May 21, 2010

Don't Blame Tony Hayward: Why We Need Laws and Regulations That Specifically Hold Parties Liable for the Harm They Cause

BP CEO Tony Hayward has been careful to say his company will pay for the "clean-up" from the oil spill -- meaning, not the damages. But if past disasters are any guide, the clean-up will be just a small fraction of the damages from the spill (the deaths, the damage of the oil to natural resources and the humans that depend on them, and more). Many media have commented that Hawyard is a “jerk”, but the who-pays-for-the-damages problem isn't really about Hayward and BP. Rather, it points out a weakness with our health and safety laws not unique to this case – they do not always demand and require that industry pay for the harm it causes society.

Hayward, in fact, has been answering in the only way that he legally can while still representing the shareholders of the corporation. Why? The law (specifically the Oil Pollution Act, passed after Exxon-Valdez) requires BP to “clean up” the oil spill itself, but caps economic damages at $75 million.   What if BP decided it wanted to pay all of the damages, though? Corporate law, which defines the fiduciary responsibility of a Corporate Board as maximizing shareholder profit, would forbid the managers of BP from voluntarily offering to pay more than the law required (unless they could show that their public image would be so improved as to justify the cost). Doing so would risk shareholder derivative suits (which the company will likely face in any event).

I'd be happy to change the rules governing corporate responsibility, but a far easier solution would be to stop subsidizing the private interest at cost to the public. Because that is what liability caps and myriad other federal and state laws do. 

An application of the common law to BP’s actions would result in BP being responsible for all of the harms it causes to persons, property, and more through the application of the strict liability provisions that govern inherently risky activities and enterprise liability. But the federal government has instead intervened to limit how much those harmed can recover. Many thousands of fisher-persons may lose their jobs, thousands of animals can be killed, hundreds of miles of beaches ruined, and ecosystems upset,  but our federal laws see fit to let them suffer the loss rather than let the corporation responsible pay its own bills. This is corporate welfare at its worst, and it is symptomatic of a system of rules and regulations that tilt the playing field in favor of moneyed private interests and against the public.

If it means anything, progressive reform at least means shining a light on these egregious money transfers from the taxpayers to private interest - transfers that not only enrich some unfairly, but also create warped economic signals, which don’t encourage such legally sheltered entities from taking the proper precautions to avert harm.

Senators Menendez and Nelson proposed raising the cap to 10 billion dollars, while Senator Harry Reid proposes eliminating it altogether. Some other voices, notably Senator Murkowski from Alaska, have stated that we need the liability cap to protect the "small" oil companies. I would suggest that they could protect themselves by taking proper precaution in their business, and that individuals shouldn’t subsidize them for their benefit or for the revenue benefit it brings to states, such as Alaska.

Eliminating the liability cap on oil spills would be the truly conservative and truly progressive thing to do. Progressive because it protects individuals and the environment; conservative because it protects individuals and lets the market decide and send proper economic signals regarding risk. 

Our common law evolved over hundreds of years to govern interactions between persons.   The tort system generally is designed to require those that cause harm unreasonably to pay for losses, and it helps send market signals to properly allocate money to precaution. Laws like the Oil Pollution Act change that equation and should be scrapped. Don’t blame BP, blame Congress.

Victor Flatt, CPR Member Scholar, Taft Prof. Environmental Law, UNC School of Law. Bio.

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