Duhaime's Law Dictionary


Efficient Breach Definition:

The intentional breach of a contract by the payment of the breaching party of damages because it has become more cost-effective than performance.

Related Terms: Anticipatory Breach, Inducing Breach of Contract

An intentional breach of contract designed to minimize damages because, in the circumstances, it is more efficient for the party to breach a contract rather than perform.

In Economic Analysis of Law, Richard Posner described the efficient breach as follows:

"In some cases a party would be tempted to breach his contract simply because his profit from breach would exceed his expected profit from completion of the contract. If his profit would also exceed the expected profit to the other party from completion of the contract, and if damages are limited to the loss of expected profit, there will be an incentive to commit a breach. There should be. The opportunity cost of completion to the breaching party is the profit that he would make from a breach, and if it is greater than his profit from the completion, then completion will involve a loss to him."

efficient breachIn his 1999 article, Craig Warkol proposes this example of circumstances in which an efficient breach might occur:

"To illustrate the theory of efficient breach, consider the following hypothetical: Suppose Seller agrees to sell to Buyer 100 widgets for three dollars each. Before Seller performs the contract, a third party offers Seller eight dollars a piece for the same 100 widgets. If Seller chooses to sell the widgets to the third party she will be unable to perform her contract with Buyer. Nevertheless, proponents of efficient breach theory encourage Seller to breach the contract with Buyer and to sell the widgets to the third party. While the theory advocates immoral behavior, by encouraging parties to break bargained-for promises, an efficient breach promotes aggregate economic efficiency."

Another example is provided by NIna Khouri:

"A manufacturer of bolts (A) contracts with B to supply 1000 bolts for a total price of $500. B is expecting to on-sell the bolts in the near future for $700, making a profit of $200. A then gets an offer from C to purchase 1000 bolts for $2000. A cannot meet C's demand without breaching his contract with B, for he only has 1000 bolts to sell at the present time. If damages are limited to compensating B for his loss of expected profit ($200) then by breaching the contract with B, A stands to make a profit of $1300 (the $1500 extra which C is willing to pay minus the $200 in damages payable to B). The theory of efficient breach states that in this situation A should act efficiently and maximise societal wealth by breaching the contract with B and pursuing the contract with C.

"The idea is that the situation where A breaches the contract with B is Pareto-superior to the situation where he does not breach. A is better off and B is in the same position he would have been in had the contract been performed. One person is better off and no one is worse off.

"The breach therefore creates a more efficient distribution of resources. But is this how the law of contract operates? Should it operate like this?"

REFERENCES:

  • DuPont v. Pressman, 679 A. 2d 436 (1996)
  • Khouri, N., Efficient Breach Theory in the Law of Contract: An Analysis, 9 AULR 739 (2000-2003)
  • Posner, Richard, Economic Analysis of Law (New York: Wolters Kluwer Law & Business, 2003)
  • Warkol, Craig S., Resolving the Paradox Between Legal Theory and Legal Fact: The Judicial Rejection of the Theory of Efficient Breach, 20 Cardozo L. Rev. 321 (1998-1999)

EDITOR'S NOTE: The inspiration for the image above comes from page 147 of M.E. Morgan's book Confessions of a Sociopath (New York: Crown Publishers, 2013). Ms Morgan uses a pseudonym and professes to be a law professor so there is no opportunity to verify her law credentials but she does write of an efficient breach as follows: "For example, I commit to date someone exclusively. Maybe I even marry him. If one of us later find someone we prefer, it may actually be better for both parties if one or both of us breaks the agreement.... In efficient breaches, it is often the immoral choice that leaves everyone better off...."

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