English Contract Law and the Efficient Breach Theory

Published date01 June 2015
Date01 June 2015
Subject MatterArticle
396 22 MJ 3 (2015)
Can  ey Co-Exist?
T A-T*
e ‘e cient breach’ theory holds that remedial orders, namely speci c performance,
compensatory damages and restitutionary damages for wrongs, should be designed in
such a way as to maximize the production of e cient outcomes. For lawyer-economists,
the goal of creating rules of law is to maximize the achievement of a particular outcome,
that is, economic e ciency.  is paper seeks to identif y the major problems of adopting
the e cient breach theory in English contract law. It also aims to explain and justif y the
existing scheme of remedies for breach of contract in the English contract law on (non
e ciency-based) normative grounds.
Keywords: e cient breach; promis sory obligations; restitution
When parties enter into a contr act, each part y usually e xpects to perform it s obligation and
that the other par ty will do t he same. However, these expectations are not a lways ful lled,
since one party may  nd it in its self-interest to breach the contract and to compensate
the other part y for the breach. On the other hand, t he other non-breaching part y may
have an interest in the contract being ful lled rather than receiv ing compensation for
this breach.  ere are two main and quite d istinct contrac tual interests const itutive of
a contract. First, the i nterest in securing t he contracted-for performance; secondly, the
interest in ensuring, i f that performance is not completely (but substantially) secured or
not secured at all, th at one is not le worse o a s a result the reof.  e clai mant can bring
* Associate Profes sor of Law, New York Institute of Technology, School of Management.
English Cont ract Law and the E cient Breach  eory
22 MJ 3 (2015) 397
a claim to give e ect to h is/her performance interest a nd/or can bring a claim to g ive
e ect to his/her compensation interest. In such situ ations, one might wonder, should
the court force the par ty in breach to perform or is compensation an adequate remedy?
Judge Oliver Wendell Holmes argued that in law, a contracting par ty has the option
either to perform the contract or to pay da mages for the loss su ered by the other part y
as a result of non-p erformanc e.1 erefore, if he/she provides compensat ion, he/she
com mit s no w rong ; he/s he ha s don e no m ore o r les s th an to choo se w hich way t o per for m
his/her obligation. Holmes v iewed the obligation to perform a contract as cor responding
to a choice to perform or else to provide compensation.2 His v iew predates the so-
called ‘e cient breach’ theor y (EBT). Inasmuch as e cient breaches bene t society by
maximi zing its wealth, lawyer-economists have suggeste d that remedial orders – namely,
orders for contract damages and speci c performance – should be designed in such a
way as to promote or encourage those breaches.3
is paper seeks to ana lyse the EBT. In the name of economic e ciency, wealth
maximization and social wea lth, some prominent legal scholars, for example, Judge
Richard A. Posner, have argued that e cient breach is justi ed.4 e general i n uence
of the EBT remains much more normative than p ositive. However, the theory, if correct ,
would o er a rationa le for forcing the remedy of speci c performa nce, which does not
allow breach, and restitutiona ry damages for wrongs, which require the defendant to
give up to the claimant the pro ts made from his wrongful breach of contract, into
narrower limits.5
ere are, thus, two mai n questions which th is paper will address:  rst, is there any
justi cation for giving the EBT a central role in u nderstanding contrac t law? As will
become clear in Sect ions 3 to 5, the answer must be in the negat ive. Second, why is it
that English contrac t law does not adopt speci c performance as the primar y remedy?
In the event of promise-breaking , English courts order the defendant to compensate
the claimant for the loss t hat  ows from the breach of the duty to perform. Is it because
English law runs a gainst the mora lity of promise?  e answer to this question is no.
In spite of denying the non-breaching party speci c performa nce at times, Eng lish law
1 O.W. Holmes, ‘ e Pat h of the Law’, 10 Harvard Law Revie w (1897), p.457, 462.
2 C.A. Remington, ‘International Interference with Contract and the Doctrine of E cient Breach: Fine
Tuning the Notion of the C ontract Breacher as Wrongdoer’, 47 Bu alo Law Rev iew (1990), p.645, 647.
3 S.A. Smith, Contract eory (Ox ford University Press, 200 4), p.117.
4 See origina lly R.L. Birming ham, ‘Breach of Contract, Dama ges Measures, and Economic E ciency’,
24 Rutgers Law Re view (1970), p.273, 284 –285.  e theory has been developed by, among ot hers, C.
Goetz and R . Scott, ‘Liquidated Da mages, Penalties, a nd the just Compensation P rinciple: Some Notes
On an Enforcement Mode l and a  eory of E cient breach ’, 77 Colum. Law Review (1977), p.554; A .
M. Polinsky, An Introduction to Law and Economics (3 rd edition, Aspen, 2003); Richard Posner in the
various edit ions of his textbook, the latest b eing R.A. Posner, Economic Analysis of Law (8th edition,
Aspen, 2010), p.118–126.
5 M. Eisenberg, ‘ e eory of E cient Breach and the  eory of E cient Termination’, Univers ity of
California-Be rkeley Law & Economics Workshop wor king paper no. 14 (2004), http://escholarship.org/
uc/item/0gq0n2gz#pa ge-9.

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