English Contract Law and the Efficient Breach Theory
| Author | Tareq Al-Tawil |
| Published date | 01 June 2015 |
| Date | 01 June 2015 |
| DOI | http://doi.org/10.1177/1023263X1502200305 |
396 22 MJ 3 (2015)
ENGLISH CONTRACT LAW
AND THE EFFICIENT BREACH THEORY
Can ey Co-Exist?
T A-T*
ABSTRACT
e ‘ecient 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 identify the major problems of adopting
the e cient breach theory in English contract law. It also aims to explain and justify 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
§1. INTRODUCTION
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 party for the breach. On the other hand, the other non-breaching party may
have an interest in the contract being ful lled rather than receiving compensation for
this breach. ere are two main and quite distinct contractual interests constitutive of
a contract. First, the interest in securing the 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 his/her performance interest and/or can bring a claim to give
e ect to his/her compensation interest. In such situations, 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-performance.1 erefore, if he/she provides compensation, 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 view predates the so-
called ‘e cient breach’ theory (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 analyse the EBT. In the name of economic e ciency, wealth
maximization and social wealth, some prominent legal scholars, for example, Judge
Richard A. Posner, have argued that e cient breach is justi ed.4 e general in uence
of the EBT remains much more normative than p ositive. However, the theory, if correct ,
would o er a rationale for forcing the remedy of speci c performance, which does not
allow breach, and restitutionary damages for wrongs, which require the defendant to
give up to the claimant the prots 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 understanding contract law? As will
become clear in Sections 3 to 5, the answer must be in the negative. Second, why is it
that English contract law does not adopt speci c performance as the primary 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 against the morality of promise? e answer to this question is no.
In spite of denying the non-breaching party speci c performa nce at times, English 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#page-9.
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