Sources
Help build the largest human-edited directory on the web.
Submit a site - Become an editor
Wikipedia. Licensed under the GNU Free Documentation License.
Are you an expert in this subject? Join the discussion and share your knowledge at Wikipedia.org.
Efficient breach
From Wikipedia, the free encyclopedia
Efficient breach refers to a breach of contract that the breaching party considers desirable even when the legal and economic ramifications of such a breach are considered.
The first statement of the theory of efficient breach appears to have been made in a law review article by Robert Birmingham, Breach of Contract, Damage Measures, and Economic Efficiency, 24 Rutgers L.Rev. 273, 284 (1970) (“Repudiation of obligations should be encouraged where the promisor is able to profit from his default after placing his promisee in as good a position as he would have occupied had performance been rendered”). The theory was named by Charles Goetz and Robert Scott, Liquidated Damages, Penalties, and the Just Compensation Principle: A Theory of Efficient Breach, 77 Colum.L.Rev. 554 (1977).
Efficient Breach Theory is associated with Richard Posner and the Law and Economics school of thought. It has been used to defend the traditional common law rule that a non-tortious breach of contract cannot be remedied by punitive damages and penal damages (unreasonably excessive liquidated damages that are seen as a punishment for breach rather than a remedy). Such penalties would discourage efficient breach (therefore discouraging efficient behavior) and possibly put companies at increased risk of bankruptcy, which would be very bad for society. Posner explains his views in his majority opinion in Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985).
The theory of efficient breach is that such an action can result in an outcome that benefits the breaching party and society as a whole. To illustrate, suppose I contract to sell you a ton of bricks for $1,000. We sign the contract, and then a third party comes along and offers me $1,500 for that same ton (maybe he needs them more urgently). One might say that morally, I am obligated to sell you the bricks because I am bound by my promise. See, for example, Charles Fried's "Contract as Promise." Posner would say no -- I could choose to sell the other person the bricks. If you already paid me, I would have to refund you the $1,000. If it costs you $1,100 to get replacement bricks, and $100 because of the delay in getting the replacement (e.g., your workers don't have bricks to use but you still have to pay their salaries), you would also be entitled to collect $200 from me. This is known as the expectation interest because it puts you in as good a position as if I had performed the contract (if I had delivered the bricks when I said I would). Society is better off on net by at least $300, because I am better off by $300, whomever I sold the bricks to is better off, and no one is worse off.
Efficient breach is not a legal defense to a suit for breach of contract. If there is no defense, the breaching party must pay damages to the non-breaching party, such as the expectation interest described above.
 |
This law-related article is a stub. You can help Wikipedia by expanding it. |