India is working to commercialize its launch and satellite manufacturing sectors, but those efforts require reforms in areas like liability and insurance. (credit: ISRO)

Liability and insurance framework for manufacturers of space objects in India

by Biswanath Gupta, Lavanya Pathak, and Kunwar Surya Pratap
Monday, January 17, 2022

On June 24, 2020, India approved the participation of Non-Government-Private-Entities (“NGPEs”),[1] in end-to-end space activities. This shift from exclusive reliance on a state-owned agency, Indian Space Research Organization (“ISRO”), is likely to boost the economy and allow ISRO to focus on capacity building. Thus, ISRO and New Space India Limited (“NSIL”), a public undertaking, will now outsource work to NGPEs on a demand basis and an autonomous nodal agency will regulate private endeavors.[2]

NGPEs are expected to undertake the production of launch vehicles and spacecraft,[3] with the ambition to “make India the space manufacturing hub of the world.”[4] However, this requires cost efficiency and a conducive environment for NGPEs, which are mainly startups,[5] with low liquidity and risk-taking capacity. Unfortunately, while risk-mitigation and financial incentives are required, the present framework for manufacturers’ liability is highly discouraging.

ISRO has announced that a new bill is currently under Ministerial discussion,[6] and allied policies are being drafted but presently, there are no laws or policies to govern upstream space activities.[7] The Department of Space (“DOS”), clarified that manufacturers’ liability and insurance framework will be user-friendly and affordable.[8] However, it is unlikely that the framework will be adept to promote the manufacturing industry as the previous Indian Space Activities Bill of 2017[9] left manufacturers’ liability completely unaddressed and did not provide a comprehensive liability-sharing mechanism in as much as it merely required indemnification by the licensee[10] for the damages paid by India in pursuance of international liability (under Article VI and VII of the Outer Space Treaty[11] and Article II and III of Liability Convention.)[12]

Thus, to further the goal of promoting the space object manufacturing industry, India must ascertain a strict yet financially viable mechanism for the claims that may be brought against space object manufacturers and an insurance policy. While liability sharing for space-based activities is generally dealt in in three layers of damages (i.e. first-party damages, second-party damages, and third-party damages),[13] this article shall deal with the claims in two categories, contractual and non-contractual, based on the governing law and insurance requirements.

Contractual claims

The first category of claim includes those by the state or organization procuring the space objects. While these relations are strictly governed by the terms of contract, there are two policies[14] that ISRO, NSIL, and NGPEs may adopt regarding liability for claims arising after acceptance of products considering the relative freedom to set the terms of the contract under the Indian Contract Act of 1872.

The first policy of “exclusive governmental liability” requires that the Third-Party Liability Clauses provide for direct reimbursement for third-party claims,[15] reimbursement for insurance taken by manufacturers, or a combination thereof.[16] Alternatively, they may adopt the “exclusive manufacturer’s liability” approach, which requires complete indemnification against third-party claims thereby increasing deterrence.[17]

At present, the contracts with ISRO merely prescribe a “warranty” for replacement of faulty parts for a period of 12 months.[18] However, considering the expanded scope of production and the high quantum of claims it may bring, these clauses are absolutely inadequate. Thus, ISRO and NSIL, like NASA and ESA, should adopt the former policy as they will benefit by assuming risk instead of paying a higher fee, subsuming the cost of product liability insurance.[19]

The latter policy, on the contrary, will sabotage India’s aim because the manufacturers will have to purchase expensive insurance, thereby increasing the cost of the products and making it undesirable to foreign buyers. Moreover, a “limitation of total liability clause” can be used to limit the government’s risk and, like ESA,[20] ISRO and NSIL can add a clause that the manufacturer should be liable to reimburse when there is “gross negligence” on their part.

