Rules of evidence and liability in contract litigation: The efficiency of the General Dynamics rule

• Author: Simon J. Wilkie,Vlad Radoias,Michael A. Williams
• DOI: http://doi.org/10.1111/jpet.12279
• Published date: 01 December 2017
• Date: 01 December 2017

Received: 7 August 2017 Accepted: 8 October 2017

DOI: 10.1111/jpet.12279

ARTICLE

Rules of evidence and liability in contract litigation:

The efficiency of the General Dynamics rule

Vlad Radoias1Simon J. Wilkie2Michael A. Williams3

1SamHouston State University

2Universityof Southern California and Microsoft

3CompetitionEconomics LLC

VladRadoias, Department of Economics and

InternationalBusiness, Sam Houston State Uni-

versity,Box 2118, Huntsville, TX 77341, USA

(radoias@shsu.edu).

SimonJ. Wilkie, Department of Economics, Uni-

versityof Southern California, 3620 South Ver-

montAvenue, KAP300, Los Angeles, CA 90089,

USA(swilkie@usc.edu).

MichaelA. Williams, Competition Economics LLC,

2000Powell Street, Suite 510, Emeryville, CA

94608,USA (mwilliams@c-econ.com).

Wethank Brijesh Pinto, three anonymous ref-

erees,and the editors for helpful comments. We

alsothank William Havens, David Park, and Lara

Yangfor research assistance.

We examine rules of evidence and liability in contract litigation.

When a contractor fails to perform, it has a legal defense that the

buyer withheld private information relevant to the performance of

the contract. Suppose the buyer claims that admitting evidence for

thedefense would compromise a valuable secret, for example, a state

secret, what should the legal rule be? We show that the evidentiary

rules introduced by the Supreme Court in General Dynamics v. U.S.

leadto a more efficient outcome than either a strict liability rule or an

evidentiary rule requiring the disclosure of the buyer's private infor-

mation.

1INTRODUCTION

In 1988, the U.S.Navy awarded through a procurement auction a $4.8 billion fixed-price contract to General Dynamics

Corporation and McDonnell Douglas Corporation for the design and production of an advanced, carrier-based stealth

aircraft called the A-12 Avenger.The government agreed to share certain classified information with the contractors

because the project relied on state-of-the-art stealth technology already being used in other government programs,

and such technology would have been prohibitively costly and time-consuming to reproduce (Schwinn, 2011). The

project soon encountered a series of delays, and after failing to meet various benchmarks, the contractors formally

requested a restructuring of the contract from a fixed-priceto a cost-reimbursement agreement, arguing that the cost

was much higher than originally anticipated. Failing to reach an agreement and dissatisfied with the lack of progress,

the Navy terminated the contract for default in 1991 and sought repaymentof $1.3 billion plus $2.5 billion in accumu-

lated interest.

The contractors countersued the United States claiming that their inability to complete the project was excusable

due to the government's failure to share its superior knowledge regarding stealth technology. As a general principle

in contract law, either the impossibility to perform or the withholding of keyprivate information by the principal is an

admissible legal defense (Posner, 2005; Posner & Rosenfield, 1977). In response, the government invoked the state-

secrets privilege to prevent the classified information from being used as evidence. Thus, the contractorswere caught

Journal of Public Economic Theory.2017;19:1154–1165. wileyonlinelibrary.com/journal/jpet c

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