Theory Of Efficient Breach Research Articles

Efficient Breach and Ex-post Disgorgement of the Defendant’s Gain: A Comparative Contract Law and Economics Perspective

Abstract Compensating the plaintiff’s expectancy loss is the established remedy for breach of contract in common-law jurisdictions. Legal theory has examined losses and gains extending beyond lost expectancy, especially gain-based disgorgement as a remedy reflecting the restitution interest in contract law. The theory of efficient breach implies that restitution remedies inaccurately compensate loss, whereas the case in jurisprudence for gain-based disgorgement ignores efficiency all together in focussing on ‘wrongs’ and ‘just’ compensation. We consider legal developments in the UK and US to show (i) efficient breach and gain-based disgorgement can be reasonably reconciled; (ii) a full disgorgement remedy will be evaded because the defendant will deliver specific performance; (iii) careful recognition of the type of externalities affecting the plaintiff, defendant and third parties indicates when disgorgement is useful.

Is it Possible to Introduce Efficient Breach Theory to a Civil Law Country? The Case of Qatar

Abstract The economic goal of the doctrine of efficient breach is to ensure that the rules and remedies of contract law are expected to be value maximising and that contracts are breached only if a breach is value maximising. The theory originated in the United States, and it has not been adopted in Qatar or any civil law countries. This article makes an initial attempt to understand the legal hurdles in civilian traditions that lead to rejection of the theory. Before analysing the hurdles to the theory of efficient breach, a proper appreciation for how and when efficient breach arises is necessary. One might worry about the tendency of efficient breach theory to escape its proper bounds. Therefore, analysis of efficient breach should fully consider all possible consequences and remedies available to the non-breaching party when the contract is breached.

When Law & Economics violates the rule of law: Three illustrations

Law & Economics scholarship movement continues to be an important methodological approach to the positive and normative analysis of law since its inception in the second half of the 20th century. However, Law & Economics has been criticized on various grounds, from its over-reliance on consequentialist arguments against deontological arguments to its indifference towards the fundamental concepts of law such as the Rule of Law. This latter argument is scrutinized and further illustrated in this article. Here, we demonstrate that despite the common theoretical underpinnings between Law & Economics and the Rule of Law (I), it is argued that Law & Economics conflicts with the Rule of Law principles on three major instances, namely the Coase theorem, the theory of efficient breach of contracts and the influential rule of reason in the field of competition law and policies (II). We therefore conclude that there cannot be a practical convergence between Law & Economics and the Rule of Law at the universal level unless Law & Economics revisits some of its normative conclusions that conflict with the Rule of Law as exemplified in this article.

UNA CRÍTICA A LA IDEA DE INCUMPLIMIENTO EFICIENTE DESDE EL DERECHO DE CONTRATOS

The theory of efficient breach of contract is one of the core components of the economic analysis of contract law. This paper makes a review of this theory. On this respect, and starting from an instrumentalist perspective, consistent with law and economics, the paper claims that efficient breach is an inadequate approach towards the analysis of remedies for breach of contract.

The Contractual Liability Function: Efficient Breach Theory or Best Risk Bearer Theory? The Two Theories Tested by the Commercial Impracticability Doctrine in the Italian Legal System

The aim of this paper is to examine whether the Italian commercial impracticability doctrine reflects the efficient breach theory or the best risk bearer model. The conclusion is that in the Italian legal system there is a discipline that could be considered as a form of “modified” efficient breach theory, according to which judges can decide to terminate contracts that are ictu oculi inefficient because the cost of performance (C) is greater than value for the promissory (V), but since judges’ decisions cannot always be right, it allows the potentially compliant party to offer a modification of the contract to the other party. In these hypotheses, if performance is efficient, that is C is less than V, parties will find an agreement to execute the contract.

The Rules of the Game and the Morality of Efficient Breach

Moralists have long criticized the theory of efficient breach for its advocacy of promise breaking. But a fully developed theory of efficient breach has an internal morality of its own. It argues that sophisticated parties contract for efficient breach, which in the long run maximizes everyone’s welfare. And the theory marks some breaches — those that are opportunistic, obstructive, or otherwise inefficient — as wrongs that the law should deter, as transgressions that should not be priced but punished. That internal morality, however, does not excuse the theory from moral scrutiny. An extended comparison to Jean Renoir’s 1939 film, La Regle du Jeu (“The Rules of the Game”), illustrates what more sophisticated moral criticisms of the theory might look like. Renoir’s film depicts a society in which marital infidelity is a transgression that is tolerated, but only when done according to society’s rules. Renoir’s attitude toward that society suggests that moral critics of the efficient breach theory should focus not on its celebration of efficient breach, but on the value of the sort of moral community it imagines and on the theory’s effect on parties who are not playing the efficient breach game, whether because they do not understand its rules or because they seek a different type of obligation. The comparison to the film also highlights the theory’s own narrative elements, which both add to its persuasive power and, once identified, mark out its limits.

