The Worst Contract Ever
I just finished Simon Schama’s Rough Crossings: Britain, Slaves, and the American Revolution. I leave an assessment of its ultimate merits to the historical experts on slavery in the late 18th-century Atlantic world, but I thoroughly enjoyed the book. By taking characters that usually sit at the margins of narratives about the American Revolution — slaves who escaped to British lines — and placing them at the center of the story, a story that ultimately sits in Britain looking west rather than American looking east, it made an old story new. Also, despite his efforts at even handedness, one can’t help but pick up on the fun that Schama is having poking at American hypocrisy and lauding “British Freedom” (the name that one of the escaped American slaves actually took). To be sure, Schama is at pains to point out the frequent expediency and hypocrisy of British policy toward African-Americans. This is not a bit of Rule Britannia flag waving. Still, reading about Glanville Sharpe and other English abolitionists, or the final English general in America — Guy Carleton — a blustering non-entity who nevertheless refused to abandon escaped slaves to their masters, despite pressure from Washington and more-or-less explicit language in the Peace of Paris gave my inner Anglo-phile a thrill. As a contract geek, however, the most fascinating part of the book was the story of The Zong, an episode that surely must stand as the most hideous example of perverse incentives in the history of contract drafting.
The Zong was a slave ship operating between West Africa and Jamaica. During the notorious Middle Passage across the Atlantic and Caribbean, disease broke out among the crew and human cargo of The Zong. In addition, the captain — apparently a less than stellar navigator — managed to miss Jamaica. The Zong like most 18th-century ships was covered by an insurance policy. To avoid liability for appalling rates of mortality among captured slaves policies on slavers routinely excluded recovery for what was euphemistically called “natural wastage,” in other words death from disease, abuse, and overcrowding below decks. On the other hand, damage to “cargo” caused in the course of efforts to save the ship from the perils of the sea was covered by the policy. Sailing across the Caribbean with a dwindling stock of water and a dying cargo of human misery, the master of The Zong seems to have hit upon a way of recouping his losses on the disastrous voyage. He would kill his “cargo” by throwing slaves over the side. His excuse was that this was necessary in order to preserve water on the ship, a claim belied by the fact that the murdering continued even after rain squalls had replenished the ship’s water. According to Schama, the captain’s real motivation seems to have been to maximize his recovery from the insurers, a course of action that promised more money than an attempt to nurse his cargo to health and then sell it upon landing in Jamaica. Hence, upon returning to England he sued the insurers, baldly claiming that the mass murder on The Zong was necessary to preserve the ship from the “perils of the sea,” a position that the trial court initially seemed inclined to accept. Indeed, the only real controversy — at least before the English abolitionists turned the case into a cause celebre — was whether the murders were truly necessary to save the ship, or whether the captain was simply killing off diseased slaves early as a way of defrauding the insurers. The best evidence for the captain, of course, was that some of the people thrown — literally — to the sharks, were in fact healthy.
All and all, it is perhaps the worst contract that I have ever read about. By covering the cost of dead slaves in some circumstances, the insurance created an incentive for slavers to kill off their “cargo” when doing so would result in an insurance recovery that exceeded their returns from sale of the slaves. Of course, by excluding “natural wastage” the insurers limited the incentive for slavers to mistreat slaves as a way of increasing insurance recovery, at least in “ordinary” circumstances (although to be sure, massive incentives to mistreat slaves remained), but The Zong case shows that even such an exclusion was hardly proof against moral hazard the most grisly kind.