Nuclear industry can create a culture that proactively manages disputes

Out-Law Analysis | 13 Nov 2020 | 3:06 pm | 4 min. read

There is a long history of disputes arising from the significant complexity in delivering civil nuclear projects in a commercial and regulatory environment. The concern is that this is now contributing to an increasingly negative impact on the perceived attractiveness of civil nuclear new build projects at a time when global policy makers and investors are recognising the need for price competitive low carbon energy.

The civil nuclear industry has a record of responding positively to major challenges in the past.  It should do so again to ensure that a systemic disputes culture is not allowed to develop, which will undermine the industry's ability to demonstrate the commercial viability of future projects.

The current challenge facing a resilient industry

The development of the civil nuclear industry, since the first commercial nuclear power was produced in 1953, has often been significantly affected by events of international significance. For example: the 1970s saw a focus on non-proliferation with the Non-proliferation Treaty in tune with the move towards nuclear disarmament and the end of the Cold War; the 1980s and 1990s saw an emphasis on safety in response to the events at Three Mile Island and then Chernobyl, leading to Conventions on Emergency Assistance and Early Notification; and the early 2000s saw the Convention on Nuclear Terrorism in response to 09/11 and other terrorist acts.

Nuclear power today is being scrutinised as to its economic viability. Only a small proportion of the 450 plants now in operation were delivered within their original programme and budget.

There is a sharper focus on the cost and time associated with the  complex regulatory regimes in place to ensure the safety of nuclear facilities and how that is to be balanced against making affordable low carbon electricity available.

Much of the complexity derives from enhanced safety and regulatory requirements put in place in response to the events of the past. However, the incremental increase in disputes we are seeing is also being fuelled by traditional characteristics of the industry. These include its culture that all problems can be solved by engineering – whatever the time and costs consequences might be; a funding model reliant on public funds, government guarantees and bailouts; and an industry that has lagged behind in embracing modern contracting and procurement practices and commercial and programme management skills.

Just as it had to convince a sceptical world about safety post Chernobyl, so it now has to persuade the world that it is commercially viable as part of a low carbon energy generation mix, and demonstrate that it can provide base load/load following nuclear energy at a price competitive with other comparable volumes of renewable or green energy. In this context there will be increased onus on contractors to be on time and on budget and they will have a much harder time in being able to rely upon contractual claims to cover time and cost overruns. 

Preventing an increasing disputes culture – actions for industry

Industry collaboration

At an international level the civil nuclear industry is probably the best exemplar of an industry that understands its interdependencies and has best self-regulated itself in 'soft law' areas such as safety, security, peer review, licensing norms and standards. It is an industry that is good at sharing its lessons learned and has effective established institutions such as the IAEA, NEA, WANO, WENRA, INLA in support.

If it can adopt and adapt to best engineering practices, there is no reason why it cannot embrace best commercial practices too without compromising its culture of safety and security.

Re-base relationships

There is typically a ‘premium’ to be paid for work in the nuclear industry which operators will often consider is worthwhile paying to preserve relationships and avoid disputes. This approach may need to be re-examined both by the operators and by members of their supply chain. Any premium, if one is to remain, should be based on performance and investment in the medium to long term. There are examples of how this might be achieved in practice, some of which are being adopted on current projects:

  • Operators and more significant members of their supply chain may welcome a greater level of ‘skin in the game’ through long term or project specific joint ventures, consortia and/or alliances in which pain and gain are suitably shared. This could be achieved by reference to performance based incentives and key performance indicators and if there is a greater transparency as to cost;
  • Agreement with framework and key suppliers, consultants and contractors as to standardisation of programme management and project control skills and tools;
  • A more balanced approach to the allocation of risk to reduce excessive risk premiums in supply chain pricing and the adoption of the kind of risk register and early warning arrangements now so familiar to those using the NEC suite of contracts; and
  • Change the culture of contract management for dispute handling by including fit for purpose, tailored dispute resolution provisions in contracts which allow for swift, cost effective and proportionate decision making. These provisions should become a recognised contractual mechanism and a normal aspect of the ongoing commercial dialogue during the course of the project. They should not be used as a threat and/or as a matter of last resort: this should help to produce a less adversarial culture and one which is more focussed upon preserving long term relationships.
Recognise the difference

There are many highly regulated industries that operate to internationally recognised norms and standards: aviation is a good example. However there are none, so far as we are aware, that have a third party liability regime which compares to the nuclear industry.

The liability of the operator for third party nuclear damage is absolute and if there is transboundary damage and the relevant states are parties to one of the international conventions on third party nuclear liability, then liability will be channelled to the operator and claims may only be brought in the jurisdiction of the relevant operator. The liability of such an operator will be assured usually through a nuclear insurance pool up to specified limits.

The issue is considerably more complex if operators are not within states that have ratified one of these conventions. It is crucial that this issue is properly understood and addressed so far as necessary in contracts for work and services in the nuclear industry.

Similarly, it is crucial to understand the nature and environment in which nuclear operations are undertaken so that disputes and claims can be put in their proper context. Nuclear operations are licensed and regulated by a nuclear regulatory body and often other agencies also have a role to play, for example in environmental permitting. Licence conditions and internationally adopted norms and standards provide best practice in the management of operations, especially in the context of safety, security and accountability. No actions undertaken on a nuclear licensed installation or in the transportation of fissile material can be properly assessed without this context; dispute resolution procedures need to recognise the context and be tailored accordingly.