Japan Nuclear Crisis to Trigger Huge Civil Damage Claims

By Rachel Armstrong | April 4, 2011

Japan’s nuclear crisis is likely to lead to one of the country’s largest and most complex ever set of claims for civil damages, handing a huge bill to the fiscally strained government and debt-laden plant operator, Tokyo Electric Power Co.

Lawyers say the size of the claims could be the biggest in Japanese legal history and the lack of precedent for dealing with these incidents means it is still not clear how the claims will be handled.

“Potentially, this could be one of the largest civil claims historically in Japan because of the number of people affected,” said George Gibson, a partner at law firm Norton Rose in Tokyo.

Japan’s government expects the earthquake and tsunami to cost up to $300 billion in material damage, but the ultimate cost will be far bigger as economic activity shrinks due to power shortages and compensation claims mount.

Most of the claims will be made under the country’s 1961 Act on Compensation for Nuclear Damage. Unlike the nuclear laws in the United States and most of the European Union, this places no cap on the total level of liability.

Analysts at Bank of America Merrill Lynch estimate that claims could top $130 billion if the crisis continues for two years. While this is their worst case scenario, the latest warnings that it could still take months to end radiation leaks plus the government’s probable desire to avoid publicly contesting a lot of claims means this may not be too far off the mark.

That cost is likely to be split between Tokyo Electric (TEPCO) and the Japanese government. While the law does allow for the operator to be exempted if an incident was caused by a grave natural disaster of an “exceptional” nature, lawyers say TEPCO will be under huge political pressure to absorb at least some of the cost.

“There is no precedent about the applicability of the natural disaster exemption and I expect TEPCO shall still probably be liable – maybe not for 100 percent of the damages but they will probably still face say 40 to 60 percent of the liability given their mismanagement in the weeks after the earthquake,” said Koji Ishikawa, a partner at DLA Piper in Tokyo.

Lawyers say the sheer range of claims is also likely to be huge.

A 1999 radiation leak at the country’s Tokaimura reactor is the only precedent for claims made under Japan’s nuclear liability law. Court cases arising from that accident indicated that disruption to business and a loss of real estate value can be claimed, if radiation damage is shown to be the direct cause.

A report on that incident in 2000 indicated that psychological damage, evacuation costs, bodily injury and medical tests can also be grounds for compensation.

At present more than 163,000 people from the Fukushima area are living in shelters making up one tranche of likely claimants. Thousands more living a little further out from the reactor may still though be able to claim for a loss in the value of their real estate.

Farmers have already been promised compensation for their damaged crops and all businesses based within the evacuation zone should also be able to claim.

Some reputational damage to businesses and produce from the region is also likely to be eligible, even though those sorts of claims are usually very difficult to prove under Japan’s civil law.

“TEPCO and the Japanese government will compensate a lot of the claims voluntarily and they even may compensate some damages that courts might rule weren’t caused by nuclear damage,” said So Saito, a partner at law firm Nishimura & Asahi.

Handling the huge scale of claims will also be a challenge. Experts anticipate the government will establish a fund to begin paying off the most urgent claims as soon as it is practically able to.

“It is possible that the government could seek to implement an expedited claims process, as the U.S. is doing with the Gulf of Mexico oil spill,” said Hideyuki Sakai, managing partner at Bingham, McCutchen, Murase, Sakai Mimura Aizawa in Tokyo.

However, despite the government’s best efforts it is still likely that the courts will end up dealing with the most contentious claims.

“It is hard to imagine a scenario, however, that does not involve a great deal of litigation,” added Sakai.

TEPCO’s debt situation — it currently owes around $115 billion in debt compared to its equity valuation of around $35 billion — means the government will probably handle most of the claims to begin with.

“TEPCO can’t afford the scale of the damages facing it at one point in time so they will probably owe the payments to the compensation fund over a number of years,” said Saito at Nishimura & Asahi.

And this situation would be muddled further if the government were forced to step in and impose some form of nationalization on the company.

“If the government nationalizes TEPCO then they take on TEPCO’s debts, and if TEPCO remains private it will probably need government support for its obligations to pay damages, so whichever way you look at it the government will be taking on responsibility to a certain degree” said Saito.

($1=84 Japanese Yen) (Editing by Lincoln Feast)

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