| Contract law |
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| Formation |
| Defences |
| Interpretation |
| Dispute resolution |
| Rights of third parties |
| Breach of contract |
| Remedies |
| Quasi-contractual obligations |
| Duties of parties |
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| Related areas of law |
| By jurisdiction |
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| Other law areas |
| Notes |
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In legal theory, particularly in law and economics, efficient breach is a voluntary breach of contract and payment of damages by a party who concludes that they would incur greater economic loss by performing under the contract.
The theory of efficient breach seeks to explain the common law's preference for expectation damages for breach of contract, as distinguished from specific performance, reliance damages, or punitive damages. According to Black's Law Dictionary, efficient breach theory is "the view that a party should be allowed to breach a contract and pay damages, if doing so would be more economically efficient than performing under the contract." Expectation damages, according to the theory, give parties an incentive to breach when and only when performance is inefficient.
Judicial laws that govern contractual agreements and the damages to be incurred upon the breach of an agreement have existed since the 15th century. The motivating factor for establishing the standards of efficient breach was to ensure that the agreement fell under the enforceable fixing of the damages by the execution. this, therefore, stated that there should be a prior forecast or prediction of the provable injury resulting to the breach, otherwise, the breach will be unenforceable and then and breaching party will be limited to unconventional damage measures liquidated. [1] The common law courts then continued to revisit the provisions of liquidated damage provision from the "breacher" compensating for injury and losses only, to a consideration of cost and damages incurred during the process of breaching the contract, as well as the benefits that breaching the contract may have already experienced from the contract. As such, the non-breacher of the contract is in the same position as if the contract had undertaken its full performance, thus, establishing and maintaining efficiency value of the rule [2]
The first statement of the theory of efficient breach appears to have been made in 1970 in a law review article by Robert L. Birmingham in "Breach of Contract, Damage Measures, and Economic Efficiency". [3] The theory was named seven years later by Charles Goetz and Robert Scott. [4] Efficient breach theory is commonly associated with Richard Posner and the Law and Economics school of thought. Posner explains his views in his majority opinion in Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir. 1985).
Simple versions of the efficient breach theory employed arguments from welfare economics, operating on the premise that legal rules should be designed to give parties an incentive to act in ways that maximize aggregate welfare or achieve Pareto efficiency. More sophisticated versions of the theory maintain that parties themselves prefer remedies that incentivize efficient breach, as efficient breach maximizes the gains of trade from transacting. As Richard Posner and Andrew Rosenfeld put the point, "the more efficiently the exchange is structured, the larger is the potential profit of the contract for the parties to divide between them." [5]
Judge Richard Posner gave this well-known illustration of efficient breach in "Economic Analysis of Law":
Suppose I sign a contract to deliver 100,000 custom-ground widgets at $.10 apiece to A, for use in his boiler factory. After I have delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will be forced to close his pianola factory at great cost, and offers me $.15 apiece for 25,000 widgets. I sell him the widgets and as a result do not complete timely delivery to A, who sustains $1000 in damages from my breach. Having obtained an additional profit of $1250 on the sale to B, I am better off even after reimbursing A for his loss. Society is also better off. Since B was willing to pay me $.15 per widget, it must mean that each widget was worth at least $.15 to him. But it was worth only $.14 to A –$.10, what he paid, plus $.04 ($1000 divided by 25,000), his expected profit. Thus, the breach resulted in a transfer of the 25,000 widgets from a lower valued to a higher valued use.
