EFFICIENT BREACH
I. THE THEORY OF EFFICIENT BREACH
Elements of the theory
Goal > Pareto Efficiency.
Legal rules lead 2 wealth-maximizing individuals to make pareto superior moves when available.
Where performance will cost promisor more than it will benefit promisee, contract 2 be breached.
Both parties will prefer breach if costs > damages > value and the end result after damages will be pareto superior to performance.
Promisor will prefer breach when costs > damages.
Promisee will prefer breach when damages > value.
What is efficient is not = what is individually rational—for example, transaction costs can make efficient breach no longer individually rational.
Example of effect of transaction costs on performance decisions: fee shifting UK.
Stakes go up, so settlement price will go up.
Some breaches will not occur because they will not be individually rational, despite the fact that they would be efficient.
American rule lowers the cost of nonperformance to breaching party, making efficient breach more likely.
II. PROS AND CONS OF THE THEORY OF EFFICIENT BREACH
Arguments in favor
Contracts facilitate efficiency.
Resources R allocated to those who value them the most.
Critiques of the theory
Transaction costs can be high, making it inefficient on its own terms.
Expectation damages tend to undercompensate.
Rewards individualistic, uncooperative behavior, which is socially undesirable.
Undermines laws which tend 2 promote fairness and justice.
Most people not rational & efficient economic actors.
Inadequate account of noneconomic costs to promisees of breach.