However, it must be noted that while ISRO and NSIL may adopt the former policy, private procurers will prefer the second approach, as most likely they cannot self-insure.[21] To address this issue, India, like France,[22] may also choose to mandate or allow cross-waiver clauses that precludes stakeholders (including launch operators, manufacturers, contractors, sub-contractors, customers, and insurers) from lodging claims against each other for losses incurred in that activity.[23] These clauses include waiver for the losses and indemnification.[24] The same is incentivizing while being strict if an exception is made for manufacturing defects.[25]

Non-contractual claims

This category of claims against manufacturers includes third parties like victims in cases where damage occurs in a non-contracting state or when a victim state bypasses the complicated claims procedure of the Liability Convention to directly sue the manufacturer.[26] It also includes any non-contractual claims that may be brought by stakeholders for holding the manufacturer liable for defects. Furthermore, since countries have different legal frameworks when it comes to third-party liabilities, some to the complete exclusion of manufacturers; these liable parties may seek compensation from the manufacturers, when responsible, for the damages already paid to third party, regardless of fault.[27]

Generally, all other countries leave the manufacturers out of the loop from their national space legislation,[28] and product liability law determines the liability of the manufacturers[29] as against the satellite or launch vehicle procurers on the basis of breach of warranty (implied or express),[30] and as against victims, under a theory of negligence or strict liability.[31] It generally requires proof of a defect in the product and a causal connection between that defect and damage suffered.[32] Here, liability will be determined in accordance with applicable product liability laws.[33]

In India, such claims may be redressed under tort law or consumer protection law. While the former extends to negligence, strict, and absolute liability,[34] the law, being uncodified in India, is developed by judgments[35] and, consequently, the liability standard of proof and onus of proof for space object manufacturers is unclear. Furthermore, the Consumer Protection Act of 2019 that addresses defective products and deficiency in service[36] is unviable as it prescribes for compensation, which can be very high for space objects.[37] The Act has no extra-territorial application, thus raising a gap for regulating cross-border disputes.[38] Furthermore, consumer courts are not equipped to determine fault of manufacturers considering the special nature of space objects.

Ergo, like France,[39] a provision for fault-based liability in the national space legislation will be beneficial. There should also be a limit on a manufacturer’s liability, except in case of willful misconduct or gross negligence,[40] or else the victims will find it more favorable to bring a claim against them, considering that the license procurer is generally protected with a limited liability provision.[41]

Furthermore, a specialized body having requisite technical skills is required for adjudication of these disputes. For instance, in South Korea, a Space Accident Inquiry Committee has the power to investigate the manufacturers for space accidents.[42] The government can also prescribe a list of experts on space technology who the parties can prefer to be panelists, should they choose to arbitrate.

Insurance and its alternatives

Space activities are dangerous and expensive, thereby making insurance essential for risk mitigation.[43] Countries often mandate liability insurance for space operators in differing amounts. For example, China, the Netherlands, Hong Kong, and South Korea mandate maximum coverage; Australia and the United States require the third-party liability insurance; and Austria, Belgium, Denmark, and United Kingdom decide the level of coverage on a case-by-case basis. However, while manufacturers are not required to take these mandatory insurances for protecting sovereign interests, they generally take up “damage insurance” for pre-launch and in-orbit stages[44] and “incentive insurance”[45] to protect their commercial interests.

Unfortunately, the Indian space insurance industry is undeveloped, so there are no data for ascertaining risk coverage and premium rates, and insurance is highly expensive. Indian insurance laws also require major changes to make it compatible with space insurance, including the appointment of space experts and ombudsmen.[46] Thus, insurance will not only increase product cost, making it less lucrative for foreign buyers, but also act a barrier to entry, limiting the competition in the sector.[47]

The government must remedy this by providing subsidized insurance and exploring alternatives to damage insurance like promoting cross-waivers,[48] re-launch guarantees,[49] and asset security. Furthermore, development of a “Space Liability Pool,”[50] akin to the nuclear pool,[51] acting as a common space fund for third-party liability will also mitigate the requirement of expensive insurances.

Conclusion

For promoting space-based entities, jurisdictions such as Argentina and Brazil make themselves completely responsible for the damages caused in furtherance of the launches done from the territory irrespective of whether it is facilitated by a public or a private entity, while others, including United Kingdom, theNetherlands, South Africa, Sweden, South Korea, prefer the system of indemnification while reserving the right to countersue. Since India is likely to follow the latter system, it is integral to establish a sound liability-sharing mechanism and to provide a lucrative legal framework for the adjudication of third-party claims. A hybrid model suitable to the peculiarities and needs of Indian industry is essential.

