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Falcon 9 pad explosion
Launch failures, like the Falcon 9 pad explosion in September, are a reminder of the importance of a properly negotiated launch contract. (credit: USLaunchReport.com)

Negotiating a launch contract for a mishap


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Launch failures always raise the question of who bears the brunt of such failures. In a complicated scenario, such as the September explosion of a Falcon 9 on the launch pad prior to a static-fire test, a launch contract with clear liability allocation (and limitation) can be a blessing.

An industry outsider may find it surprising that a multi-million-dollar contract refrains from establishing liability upon the parties for failure to accomplishing their respective obligations, and commits them only to making their best efforts.

A well-negotiated launch contract will provide a complex system of reciprocal waivers of liability, indemnification granted by the parties, commitments to obtain insurance, and the inclusion of the best-efforts principle.1 The best-efforts principle and reciprocal waiver of liability are the most prominent features of launch contracts. Under the best-efforts principle, the launch provider “limits its obligations to making its best efforts instead of warranting the actual placing of the satellite in orbit.”2 Under the reciprocal waiver of liability principle, both the launch provider and user agree to be responsible for any damage which they may sustain to their own property and employees during the launch operations. It is immaterial whether the damage is caused by the launch provider, the user, or third parties, and whether such damage arises through negligence or otherwise.3

An industry outsider may find it surprising that a multi-million-dollar contract refrains from establishing liability upon the parties for failure to accomplishing their respective obligations, and commits them only to making their best efforts. However, this industry practice of incorporating reciprocal waivers of liability and the best-efforts principle has evolved from the need to limit the universe of complex risks assumed by launch providers. First, it is not often that the cause of the failure lies at the end of the user.4 Second, a launch is a complex transaction involving not only the launch provider and the user, but also the payload manufacturer, the government, contractors, and sub-contractors, and it can often be difficult to pinpoint liability. Third, a launch failure may cause damage not only to the payload and launch vehicle but also to persons and property who may not be even involved in the space venture. Accordingly, the system of reciprocal waivers has been used by organizations like NASA and Arianespace for years and it has now become a standard clause in launch contracts.5

The launch contract should further specify the party that is under an obligation to purchase the insurance cover, which is usually the launch provider. The other party should ensure that the terms and conditions of the insurance policy and the insurer are subject to their approval. Considering the nature of the activity, liability towards third parties who are not connected with the launch can never be ruled out. Third party liability insurance, therefore, is customary.

Insurance coverage is generally sought for the launch phase—from the time when the rocket ignites until the satellite is safely placed in orbit—and the in-orbit phase, which covers risks once the satellite is successfully placed in orbit. Speaking of the Falcon 9 incident, this limited insurance cover should suffice, if, as is usual, the satellite is not mounted on the launch vehicle during pre-flight testing. SpaceX, however, has begun doing so in order to save time. In this case, the payload, the Amos-6 satellite, had separate pre-launch coverage.

One means by which the user can reduce its risk is by providing in the launch contract for a re-launch in case of a launch failure, instead of compensation in cash. At times, launch providers negotiate a cost for the re-launch, regardless of whether or not the launch failure is owing to their own default. The launch contract should clearly detail the timeline and procedure, along with the terms and conditions that will govern such a re-launch. Such provisions save the time and cost of negotiating a new launch contract altogether in case of a launch failure.

With increasing innovation in the launch industry and accompanying risk the negotiation of the liability provisions in a launch contract has never been more critical.

The Falcon 9 explosion and ensuing investigations also mean that the future commercial launches by SpaceX have been delayed. Generally, the user and launch provider agree on a launch schedule. A satellite launch may depend on factors such as timely delivery of the satellite, availability of launch vehicle, and favorable weather. To account for such factors, launch contracts provide for adjustments to launch schedules. The user may seek flexibility of the launch schedule, while the launch provider might be cautious so as to not affect its other launch commitments. A cut-off date is usually included beyond which no adjustment to launch schedule is possible. A launch contract should provide for a detailed procedure for making a change to the launch schedule. Given the fact that SpaceX had ten more launches on the books before the end of 2016 at the time of the accident, it would be interesting to see how the upcoming launches are affected in the light of the Falcon 9 blast, and to what extent SpaceX is able to invoke adjustments to the launch schedule negotiated with each of the other users. A clearly defined “force majeure” clause may also come to SpaceX’s rescue.

Such peculiarities of the space sector, wherein the legal, regulatory, and contractual bearings are complex and unique, make the negotiation of a launch contract a highly specialized task. It is important, therefore, to be properly advised when negotiating one. With increasing innovation in the launch industry and accompanying risk—Falcon 9 being a case in point—the negotiation of the liability provisions in a launch contract has never been more critical.

Endnotes

  1. Julian Hermida, Commercial Space Launch Services Contracts in France and the United States of America, Uniform Law Review, Vol. 9, p. 537, (2004).
  2. B. Schmidt Tedd, “Best Efforts Principle and Terms of Contract in Space Business,” 31 International Institute of Space Law (1988), 330.
  3. George V. d’Angelo, Aerospace Business Law, 65 (United States of America, Quorum Books, 1994).
  4. Julian Hermida, Risk Management in Arianespace Space Launch Agreements, (2000) XXV Ann. Air & Space Law, 143.
  5. Valerie Kayser, Legal Aspects of Private Launch Services in the United States, LL.M Thesis, McGill University (1991).

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