English Contract Law and the Efficient Breach Theory

The ‘efficient breach’ theory holds that remedial orders, namely specific performance, compensatory damages and restitutionary damages for wrongs, should be designed in such a way as to maximize the production of efficient outcomes. For lawyer-economists, the goal of creating rules of law is to maximize the achievement of a particular outcome, that is, economic efficiency. This paper seeks to identify the major problems of adopting the efficient 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 efficiency-based) normative grounds.

Unbundling Efficient Breach

Current law and economics scholarship analyzes efficient breach cases monolithically. The standard analysis holds that breach is efficient when performance of a contract generates a negative surplus for the parties. However, by simplistically grouping efficient breach cases as of a single kind, the prior literature overlooks some important factors that meaningfully distinguish types of efficient breach, such as effects of the breach on productive and allocative efficiency, restraints on the incentive to breach, information-forcing, and competitive effects of the right to breach. We argue that these factors are important for the development of a more nuanced economic theory of efficient breach. More specifically, we contend that there are relevant economic considerations that distinguish breaches carried out for the pursuit of a gain (“gain-seeking breaches”) from breaches meant to prevent a loss (“loss-avoiding breaches”) and breaches carried out by the seller from those carried out by a buyer. We show that the economic argument for loss-avoiding efficient breach is stronger than for gain-seeking efficient breach especially when the breaching party is the seller. From this analysis, we generated several hypotheses, which we tested in an incentivized lab experiment. The data show that test participants’ reactions differ with respect to gain-seeking and loss-avoiding breaches, exhibiting behavior in line with our theoretical predictions, giving us insight into the preferences and expectations of ordinary people in cases of breach, and being correlated with the apparent intuitions of judges in deciding efficient breach cases.

Can the WTO Rules Be Efficiently Breached for Welfarist Objectives?

After Eric Posner and Jack Goldsmith published their controversial book, The Limits of International Law, a number of critical reviews were written, even by rational choice theory law scholars, contradicting what they saw as ‘simplistic’ and ‘inconsistent’ assumptions about the role of international law. However, neither Posner nor Goldsmith seem to be affected by the critique and have continued to explain the book’s main thesis in new publications. For instance, the co-author Posner and Alan Sykes have recently published a book entitled, Economic Foundations of International Law, which apply the rational choice theory to explain the state cooperative behaviour at the International level. They did that by claiming that international law must be self-enforcing by the application of private contract theory of efficient breach. This article will evaluate Posner, Sykes and others claim of the need for efficient breach in the context of the World Trade Organization (WTO) law. The authors have mainly relied on the WTO acquis to introduce their theory to other subfields of public international law, such as, international human right law. Sometimes they justify their argument based on ‘the absence of welfarist justification of international law’ and most of the time on the weakness of the public international law enforcement mechanism, citing the WTO dispute settlement system as an example. This article will try to answer this question: does the lack of ‘welfarist grounds’ justify an efficient breach of existing WTO rules to serve the states self-interest objectives?

Reconsidering financial remedies in WTO dispute settlement

Enforcing international law remains problematic: what happens if a sovereign state refuses to comply with its obligations, even after an international adjudicatory body has ruled in its disfavour? The solution offered under the World Trade Organization (WTO) system has been to authorize the prevailing member in the settlement of a dispute to retaliate, if and when the respondent member fails to implement a panel or Appellate Body ruling. Such retaliation can take the form of additional restrictions on imports of goods or services, or suspensions of intellectual property rights. Our article examines whether fairer and more effective means of ensuring compliance could be inserted into the WTO system. First, existing remedy systems are outlined, comparing general public international law with the current WTO system. We posit that the objective of both is rule compliance and take issue with the recent theory of efficient breach. Further support is drawn from the EU compliance regime. This is followed by an examination of the advantages of introducing financial remedies in WTO dispute settlement as well as a refutation of potential objections. The main elements of the subsequent proposal relate to the calculation, term, retro-activity and beneficiary of financial payments as a remedy. The Author 2013. Published by Oxford University Press. All rights reserved., Oxford University Press.