Considering the increasing reallocation of risk of loss towards manufacturers,[52] a dearth of protection will leave them “exposed to potential lawsuits”[53] that can radically weaken their ability to compete in this high-investment industry. Thus, for India to achieve the intended results from the recent reforms, every aspect of manufacturers’ liability must be regulated to maintain high accountability, while being incentivized to make the industry cost-efficient. Whether or not these solutions are put into place, manufacturers ideally have to take insurance. Thus, the government must ensure that these insurances are provided at subsidized rates and promote alternatives to insurance like waivers of recourse[54] and a common funding pool.[55]

Endnotes

1. Prime Minister's Office, 2020. Historic Reforms Initiated in The Space Sector: Private Sector Participation in Space Activities Approved.
2. Department of Space, Indian Space Research Organization, 2020. Briefing by Secretary, DOS/Chairman, ISRO.
3. Department of Space, Indian Space Research Organisation, 2020. Space Activities by NGPEs, Unlocking India’s Potential in Space Sector.
4. PWC Antrix Corporation, 2020. Preparing to scale participation in India’s commercial space sector, p. 11.
5. Department of Space, Indian Space Research Organisation, 2020. Opening Up Indian Space Sector for Private Sector –Reforms, Unlocking India’s Potential in Space Sector.
6. Chetan Kumar, Space activities bill to get cabinet nod soon: ISRO, TOI (August 20, 2020).
7. Sadeh, E., 2016. Dynamics of the Indian Space Program: Doctrine, Power, Strategy, Security, Policy, Law, Commercialization, and Technology.
8. Lavanya Pathak et al, In Webinar, ISRO Spells Out its Plan for IN-SPACe and Private Sector Participation, THE WIRE (Aug. 22, 2020).
9. Government of India, Department of Space, Draft Space Activities Bill, 2017. (Hereinafter, “Draft Space Activities Bill, 2017”).
10. Draft Space Activities Bill, 2017, §12.
11. Treaty on the Principles Governing the Activities of States in the Exploration and Use of Outer Space Including the Moon and Other Celestial Bodies 18 U.S.T. 2410, T.I.A.S. No. 6347, 610 U.N.TS. 205 (Jan 27 1967).
12. Convention on International Liability for Damage Caused by Space Objects (Mar. 29, 1972) 24 U.S.T. 2389, 961U.N.T.S. 187; G.A. Res. 2777 (XXVI) (Nov. 29, 1971) (Hereinafter, “Liability Convention”).
13. Loucks, W.H., 2019. Kerberized identity-based encryption and the interoperability of space-based systems (Doctoral dissertation, Massachusetts Institute of Technology).
14. Nicolas Mateesco Matte, Product Liability of the Manufacturer of Space Objects, 2 ANNALS AIR & SPACE L. 389 (1977) (Hereinafter, “Matte”).
15. General clauses and conditions for ESA Contracts, Doc. ESA/C/290, Rev. 2, Chapter VI, clause 30.1 (b) and 30.2.
16. NASA Procurement Regulations, (1975 Edition) Contract Clauses For Cost-Type Supply Contracts, Clause 7, 203-222.
17. Nicolas Mateesco Matte, Product Liability of the Manufacturer of Space Objects, 2 ANNALS AIR & SPACE L. 375 (1977).
18. Global Tender Enquiry Document for Supply, Installation, Commissioning Of The Radar For Space Objects Observation And Tracking, ISRO, Clause 1.1.26.
19. S. H. Lay - R. E. Poole, Exclusive Governmental Liability for Space Accidents, 53 A.B.A.J. (1967), 831.
20. General clauses and conditions for ESA Contracts, Doc. ESA/C/290, Rev. 2, Annex I, Clause 9.
21. Matte, supra Note 17, at 390.
22. Article 20, France Space Operations Act 2008, No. 518 of 2008 (France).
23. P. Meredith, Risk Allocation Provisions in Commercial Launch Contracts, 34 ILSL at 267 (1991).
24. Hermida, J., Risk Management in Arianespace space launch agreements, ANNALS OF AIR AND SPACE LAW, 25, p.143 (2000).
25. Giugi Carminati, French National Space Legislation: A Brief "Parcours" of a Long History, HOUS. J. INT'L L., 36, p.1 (2014)
26. Art. XI (2), Liability Convention, supra note 15.
