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(More on) Sticky Shipping Contracts

posted by Mitu Gulati

A few days ago, I put up a post about a very interesting recent article by Richard Kilpatrick on highly sticky (and inefficiently so) shipping contracts. The focus of Richard's article was on the failure of these standard-form ship contracts to pre-specify the allocation of financial responsibility among the various parties (ship owner, chartering party, etc.) when refugees need to be picked up and the ship's pre-planned journey gets diverted. Refugees needing to be rescued at sea has, as we know, become a huge international issue over the last couple of years.  In that post, I wondered aloud about what the explanation for the stickiness in the ship contracts might be. Theory, after all, would suggest that in a market with highly sophisticated repeat players, inefficient contract clauses would get reformed quickly -- yet they do not. Richard, whom I had never corresponded with before this, was kind enough to send me his thoughts on the question. With his permission, since his thoughts on this are fascinating -- especially the bit at the bottom about how these same parties are simultaneously highly innovative (with ship technology) and highly conservative (with contracts) -- I'm reproducing them below.

From Richard:

I’ve thought about these same questions over the past months and certainly agree that there is a more work to be done in understanding and exposing why there is continued reliance on these antiquated contract forms. In the charterparty context, this is especially surprising given that new iterations of similar forms have been promulgated by the same organization (BIMCO) that drafted the ‘46 form. One answer that invariably comes up is that the shipping industry is deeply conservative and resistant to change. At a recent Singapore Shipping Law Forum, a bunch of us legal and industry people discussed this phenomenon in the context of international conventions on carriage of goods. The Hague Rules governing bills of lading were drafted in the 1920’s (and revised very minimally in the 1960’s via the Visby amendments). These rules desperately need updating because containerization and multimodalism has completely changed the shipping landscape. The subsequent "Hamburg Rules" largely failed. And while the recently drafted "Rotterdam Rules" attempt to rectify some of these problems, they are already viewed by some observers as unlikely to catch-on. Only 4 countries have ratified them so far (including Cameroon in Oct 2017): http://www.uncitral.org/uncitral/en/uncitral_texts/transport_goods/rotterdam_status.html .

At least in part, this appears to be because the industry folks, including their fancy shipping lawyers, don't like change. Note also that the shipping industry is constantly evolving in other ways, particularly in its reliance on technology. Larger and more sophisticated vessels are constantly entering the market, and ports (as well as the vessels themselves) are increasingly being operated by computers rather than traditional labor. So I think it is fair to say there is a very traditional view towards regulation and liability allocation, but a relatively innovative approach towards operations. This creates an increasingly widening gap between the legal framework and the realities of business practice.

Comments

Another possible explanation for why outdated contract clauses would be sticky is that informal norms have developed around dealing with these situations, and that these unwritten norms are fairly efficient. From a theoretic point of view it's not obvious that written contracts will always dominate unwritten norms, when situations can be complicated.

@Carolyn

The point about informal norms dominating litigation risks (the "shadow of the law") is a very interesting one. My impression is that standard contract theory attaches too much importance to the notion that contracts are drafted in the expectation of litigation contingencies. If, however, the world was one in which settlements were entered as a function of informal industry norms (and litigation was the province of norm violators), one could imagine a situation where asking for contract reform would be seen as a signal that one was a potential norm violator.

I don't remember the exact conception of negative signal that is in the Pottow & Ben-Shahar or Kathy Spier papers on signaling and stickiness, but I think they were envisioning a similar dynamic. I wonder how one might unpack this empirically.

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