Further Fallout from the Fukushima Disasters: Long-term Contract Renegotiation in Japan

A symposium last year discussed “Fukushima Five Years On – Legal Fallout in Japan”, focusing on diverse lessons for the EU, as reported by Ruth Effinowicz in issue 42 of the Journal of Japanese Law. In the same issue, Zina Teoh also analyses “Food Safety in the Aftermath of Fukushima: Who can Consumers Trust?”.
A more recent question arises from an announcement from Tokyo Electric Power Company (TEPCO, operator of the nuclear power plant that suffered the devastating meltdown in after the 2011 tsunami) that it was seeking to terminate its contract with a Canadian long-term supplier of uranium. TEPCO argues that this is justified by the tighter regulatory regime subsequently introduced by the Japanese government, still limiting reactivation of most nuclear plants in Japan. Below is further background, and my quoted response to Bloomberg. I had also mentioned that their chances of legally terminating will depend on:
(i) pricing, termination, force majeure and hardship clauses likely included in the specific contract;
(ii) as interpreted based on the applicable background contract law (hence depending on any express governing law clause), which may in turn also allow recourse to broader background principles such as the doctrines of non-imputable impossibility or “changed circumstances” under Japanese contract law (compared to stricter doctrines of frustration under Anglo-Commonwealth law, as explained in my 2008 article);
(iii) in light also of the dispute resolution forum (with arbitration also likely to be expressly agreed, limiting scope for court review of the arbitrators’ award if a pro-arbitration seat has been chosen).
By way of further background, take a look also at the broader article (prompted by potential disputes over long-term LNG supply contracts due primarily to more fracking in the US ) written by CAPLUS associate Paul Davis, published in issue 38 (2014) of the Journal of Japanese Law.

Tepco Pulls ‘Heavy Weapons’ in Uranium Dispute With Cameco (2)
2017-02-09 07:30:12.743 GMT
By Tsuyoshi Inajima and Stephen Stapczynski
(Bloomberg) — Tokyo Electric Power Co. Holdings Inc.’s
attempt to terminate a uranium supply agreement worth almost $1
billion may be a gambit by Japan’s biggest utility to
renegotiate its contract.
The company known as Tepco said last week it’s ending the
deal with Cameco Corp. to buy uranium through 2028 because it
can’t operate its nuclear plants following the Fukushima
disaster. The Canadian supplier countered the utility wants out
because of the price, which analysts estimate to be triple
current levels. Seeking to scrap the deal may be a negotiating
tactic by Tepco, said Anatole Boute at the Chinese University of
Hong Kong.
“By trying to terminate the contract, which is a very far-
reaching claim, they’re using the heaviest weapons at their
disposal,” said Boute, an associate professor of law. “You try
to use the heavy weapons first and then see if you reach a
compromise at the negotiating table.”
Tepco will decide it’s next steps after it receives a
formal response from Cameco to its termination notice, spokesman
Itaru Kobayashi said Tuesday when asked if the company plans to
renegotiate the contract. Tepco said Feb. 2 it can end the deal
because it meets the contract’s requirements: It suffered a so-
called force majeure event for longer than 18 months as it can’t
operate nuclear plants because of the Fukushima disaster and
ensuing regulations.
Cameco prefers a “commercial solution,” according to
spokesman Gord Struthers, adding that the contract calls for a
period of negotiations. The company said last week that it sees
no basis for the termination and considers Tepco in default.
“Maybe Tepco is putting this out there as a bargaining chip
to try to get a better deal,” said Luke Nottage, a professor of
comparative and transnational business law at the University of
Sydney. “It might be sort of a bluff. Financially they are not
doing well.”

Tohoku Electric Power Co. and Chubu Electric Power Co. have
also said separately they’re in talks to delay shipments from
their own suppliers, which they didn’t identify.
Fukushima Bills
Japan, once Asia’s biggest producer of nuclear power, shut
all its reactors for safety checks in the years following the
earthquake and tsunami that led to a triple meltdown at Tepco’s
Fukushima Dai-Ichi plant. Public opposition has slowed the
return of the nation’s 42 operable reactors — just two units
are currently operating, while a third facility is temporarily
offline for maintenance.
Tepco, which hasn’t commercially operated a nuclear plant
in almost five years, is responsible for paying an estimated 16
trillion yen ($143 billion) in Fukushima-related cleanup costs,
the government said in December. The company’s growth prospects
have also been damped after Japan’s power market fully
liberalized in April, with Tepco losing about 1.4 million of its
customers as of December.
Japan, which imports almost all its energy needs, has
enough stockpiled uranium to power the nation’s reactors for
more than six years, according to Ux Consulting Co. Those ample
supplies and slowing purchases are compounding a global surplus
that last year drove prices to the lowest since 2004.
When Tepco signed the contract with Cameco in 2009, the
price for uranium bought through long-term deals was near $75 a
pound, according to David Talbot, a mining analyst with Dundee
Capital Partners. It was about $30 a pound last week, Ux data
The spot price for benchmark U308 uranium on the New York
Mercantile Exchange, which rose 1.3 percent to $26.50 a pound on
Wednesday, is down more than half since the month before
Tripled Costs
Tepco received 2.2 million pounds of uranium in the three
years through 2016, leaving about 9.3 million pounds to be
delivered through 2028, according to Cameco, which values the
remaining volume at about C$1.3 billion ($988 million).
That implies Tepco would be paying more than $100 a pound,
according to calculations by analysts at Dundee Capital and
Cantor Fitzgerald LP. The contract probably contains a so-called
escalation clause, which allows prices to rise over time,
according to Talbot at Dundee Capital.
Tepco doesn’t like the terms they committed to,
particularly the price, and they want to escape from the
agreement with Cameco, said President Tim Gitzel, according to a
transcript of a Feb. 1 conference call. The Canadian company
successfully defended against a force majeure claim from a
utility in 2014 in arbitration, he said, without identifying the
It’s not unusual for parties in long-term contracts to
negotiate in parallel to arbitration, which could allow for a
new deal to be struck, said Peter Harris, a senior associate at
Clifford Chance in Perth.
“We will be watching it closely to see what other
ramifications there may be in Japan and for the broader uranium
market,” Jonathan Hinze, Ux executive vice president, said in an
e-mail. “Contract terminations like this are very
uncharacteristic for the Japanese.”

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.