ABSTRACT
A. Introduction: Effi cient Breach and Optimal Reliance “Effi cient breach” is an essential concept in the law and economics of contract. It provides that a promisor should renege on his contractual obligations where a third party would benefi t from his performance more than the original promisee. The view that a contractual duty is a contingent promise rather than an absolute guarantee found its most famous expression in the words of Oliver Wendell Holmes, who wrote that: “the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, – and nothing else.” 1
Suppose that A is a manufacturer, the capacity limitations of which enable it to produce no more than 1,000 widgets per year. Consider a widget retailer, B, who commands a moderate business reputation in his neighbourhood and who wishes to purchase 1,000 widgets from A. The minimum selling price of A for its full output is £10,000 (£10 per widget). In light of its expected sales opportunities, B would pay no more than £20,000. Consistent with the Coase Theorem, A and B enter into a contract at a price between £10,000 and £20,000 (say £15,000). This arrangement, of course, renders both A and B better off.