27. For instance, in Australia, according to the Australia Space Activities Act, 1998, there is a clear mandate that the “responsible party”, (that does not include the manufacturers), is liable to pay the damages caused to the third parties, except when gross negligence or fault on the part of the third party is shown as a factor causing the damage. Korea, and Japan also channel liability to the launch operator on non-fault basis. Further, in United States, the tort law applies to space accidents, and provides for strict liability in case of surface damages by space objects, irrespective of whether utmost care has been taken or not, and Russian laws mandate strict liability for the damages done on the surface of the earth.
28. VON DER DUNK, F., HANDBOOK OF SPACE LAW, Edward Elgar Publishing, 2015.
29. Keeton, P., Product Liability and the Meaning of Defect, MARY'S LJ, 5, p.30 (1973).
30. Article 1, Hague Convention on Law Applicable to Product Liability, 1973.
31. O. Brown and P. Eremenko, Application of value-centric design to space architectures: the case of fractionated spacecraft, AIAA SPACE, p. 7869 (2008).
32. Roy Khaskel, A., Outer Space Environmental Pollution A Legal Study, Shodhganga (2018).
33. Haanappel, P.P.C., Product Liability in Space Law, 2 HOUS. J. INT'L L., 2, p.55 (1979).
34. Biswanath Gupta, Dr.Raju. KD, Product Liability in Outer Space Activities: Need for an International Legal Regime, 1 IJASL (2015).
35. Union Carbide v. Union of India, SCC 1991 (4) SC 584 (India).
36. Section 2 (c), Consumer Protection Act, 2019.
37. Biswanath Gupta, Dr.Raju. KD, Product Liability in Outer Space Activities: Need for an International Legal Regime, 1 IJASL (2015).
38. Section 1, Consumer Protection Act, 2019.
39. Article 13, France Space Operational Act 2008.
40. Article 14, France Space Operational Act 2008.
41. Nicolas Mateesco Matte, Product Liability of the Manufacturer of Space Objects, 2 ANNALS AIR & SPACE L. 375 (1977).
42. Article 16 (3) (3), Space Development Promotion Act 2005, (S. Korea).
43. Schöffski, O. and Wegener, A.G., Risk management and insurance solutions for space and satellite projects, The Geneva Papers on Risk and Insurance, 24(2), pp.203-215 (1999).
44. United States Department of Transportation, Federal Aviation Administration, Update of the Space and Launch Insurance Industry, Special Report, (1998).
45. Update of the Space and Launch Insurance Industry, Commercial Space Transportation, Quarterly Launch Report, Department of Transportation Washington Dc Office Of Commercial Space Transportation (1998).
46. Section 4, Insurance Regulatory and Development Authority Of India Act, 1999 (India).
47. A.J. Harrington, Legal and Regulatory Challenges to Leveraging Insurance for Commercial Space. J. SPACE L., 41, p.29 (2017).
48. Louis de Gouyon, Space insurance and Space Law, Space Legal Issues.
49. United States Department of Transportation, Federal Aviation Administration, Update of the Space and Launch Insurance Industry, Special Report, (2002).
50. Space Liability Pool a way out to cover space risks? TELANGANA TODAY, (2020).
51. Press Information Bureau, Government of India, Department of Atomic Energy, Nuclear Insurance Pool, (2019).
52. Bostwick, P.D., Liability of Aerospace Manufacturers: MacPherson v. Buick Sputters into the Space Age, J. SPACE L. 75 (1994).
53. Schaefer, M., The Need for Federal Pre-emption and International Negotiations Regarding Liability Caps and Waivers of Liability in the US Commercial Space Industry, BERKELEY J. INT'L L, 223 (2015).
54. Louis de Gouyon, Space insurance and Space Law (Oct. 13, 2020), SPACE LEGAL ISSUES.
55. United States Department of Transportation, Federal Aviation Administration, 2002. Commercial Space and Launch Insurance: Current Market and Future Outlook, Quarterly Launch Report.

Dr. Biswanath Gupta is an associate professor of law at the O.P. Jindal Global University, Sonipat. Lavanya Pathak is pursuing Masters of Corporate Law at the University of Cambridge. Kunwar Surya Pratap is a final year student of law at the National University of Study and Research in Law, India.

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