Virtue Ethics and Efficient Breach

The concept of “efficient breach” - the idea that a contracting party should be encouraged to breach a contract and pay damages if doing so would be more efficient than performance – is probably the most influential concept in the economic analysis of contract law. It is certainly the most controversial. Efficient breach theory has been criticized from both within and without the economic approach, but the most prominent criticism is that it violates deontological ethics - that the beneficiary of a promise has a right that it be performed, so that breaching the promise wrongs the promisee. This essay argues that this criticism is misplaced, and that efficient breach theory, properly understood, is entirely consistent with parties’ complying with their deontological obligations. Instead, the intuitive resistance that most people experience to the concept may be better explained by aretaic concerns - specifically, that failing to complete a contractual relationship is not conducive to virtuous character or to the maintenance of a flourishing community. While efficient breach can be squared with deontological ethics, it cannot be squared with virtue ethics unless one is prepared to argue that seeking efficiency is a virtue, or at least that it is not a vice.

The Efficient Breach Theory

This article discusses the moral objection to the efficient breach theory, specifically the objection that it is not based upon a moral obligation to perform a contract. The efficient breach theory endorses the immoral behaviour of breaching a promise whenever the consequences of breach are considered to be superior (in the sense that they are more efficient or better) to those of performance. It considers that contracts (namely, those promises in which legal rules and institutions are involved) are simply vehicles for achieving economic efficiency. The efficient breach theory has been challenged by a number of critics. It is the idea underlying promissory obligations that a promise excludes or ignores the ordinary grounds – for example, utilitarian grounds – that a promisor may bear in mind and consider in the course of making the decision about whether they should perform the promise. This characteristic of promises can be explained by saying that a promise creates an exclusionary reason for action. This article also addresses two crucial questions. First, why do promises create exclusionary reasons for action in the first place? Without answering this question, it would be difficult to argue that promises should be understood differently from the way the efficient breach theory understands them. Second, how do we decide when breaching a promise is or is not immoral? This question is significant because without such knowledge, it would be difficult to argue that the efficient breach theory endorses the immoral behaviour of promise-breaking once a better opportunity presents itself.

THE EVOLUTION OF CONTRACT REMEDIES (AND WHY DO CONTRACTS PROFESSORS TEACH REMEDIES FIRST?)

This essay traces the evolution of the scholarly understanding of contract remedies, beginning with the era in which the compensation principle and expectation damages dominated. Fuller and Perdue's classic articles in 1936/1937 and the theory of efficient breach in the 1970s each offered important justifications for the principle. However, as economic analysis extended to incorporate a wider range of incentive and risk-bearing goals, support for the compensation principle became increasingly frayed. The emergence of the incomplete contracts theory further weakened its normative significance. In practice, the cutting-edge uses of contract damages pursue several other objectives unrelated to compensation. In particular, damages promote contracting goals by (a) providing prices for embedded options or (b) setting the stakes, and thereby incentives, for future litigation. Finally, the essay discusses the design of ‘tiered’ damages within a single contract that are triggered by different contingencies. In this sense, damages and contract conditions act as complements as well as substitutes. In light of the complex and interactive role played by contract remedies, the author suggests that this topic should be taught near the end rather than at the beginning of the first-year contracts course.

The evolution of contract remedies (and why do contracts professors teach remedies first?)

This essay traces the evolution of the scholarly understanding of contract remedies, beginning with the era in which the compensation principle and expectation damages dominated. Fuller and Perdue's classic articles in 1936/1937 and the theory of efficient breach in the 1970s each offered important justifications for the principle. However, as economic analysis extended to incorporate a wider range of incentive and risk-bearing goals, support for the compensation principle became increasingly frayed. The emergence of the incomplete contracts theory further weakened its normative significance. In practice, the cutting-edge uses of contract damages pursue several other objectives unrelated to compensation. In particular, damages promote contracting goals by (a) providing prices for embedded options or (b) setting the stakes, and thereby incentives, for future litigation. Finally, the essay discusses the design of ‘tiered’ damages within a single contract that are triggered by different contingencies. In thi...

The Evolution of Contract Remedies (and Why Do Contracts Professors Teach Remedies First?)

This essay traces the evolution of the scholarly understanding of contract remedies, beginning with the era in which the compensation principle and expectation damages dominated. Fuller and Perdue’s classic articles in 1936-7 and, later, the theory of efficient breach both offered important justifications for the principle. However, as economic analysis extended to incorporate a wider range of incentive and risk-bearing goals, the support for the compensation principle became increasingly frayed. Subsequently, the emergence of the incomplete contracts theory further weakened its normative significance. In practice, the cutting-edge uses of contract damages pursue several other objectives, unrelated to compensation. In particular, damages promote contracting goals by (a) providing the price for embedded options or (b) setting the stakes and thereby incentives for future litigation. Finally, the paper discusses the design of “tiered” damages within a single contract that are triggered by different contingencies. In this sense, damages and conditions act as complements as well as substitutes. In light of the complex role played by contract remedies, the essay suggests that this topic should be taught near the end rather than beginning of the first-year contracts course.

