Efficient breach theory
DOI link for Efficient breach theory
Efficient breach theory book
This chapter answers a question: what is the optimal remedy when a party breaches a valid contract? The idea behind "efficient breach theory" is that it is desirable not to perform those contracts for which the cost of performance turns out to exceed the benefit of performance. From this perspective, the purpose of legal remedies for breach is to create incentives for promisors to breach only in those circumstances where this is true. The efficiency of breach depends only on whether there exists a net social gain from performance, not on how that gain is distributed between the two parties. Efficient breach theory is concerned not only with the conditions under which breach is efficient, but also whether actual remedies achieve this ideal. The chapter focuses on a money damage remedy, meaning that the breaching party has the option to perform the contract as written, or to pay damages in lieu of performance.