (as amended by the 2016 Order).

48 INDECS also recommended that this reinsurance be repriced annually and, in order to encourage prompt market entry, be priced at a premium.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.