Contracting within the nuclear sector

30 January 2018

Contracting within the nuclear sector carries challenges due to the highly regulated nature of nuclear power, the technically complex nature of the goods and services supplied, and the high capital cost of most nuclear projects - whether new build or maintenance, write Elina Teplinsky and Vincent Zabielski. Furthermore, nuclear contracting practices must keep up with market trends, adapt to technical developments, and reflect frequent changes and updates to nuclear-related legislation and regulations.

For vendors, the key to addressing some of these challenges is the establishment of an internal review process to understand, evaluate and seek to diminish risks. Here we provide recommendations as to the structure of such internal review processes for two key areas of risk in nuclear controls: liability for nuclear damage and nuclear trade law compliance.

Liability for Nuclear Damage

Concerns over potential liability for nuclear damage often serve as obstacles to market entry and the successful conclusion of deals in the nuclear industry. In most cases, nuclear liability risks should not be deal-breakers as long as they can be appropriately quantified and appropriate mitigation measures applied. The internal nuclear liability risk assessment and mitigation processes should include:

Evaluation of Technical Risks - Supply of parts and services closer to a nuclear safety function carry more risk than those without such a nuclear safety nexus. A vendor should thoroughly assess the potential safety impact of the particular product or service to be supplied.

Evaluation of Legal Risks - The legal risk evaluation should include at least the following assessments:

Geographical Coverage - Nuclear damage can be transboundary and there is no single international nuclear liability regime that covers all jurisdictions. The three international nuclear liability regimes – the Vienna Convention, Paris Convention and Convention of Supplemental Compensation for Nuclear Damage (CSC) - provide a patchwork of protections by channelling nuclear liability, yet each contains large geographical gaps in coverage. This means that, even though a customer country is party to a nuclear liability convention, a supplier could be sued for transboundary damage in a country that is not a member of that convention. Further, a number of major nuclear markets like China and the Republic of Korea are not party to any nuclear liability regime, maintaining only domestic legislation. Finally, protections can vary from jurisdiction to jurisdiction even among parties to the same nuclear liability treaty.

Significance of the Gaps - The risks arising out of the gaps in geographic coverage vary greatly. These risks are significantly related to plaintiffs’ economic incentives. Lack of coverage in a country where the vendor has significant access presents a greater risk than a gap in a country where the vendor has none. Further, plaintiffs may have little incentive to sue in countries where no nuclear damage compensation funds have been established. Finally, some jurisdictions (such as the United States) are more likely to allow suit with tenuous connections to the damage than others. For example, the Ninth Circuit allowed U.S. service members’ $1 billion lawsuit for injuries related to the Fukushima disaster to proceed against Tokyo Electric Power Company.

Heads of Damage
- All nuclear liability regimes exclude liability for onsite property damage. Such damage is usually covered by the operator through insurance. Other heads of damage that may or may not be covered by each particular nuclear liability regime, such as environmental damage and relocation expenses. The latter was significant percentage of damages paid out post-Fukushima. Vendors should understand the types of damages excluded and the risks arising out of these exclusions.

Mitigation Measures - Once the risks are properly understood and weighed, vendors must see if contractual protections such as indemnities and waivers can be obtained to cover these risks. Some protections – those for which customers cover insurance – are easier to obtain than those for uninsured risks. Where adequate contractual protections cannot be obtained, certain amounts of supplier insurance may be available.

Risks v. Opportunity - As a final evaluation step, any residual risk should be weighed against the value of the potential opportunity.

Nuclear Trade Law Compliance

Laws and regulations affecting the import and export of nuclear equipment, materials, software and technologies are complex and vary significantly across jurisdictions. Failure to recognize restrictions and obtain required licenses can give risk to both contractual and regulatory liability. Every vendor and service provider doing business in the nuclear industry should maintain a nuclear export control program. As part of that program, an evaluation of contracting opportunities must include:

Assessment of Applicable Requirements

Multi-Country Controls - Today's nuclear supply chains are increasingly global. Fulfilling a particular scope of work may require using resources located in different jurisdictions, as well as working with customer affiliates in multiple countries. The Nuclear Suppliers’ Group Guidelines for transfers of nuclear materials and nuclear-related dual-use equipment, materials, software, and related technology provide a harmonised framework for nuclear exports. However, interpretations differ, as do end-user restrictions and the types of licenses available. It is important to assess all potentially applicable controls across jurisdictions.

Understand Technology Nuances - Under certain nuclear export control regimes, sharing know-how is considered 'technology' subject to regulation. Technology also does not need to be written to constitute an export; conducting seminars and providing advice is often export-controlled.

Understand Access - In some jurisdictions, simply providing electronic access to export-export controlled technology to foreign nationals is considered an export. Nuclear projects often involve the establishment of databases through which informed is shared across teams. Such sharing practices may open the vendor up to inadvertent violations of export control laws if foreign nationals (even in positions such as IT) are granted access to export-controlled information. Further, restrictions often apply to traveling with technology, such as bringing documents on a laptop.

Understand Contractual Requirements - Some customer terms and conditions may require the vendor to mark all documents provided. Such contractual requirements must be understood, negotiated if needed and implemented into a technology control plan.

Evaluation Against Project Timeline - Some export licenses may take longer to secure than the project timeline allows. However, projects can be often broken up into phases and structured so as to limit technology exports during initial scopes of work. Sometimes, it is possible to re-classify technologies and products with regulators to eliminate the need to secure certain licenses. Innovative export licensing can be the difference between a vendor’s ability to proceed with a project.

Developing an in-house risk evaluation procedure that considers the factors discussed above in an objective and methodical manner will prevent the need to re-invent the wheel for each new project. Due to the complexity of nuclear liability frameworks and nuclear trade control regulations, obtaining the advice of subject area experts as part of these internal processes is recommended.

Elina Teplinsky and Vincent Zabielski 

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Elina Teplinsky and Vincent Zabielski are, respectively, a partner and a senior lawyer in Pillsbury Winthrop Shaw Pittman’s nuclear energy practice. Teplinsky is based in Washington DC and Istanbul, while Zabielski is based in London.