Some, such as Charles Fried in his "Contract as Promise", have argued that morally, A is obligated to honor a contract made with B because A has made a promise. Fried wrote, "The moralist of duty thus posits a general obligation to keep promises, of which the obligation of contract will only be a special case – that special case in which certain promises have attained legal as well as moral force." It would seem that Fried has since revised his interpretation. [6]
Others argue that the costs of litigation relevant to gaining expectation damages from breach would leave one or both of the original parties worse off than if the contract had simply been performed. Also, Posner's hypothetical assumes that the seller is aware of the value the buyer places on the commodity, or the cost of purchase plus the profits the buyer will make. [7]
Other development in the efficiency breach theory include the exhaustion of all possible benefits that would be accrued by consumer in case of breaching of any exclusive contracts in daily business scenarios. The seller in the contract will incur an overall loss of the profits that would have been enjoyed if the contract was maintained. [8] However, the seller will retain the cost of the damages that may have been incurred by the time of breaching the contract. The buyers, on the other side, suffers the loss of making close to no profits against their competitor in the instance that a contract was breached. As a result, the final consumer enjoys the most benefits of low prices, or as close to cost as possible. [8]
Scholars in the fields of law and economics have performed a comprehensive study of effective breach of contract cases. According to this Standard review, where the contract's execution results in a violation of contract, the breach is successful. Each party's overall surplus is negative. By categorizing successful violations as a single class of event, recent literature has overlooked the possibility that the violation of finding benefits is distinct from the violation of preventing losses. [9]
For academics, both moral and constructive, tortious action is vexing because it supports the economic model of "successful violation of contract" by punishing a third party for inducing breach. Nonetheless, academics have discovered a secondary rationale for invention to explain the coexistence of "successful" breaches and infringement interference. This article discusses why, on a normative level, tort interference would become a component of the better legal framework. Interference in contract rights offers obvious land security for contract rights (conversely, lack of data). When a third party assesses the promiser's results more favorably than the promiser does, processing costs are minimized. On the plus side, the rule of violation interference conforms to the first better model suggested here. The regression study of infringement intrusion proceedings demonstrates even more plainly that the second best factors proposed by effective breach researchers are insufficient to justify the case's result. The variables found in the best model here do have a substantial impact on the case's outcome. [10]
At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at law, the loss must involve damage to property, or mental or physical injury; pure economic loss is rarely recognised for the award of damages.
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable by the state. While criminal law aims to punish individuals who commit crimes, tort law aims to compensate individuals who suffer harm as a result of the actions of others. Some wrongful acts, such as assault and battery, can result in both a civil lawsuit and a criminal prosecution in countries where the civil and criminal legal systems are separate. Tort law may also be contrasted with contract law, which provides civil remedies after breach of a duty that arises from a contract. Obligations in both tort and criminal law are more fundamental and are imposed regardless of whether the parties have a contract.
In contract law, an indemnity is a contractual obligation of one party to compensate the loss incurred by another party due to the relevant acts of the indemnitor or any other party. The duty to indemnify is usually, but not always, coextensive with the contractual duty to "hold harmless" or "save harmless". In contrast, a "guarantee" is an obligation of one party to another party to perform the promise of a relevant other party if that other party defaults.
Delict is a term in civil and mixed law jurisdictions whose exact meaning varies from jurisdiction to jurisdiction but is always centered on the notion of wrongful conduct.
Law and economics, or economic analysis of law, is the application of microeconomic theory to the analysis of law. The field emerged in the United States during the early 1960s, primarily from the work of scholars from the Chicago school of economics such as Aaron Director, George Stigler, and Ronald Coase. The field uses economics concepts to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. There are two major branches of law and economics; one based on the application of the methods and theories of neoclassical economics to the positive and normative analysis of the law, and a second branch which focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.
In law and economics, the Coase theorem describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem is significant because, if true, the conclusion is that it is possible for private individuals to make choices that can solve the problem of market externalities. The theorem states that if the provision of a good or service results in an externality and trade in that good or service is possible, then bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. A key condition for this outcome is that there are sufficiently low transaction costs in the bargaining and exchange process. This 'theorem' is commonly attributed to Nobel Prize laureate Ronald Coase.
Specific performance is an equitable remedy in the law of contract, whereby a court issues an order requiring a party to perform a specific act, such as to complete performance of the contract. It is typically available in the sale of land law, but otherwise is not generally available if damages are an appropriate alternative. Specific performance is almost never available for contracts of personal service, although performance may also be ensured through the threat of proceedings for contempt of court.
