Teaching Assistants: Victor Goldberg on The Golden Victory

This is the third in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the second chapter of RLCD.

In his chapter on The Golden Victory [2007] UKHL 12; [2007] 2 WLR 691, Professor Goldberg again illustrates why the best way calculate damages for breach of a long-term commercial contract is to determine the value of the contract as an asset at the time of the breach (or the time repudiation is accepted by the non-breaching party).  The Golden Victory involved a seven-year time charter of a shipping vessel, which began in 1998 and was to terminate in 2005.  The charterer repudiated in 2001.  An arbitrator determined that there had been breach in 2002.  The award was not calculated until late 2004, and in the interim the second Persian Gulf War broke out, which would have triggered a clause in the time charter that permitted termination in case of war or hostilities between named states, including the United States and Iraq (RLCD 36-37). 

The House of Lords, in a 3-2 decision, determined that damages must take into account the fact that the United States' invasion of Iraq in March, 2003 would have triggered a right of termination regardless of the breach, and therefore reasoned that granting damages beyond that point would result in a windfall to the owner.  This seems obviously daft.  If damages were determined in 2002, they would have compensated the owner for the full term of the time charter, but they also would have taken into account that the allocation of risk between the parties meant that the value of the time charter might be something less than the most advantageous recovery sought by the owner.  That allocation of risk would include the chance of war or hostilities but also the chance of numerous other contingencies that the parties anticipated might have occurred but did not occur.  The amount of damages should not turn on what the adjudicator knows at the time of the award; it should turn on what can can be known about the value of the contract at the time of the breach (RLCD 37-39).

Professor Goldberg discusses, Flame v. Glory Wealth, which seems to take the mistake of The Golden Victory one step further.  In Flame a charterer repudiated a contract based on its belief that the owner, due to its deteriorated financial position, would not be able to provide the vessels it required.  The owner's position had deteriorated because the collapse of Lehman Brothers had resulted in a 75% decline in the market for freight.  Here we have a dispute involving a fact in control for the non-breaching party (RLCD 39). 

The court determined that Glory Wealth suffered no loss because it indeed could not have supplied the vessels.  Professor Goldberg argues that, having taken a short position in vessel market, its position was not as dire as the court assumed, and granting it recovery that reflected the discounted market value of contract at the time of the repudiation would not have resulted in a windfall to Glory Wealth (RLCD, 40).  There would be no injustice if the repudiating party paid for its breach.  Its "decision to breach is evidence of its contemporaneous belief in the owner's ability to perform" RLCD 41).

In The Golden Victory, the court awarded lessened damages because of an event that it knew had taken place but that seemed unlikely at the time of the breach.  In Bunge SA v. Nidera BV, the court similarly bungled the damages award in a case in which both parties knew that a bargained for right of termination was likely to be triggered.  In that case, a decision by the Russian government to place an embargo on wheat exports triggered a right of cancellation.  Under the contract, a delivery of wheat was to be made at the end of August.  Buyer, citing the Russian legislation, cancelled the contract on August 9th, and this repudiation was accepted on August 11th (RLCD, 41).

Here again, the UK Supreme Court followed The Golden Victory and awarded nominal damages of $5.   It did so notwithstanding the parties' "damages clause" which specified that damages should be the contract-market differential at the time of the breach (RLCD, 42).  The court just could not accept that the clause could apply in these circumstances. 

The case thus illustrates two of Professor Goldberg's themes.  First, courts err in associating the value of the contract with the value of the goods at issue at the time of the award rather than considering the value of the contract as an asset at the time of the breach.  In so doing, they should not consider subsequent events.  Second, courts err in refusing to respect the allocation of risk to which sophisticated parties have agreed.  Courts apply the default damages rules that they have devised, even if those rules are daft and even when the parties have chosen to depart from those daft default rules.  "Properly understood, the compensatory principle would compensate the promisee for the change in value of the contract at the time of the breach."  

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset