An economic defence of lords decision in Golden Victory: damages for repudiation

1. An economic defence of lords decision in Golden Victory: damages for repudiation Dr. Qi Zhou (George) University of Sheffield

2. The outline • A review of “Golden Victory” • A review of current criticism of the judgement of Golden Victory • Uncertainty • The incentive to delay the settlement • economic justifications: • Encouraging the parties to solve the uncertainty ex ante • Encouraging the party to disclose the intention to repudiate

3. 1 formation 2 repudiation 4 End of contract 3 war

4. The view of the majority • Lord Scott of Foscote, Lord Carswell, and Lord Brown of Eaton-Under-Heywood for granting correct compensation • Lord Scott of Foscote(para38 [2007] UK HL 12): • “the arguments of the owners offend the compensatory principle. They are seeking compensation exceeding the value of the contractual benefit of which they were deprived.”

5. Future events • Lord Brown said: “Account should properly be taken of a contingency which would reduce the value of the contract lost even were the chance of it happening less than 50 per cent (provided always that it was of some real and not just minimal significance)”(para 38)

6. The view of the minority • Lord Bingham of Cornhill and Lord Walker of Gesting thorpe for protecting certainty • The Market Price Rule and the Mihalis Angelos [1971] 1QB 164. • Lord Bingham: • (Para 1) “... the existing decision undermines the quality of certainty which is a traditional strength and the major selling point of English commercial law... (para 21) damages should be assessed of the date of actual assessment...”

7. Academic criticism • Uncertainty • Treitel (2007) LQR 9. • Mustill (2008) LQR 569. • Coote (2007) LQR 503. • Reynolds (2008) 38 Hong Kong Law Journal 333. • The incentive to delay paying damages • Reynolds (2008) 38 Hong Kong Law Journal 333. • Coote (2007) LQR 503. • Morgan (2008) CLJ 263.

8. G.H. Treitel (2007) LQR 9 • “Golden Victory seems to impair such certainty in two ways. First it does so with regard to the outcome of the case itself: the shipowners , as it turned out, could not know where they stood when their right to damages accrued... Secondly the case seems to impair, in the sense of failing to promote, certainty with regard to future similar cases”(p17)

9. A response to the argument of uncertainty(1) • Why the Market Price Rule certain? • The date of measuring damages • Is the Market Price Rule certain? • Certainty at the level of rule formulation not at the level of application.(Carter and Peden (2008) 24 JCL 145) • The date of measuring damages( Johnson v Agnew) • No market available

10. A response to the argument of uncertainty(2) • Contract is a device to allocate risks • the contract price • The terms • The termination clause in the Golden Victory indicates that the shipowner should bear the risk of the war. • The minority view makes such risk allocation difficult.

11. A response to the argument of uncertainty(3) • Is uncertainty acceptable? • Uncertainty always exists. • Who is in the better position to deal with uncertainty, the Court or the contract parties? • Penalty default • Ayres I. and Gertner R.(1989) 99 Yale Law Journal 87. • Encouraging the parties to solve uncertainty • Bargaining power and penalty default

12. A response to the argument of the delay paying damages (1) • Why Delay? • Expecting the contingency materialises? • Lord Brown said: “Account should properly be taken of a contingency which would reduce the value of the contract lost even were the chance of it happening less than 50 per cent”(para 38)

13. A response to the argument of the delay paying damages (2) • The minority argument undermining the party to disclose the intention to breach in the case of anticipatory breach. • The value of disclosure in anticipatory breach cases • The problems with the law of repudiation

14. 1 formation 2 Repudiate Or silence 4 End of contract 3 war

15. The seller’s payoff at stage 2 under the Market Price rule Repudiation accepted waiting Contract price=£100 The market price=£200 There is a 10% chance that he will not be liable because of the war. The seller’s compensation (£200-£100)*90%=£90 • Contract price=£100 • Market price =£200 • The seller ‘s compensation • £200-£100=£100

16. wait S=-£90, B=£90 wait S S=-£90, B=£90 repudiation B S=-£100, B=£100 A=-£90, B=£90 acceptance

17. The seller’s payoff at stage 2 under the Golden Victory Repudiation accepted waiting Contract price=£100 The market price=£200 There is a 10% chance that he will not be liable because of the war. The seller’s compensation (£200-£100)*90%=£90 • Contract price=£100 • Market price =£200 • There is 10% chance of war which should be considered • The seller ‘s compensation • (£200-£100)*90%=£90

18. Remarks • Unfair criticism • Opportunity cost argument • Economic justifications for the Golden Victory • Encouraging the parties to solve uncertainty ex ante • Encouraging the party to disclose the intention to repudiate in anticipatory breach cases.