Since the nuclear plant disaster in Fukushima in Japan, the stock of the company that designed the reactors, General Electric, has fluctuated less than $1 a share. Meanwhile, the operator of the facility, Tokyo Electric Power Co., has seen its share price plunge more than 70%. The explanation: Japanese law reportedly limits liability to the operator, not the designer, of a nuclear power plant.
A year ago, we heard similar arguments about the limited exposure of BP in the wake of the oil spill in the Gulf of Mexico. Reports suggested that BP's liability for damages might be capped at $75 million because of the 1990 Oil Pollution Act, which imposes limited liability in the event of an environmental disaster at an offshore facility — "removal costs plus $75,000,000." In court, Transocean, the company that owned and operated the doomed oil rig, argued that another statute, the Limitation of Liability Act, limited its liability to the value of the sunken vessel — the rig — which it said was worth only $26.7 million. The Justice Department called Transocean's effort to limit its liability "simply unconscionable."
The pronouncements of BP's limited liability proved premature. After discussions with the Obama administration, BP voluntarily agreed to set up a $20-billion fund to help those whose livelihoods were destroyed by the disaster.
GE's initial confidence that it may bear little liability for any design defect because of Japanese law may be premature too. The New York Times recently reported that experts have long criticized GE's design, the Mark I, because it offered a relatively weak containment vessel. The containment vessel functions as the "last line of defense," preventing radiation leaks in case of a cooling system failure in the nuclear reactor. Three GE scientists resigned 35 years ago in protest of the design of the Mark I containment system.
I say this not on the basis of any specialized knowledge of this particular situation, or even on knowledge of nuclear industry contracts or regulation, but only on the basis of legal principles of international business and liability.
First, it is not entirely clear what law applies. Although the accident is occurring on Japanese soil, the contracts for design and construction of the plants could have specified another law to govern disputes between the parties. GE might, for example, have preferred the familiarity of U.S. law. These were, after all, contracts negotiated in the 1960s, when Japan was hardly thought to be a world economic power, and thus may have lacked the leverage to insist on local law.
Second, as in the case of BP, GE could eventually agree to a voluntary arrangement. For its part, BP set up a significant fund to handle losses, but did so under enormous pressure from Washington, the American public and the media. GE's involvement in the nuclear power plant was about four decades ago when it was built, quite different from BP's day-to-day control. But if GE was responsible for a weak design, it would seem to share responsibility for the current disaster.
Third, we do not know how Japanese courts will interpret any local limits on liability. Will those limits apply even if gross negligence or willful misconduct can somehow be shown? What if GE failed to disclose design defects? The principle of operator liability would seem attractive to anyone facing a products liability claim — Toyota, for example, comes to mind. Will courts uphold a principle of exclusive operator liability even when reports suggest that there were GE and U.S. government scientists who questioned the safety of GE's Mark I design for containment?
Modern disasters are, in an important sense, man-made. Because of this fact, the need to assign legal liability will arise. It is too early yet to know who bears the blame, and it is accordingly too early to be assured that GE is well-insulated from liability. The regulators, the operator and perhaps others may well have failed the public. It is the role of the legal process to ensure that the economic burden of the disaster falls on the party or parties responsible for it.
By Anupam Chander, a professor of law at UC Davis.