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Refugee Clauses, the Allocation of Rescue Costs, and a (Really Old) Sticky Contracting Problem

posted by Mitu Gulati

HT: Joseph Blocher

I didn’t think it was possible for an article to hit all three of the issues mentioned in the title: Refugees, Allocation of the Costs of Refugee Care, and Sticky Contracting (I care because they are three topics near and dear to me –although I’ve never come close to combining them). But a recent article by Richard Kilpatrick of Northeastern Illinois University and the National University Singapore on the "Refugee Clause" does just this. The issue that Kilpatrick tackles is fascinating and highly relevant in the context of today’s refugee crisis, which is arguably at one of its worst points in history. The connection of Kilpatrick’s article (on the responsibilities of commercial ships) to the current crisis – particularly in terms of the horrors perpetrated by the regimes in Myanmar and Syria – is that many of the refugees flee in overcrowded and flimsy boats and then need to be rescued at sea.

It turns out that although there is a legal obligation on ship captains to rescue people who are in peril at sea (makes eminent sense to me – we want people rescued right away if they are struggling at sea), it is not clear who is to pay this cost. The question of allocation is particularly tricky when someone charters a ship and crew to transport goods from point A to point B.  If that ship has to take a detour along the way to rescue refugees they find struggling on the ocean, who is to bear the extra cost of the additional journey?  The charter-party or the ship owners? As an aside, it appears that the penalties on the ship captains for failing to rescue promptly can be quite substantial (there were “failure to rescue” issues with respect to the Titanic that received immense publicity).

Ordinarily, one would think that this allocation of the extra costs that result from a deviation from course to do a rescue would be clearly allocated up front; before the ship’s journey begins. As Kilpatrick explains, this is not the case. Even though there have literally been hundreds, if not thousands, of rescue operations needed over the past few years (and this is not exactly new – remember the Vietnamese boat crisis that went from 1975-1990, where many countries in the region desperately tried to push the refugees away), the standard contract form – that apparently lots of transactions use again and again – has not been changed. And this is a NY contract form that goes back to 1946. Wow. What is going on?

The bottom line of Kilpatrick’s article is to plead that the standard form be revised to deal with the question of how to allocate these costs of unexpected refugee rescues. And he points to examples from the past that could serve as a model; such as the adjustments that had to be made to the standard contracts when maritime piracy exploded explored some years ago, resulting in increases in costs and questions about allocation of those costs.

A couple of questions interest me here, beyond what Kilpatrick super article discusses.

First, why is the question of burden allocation all with respect to the charterers and the ship owners? What about the sovereign states – that is, the ones creating the refugee problem, who are violating international law by doing so? Why is there not an allocation of the legal claim in their direction? And then there are the sovereign states who are supposed to give shelter to the refugees (and who often don’t want to let the ships land). What about an allocation of some of the costs in their direction? (and then they can go after the refugee-creating state).

Second, what is going on in this industry such that folks – rich companies with fancy lawyers, I’d imagine – are still using a 1946 form that doesn’t fit modern circumstances well at all? Kilpatrick is concerned with getting the industry folks to fix the contract stickiness problem. I want to know more about why it is there in the first place. Indeed, I’d argue that one needs to understand the cause of the problem first, so as to be able to figure out the optimal solution. It would help, therefore, to have data: Who drafts these contracts? What law governs them? How often are they litigated? What kinds of external shocks does the drafting respond to?

I find this question of contract stickiness fascinating (in case you haven’t guessed).  And the longer the stickiness lasts, the more interesting it is. Chris French (of Penn State) and Michelle Boardman (of GMU) did fascinating presentations on contractual black holes in the insurance industry at a recent conference. (the papers are available here and here – Michelle has a very cool prior paper on boilerplate as well – “The Allure of Ambiguous Boilerplate”).  The standard forms that don’t get revised in the insurance world are often even older than 1946. And better still, those standard forms are sometimes so ossified and over-laden with legal jargon that sometimes no one has a clue as to what they were supposed to mean in the first place. 

Three other slipsters, Adam (with Bill Bratton), Mark (with John Coyle) and Anna, also had super papers at the contractual black holes conference (here). And John (with Omri Ben-Shahar) has one of the classic theoretical pieces on this topic. Indeed, one might say that this is a slipster dominated field.

I have no doubt that I’ll say more about contract stickiness soon since Anna, Jeromin Zettelmeyer and I have a new paper on it where we report on over a hundred interviews with market participants in the international bond market on why they keep using old, and seemingly sub-optimal, formulations of contract terms (“If Boilerplate Could Talk”). But for now, I want to see more ship contracts. A trip to ship contract archives, wherever they are, next!

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