Efficient breach

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In legal theories, especially in law and economics, efficient violations are voluntary breaches of contract and payment of damages by those who conclude that they will incur greater economic losses by committing under contract.

Video Efficient breach

Development theory

According to the Black's Law Dictionary, the efficient offense theory is "the view that a party should be allowed to breach the contract and pay compensation, if doing so would be more economically efficient than committing under contract."

The first statement of the efficient offense theory seems to have been made in a legal review article by Robert Birmingham in "Contract Breaches, Measures of Damage, and Economic Efficiency", 24 Rutgers L.Rev. 273, 284 (1970) ("Refusal of obligation should be encouraged where the promissor may benefit from his failure after placing his promise in a good position as he will serve if performance has been given"). This theory is named by Charles Goetz and Robert Scott, "The Damage of Liquidation, Punishment, and Fair Compensation Principle: An Efficient Theory of Violation", 77 Colum.L.Rev. 554 (1977).

Efficient abuses theory is associated with Richard Posner and the School of Law and Economics thought. It has been used to defend traditional common law rules that non-torture breaches can not be corrected by criminal damages and damages (excessive damage that is considered a penalty for a violation not a means of fair compensation from another party). Such punishment will prevent an efficient breach, and therefore an "efficient" behavior, which is undesirable for society as a whole. Posner describes his views in majority opinion at Lake River Corp v. Carborundum Co. , 769 F.2d 1284 (7th Cir. 1985).

Maps Efficient breach

Posner illustration

Judge Richard Posner gave this famous illustration of an efficient offense in "Legal Economic Analysis":

Suppose I signed a contract to give 100,000 custom-ground widgets at $ 0.10 each for A, to be used in his boiler plant. After I sent 10,000, B came to me, explaining that he badly needed 25,000 custom-ground widgets at once because otherwise he would be forced to close the pianola factory at great cost, and offered me $ 0.15 apiece for 25,000 widgets. I sell it widgets and as a result do not complete on-time delivery to A, which sustains $ 1000 in damage from my violations. After earning an additional $ 1250 in sales to B, I better even after replacement A for the loss. Society is also better. Since B is willing to pay me $ 0.15 per widget, it should mean that each widget is worth at least $ 0.15 to it. But it's worth only $ 0.14 for A $ 10, what he paid, plus $ 0.04 ($ 1000 divided by 25,000), his expected profit. Thus the violation results in transferring 25,000 widgets from a lower value to higher value use.

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Criticism

Some, such as Charles Fried in "Contract as a Promise", have stated that morally, A shall respect the contract made with B because A has made a promise. Fried writes, "The morality of duty thus assumes a general obligation to keep promises, in which contractual obligations will only be a special case - that particular case in which certain promises have reached legal and moral force." It seems that Fried has revised his interpretation.

Others argue that the relevant litigation costs to get hopes of damage from the offense will leave one or both of the original parties worse off than if the contract was just done. Also, Posner hypothetically assumes that the seller realizes the value that the buyer placed on the commodity, or the purchase cost plus the profit that the buyer will generate.

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Note

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References

• H Wehberg, 'Pacta Sunt Servanda' (1959) 53 (4) The American Journal of International Law 775

Source of the article : Wikipedia