Restitution and unjust enrichment is the field of law relating to gains-based recovery. In contrast with damages, restitution is a claim or remedy requiring a defendant to give up benefits wrongfully obtained. Liability for restitution is primarily governed by the "principle of unjust enrichment": A person who has been unjustly enriched at the expense of another is required to make restitution.
Breach of promise is a common-law tort, abolished in many jurisdictions. It was also called breach of contract to marry, and the remedy awarded was known as heart balm.
A legal remedy, also referred to as judicial relief or a judicial remedy, is the means with which a court of law, usually in the exercise of civil law jurisdiction, enforces a right, imposes a penalty, or makes another court order to impose its will in order to compensate for the harm of a wrongful act inflicted upon an individual.
Liquidated damages, also referred to as liquidated and ascertained damages (LADs), are damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach. This is most applicable where the damages are intangible.
Tortious interference, also known as intentional interference with contractual relations, in the common law of torts, occurs when one person intentionally damages someone else's contractual or business relationships with a third party, causing economic harm. As an example, someone could use blackmail to induce a contractor into breaking a contract; they could threaten a supplier to prevent them from supplying goods or services to another party; or they could obstruct someone's ability to honor a contract with a client by deliberately refusing to deliver necessary goods.
Damages for breach of contract is a common law remedy, available as of right. It is designed to compensate the victim for their actual loss as a result of the wrongdoer’s breach rather than to punish the wrongdoer. If no loss has been occasioned by the plaintiff, only nominal damages will be awarded.
Penal damages are liquidated damages which exceed reasonable compensatory damages, making them invalid under common law. While liquidated damage clauses set a pre-agreed value on the expected loss to one party if the other party were to breach the contract, penal damages go further and seek to penalise the breaching party beyond the reasonable losses from the breach. Many clauses which are found to be penal are expressed as liquidated damages clauses but have been seen by courts as excessive and thus invalid.
An adequate remedy or adequate remedy at law is part of a legal remedy which the court deems satisfactory, without recourse to an equitable remedy This consideration expresses to the court whether money should be awarded or a court order should be decreed.. Adequate remedy at law refers to the sufficient compensation for the loss or damages caused by the defendant with a proper monetary award. The court must grant the adequacy of remedy that will lead to a "meaningful hearing". Whether legal damages or equitable relief are requested depends largely on,whether or not the remedy can be valued. Both two elements, compensation and the meaningfulness of hearing, provide a proper way to have an adequate remedy. The word "meaningfulness" of hearing in the law process is the assumption that the defendant compensated must be meaningful for the injured party where the defendant made a fully covered compensation for all the losses. Hence, the hearing in which cannot give any right amount of compensation award or settlement is not "meaningful", and the unavailability of the compensation will lead to an inadequate remedy. The adequate remedy at law is the legal remedies by meaning it is satisfactory compensation by way of monetary damages without granting equitable remedies.
Expectation damages are damages recoverable from a breach of contract by the non-breaching party. An award of expectation damages protects the injured party's interest in realising the value of the expectancy that was created by the promise of the other party. Thus, the impact of the breach on the promisee is to be effectively "undone" with the award of expectation damages.
Robert L. Birmingham is an American academic and legal scholar, who specializes in admiralty law, federal courts, energy law, and law and philosophy. He is a professor of law at the University of Connecticut School of Law. He is best known for originating the theory of efficient breach of contract.
Competition law theory covers the strands of thought relating to competition law or antitrust policy.
Reliance damages is the measure of compensation given to a person who suffered an economic harm for acting in reliance on a party who failed to fulfill their obligation. If the injured party could go back in time, they should be indifferent to entering into the contract that would be breached and receiving the reliance damages as opposed to not entering into any contract with the breaching party. The injured party should be put in a substantially similar situation position as they would have been had the contract not been entered into. This is different from expectation damages, where the injured party should be indifferent between the fulfillment of the contract and never having entered into the contract.
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more mutually agreeing parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or rescission. A binding agreement between actors in international law is known as a treaty.