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Contracts/Efficient breach: Difference between revisions
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Efficient Breach Theory is associated with [[Richard Posner]] and the [[Law and Economics]] school of thought. Even though Posner himself has stated that "we might as well throw the book" at those who opportnuistically and voluntarily breach contracts, many judges have actually used the concept of an efficient breach to justify not awarding [[punitive damages]] to injured party. (This is because of the traditional rule that a [[tort|non-tortious]] breach of contract cannot be [[remedy (law)|remedied]] by punitive damages.) | Efficient Breach Theory is associated with [[Richard Posner]] and the [[Law and Economics]] school of thought. Even though Posner himself has stated that "we might as well throw the book" at those who opportnuistically and voluntarily breach contracts, many judges have actually used the concept of an efficient breach to justify not awarding [[punitive damages]] to injured party. (This is because of the traditional rule that a [[tort|non-tortious]] breach of contract cannot be [[remedy (law)|remedied]] by punitive damages.) | ||
The theory of efficient breach is that such an action can result in an outcome that benefits the breaching party and often times the non-breaching party and society as a whole. | The theory of efficient breach is that such an action can result in an outcome that benefits the breaching party and often times the non-breaching party and society as a whole. To illustrate, suppose I am supposed to sell you a ton of bricks for $1000. We sign a contract, and then a third party comes along and offers me $1500 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 to my promise. See, for example, Charles Fried's "Contract as Promise." Posner would say no -- I should sell the other person the bricks and give you the $1000. You now have $1000 -- the dollar value of the gain you would have realized otherwise -- and I have $500 more than I would otherwise. Society is better off on net by $500. Of course, there are criticisms of this position, not the least of which is that moral obligations trump efficiency gains. | ||
Efficient breach is not a [[defense (law)|legal defense]] to a [[lawsuit|suit]] for breach of contract. | Efficient breach is not a [[defense (law)|legal defense]] to a [[lawsuit|suit]] for breach of contract. | ||
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Revision as of 16:44, August 10, 2006
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. Even though Posner himself has stated that "we might as well throw the book" at those who opportnuistically and voluntarily breach contracts, many judges have actually used the concept of an efficient breach to justify not awarding punitive damages to injured party. (This is because of the traditional rule that a non-tortious breach of contract cannot be remedied by punitive damages.)
The theory of efficient breach is that such an action can result in an outcome that benefits the breaching party and often times the non-breaching party and society as a whole. To illustrate, suppose I am supposed to sell you a ton of bricks for $1000. We sign a contract, and then a third party comes along and offers me $1500 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 to my promise. See, for example, Charles Fried's "Contract as Promise." Posner would say no -- I should sell the other person the bricks and give you the $1000. You now have $1000 -- the dollar value of the gain you would have realized otherwise -- and I have $500 more than I would otherwise. Society is better off on net by $500. Of course, there are criticisms of this position, not the least of which is that moral obligations trump efficiency gains.
Efficient breach is not a legal defense to a suit for breach of contract.