Restitutionary Disgorgement as a Moral Compass for Breach of Contract

A quiet revolution is underway. A new rule proposed in the forthcoming Restatement (Third) of Restitution seeks to deter conscious wrongdoers from retaining profits from breaches of contract. proposed disgorgement remedy for defendant's opportunistic breach of contract will have fundamental consequences for contract theory and practice. This contractual remedy is gain-based rather than compensatory. Restitutionary disgorgement, rooted in unjust enrichment, may shift the conventional paradigm of contract law. This article examines whether a restitutionary disgorgement remedy for certain breaches of contract is compatible with traditional contract principles such as Justice Holmes's choice principle. Recall his oft-repeated declaration, The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, - nothing else. Disgorgement calls for certain value choices, including moral blameworthiness and promise-keeping. Furthermore, the underlying rationale for disgorgement is in tension with efficient breach theory. This article assesses whether disgorgement can coexist with conventional contract theories, and, if not, whether disgorgement's values should be preferred. Ultimately, restitutionary disgorgement for opportunistic breach of contract is a promising development for contract law and restitutionary theory. There is, however, room for further refinement before the ink is dry on the pending Restatement.

Some theoretical and legal perspectives on WTO compliance

This contribution offers some theoretical and legal perspectives on WTO compliance. It draws on current theories of compliance with international law in determining that WTO compliance is essentially norm-driven and liberal/institutionalist in character. The two key models of compliance at work in the WTO are the management model, which employs persuasive techniques in order to induce compliance, interspersed with the enforcement model with its coercive approach towards compliance. The latter model is clearly at work in the compliance decisions of the DSB, where a complainant Member may seek authorisation to impose countermeasures in the form of suspension of concessions or other obligations. Although even here a range of techniques are employed on an individual basis by the complainant and respondent parties as well as collectively by the membership in order manage the process of compliance. Thus, a range of ‘softer’, more persuasive, managerial techniques exist alongside coercive, enforcement ones in order to encourage compliance with WTO dispute settlement decisions and to foster normative consensus among the Members. The two models of compliance work in tandem across a broad spectrum of compliance activities and are so intertwined with one another as to form a management-enforcement ladder of compliance with WTO law. However, this ladder of compliance is less successful in accounting for some of the more egregious forms of WTO non-compliance. Instead, such non-compliance is better understood on the basis of realist (or even rationalist) theories of compliance, which may include the efficient breach theory.

Staggering Staggered Boards: The Legal Case Against Staggered Boards

Despite the prevalence of staggered boards, only lately have they become the focus of corporate debate, and the literature on them is still limited. Scholars assume that staggered boards by definition mean a guaranteed term of office, unless cause for removal is present. They further believe that staggered boards contribute to corporate stability, long-term planning, and the board's independence from management. They primarily debate the desirability of staggered boards in takeovers, some suggesting that staggered boards coupled with poison pills have become the most effective way to prevent hostile takeovers. Scholars also note that overwhelmingly shareholders are powerless to undo staggered boards without the board's consent and that state legislatures are unlikely to amend the statutes in favor of shareholders. This article argues that we can safely sever the link between staggered boards and entrenchment in office. It suggests that the traditional rationales supporting entrenched staggered boards are no longer valid. In fact, a Delaware statute, protecting staggered boards against removal without cause, was based on a misreading of a judicial opinion, which was not even good law at the time it was enacted. The article draws an analogy from agency law to contend that the law should not tolerate the irrevocability of staggered terms in quasi-agency relationships of the kind that exist between shareholders and directors, notwithstanding contractual provisions to the contrary. Indeed, other countries with similar statutory protections require only monetary damages for unjustified removals. They treat shareholders' removal power as mandatory and unwaivable. A look at independent agencies, the closest constitutional analogy, shows that there, too, staggered terms and removal protection warrant only compensatory damages, not reinstatement. This article thus argues for similar treatment of staggered boards and removal-for-cause protections, which would resolve one of the most difficult problems in corporate governance today. By permitting only monetary damages, not entrenchment, to directors removed without cause, their entitlement to office is transformed from a property rule to a liability rule, which is fully justified under the contractual theory of efficient breach and restores shareholder power to its intended potency.

Should punitive damages be part of the judicial arsenal in contract cases?

This paper challenges the traditional assumption that punitive damages are unavailable for breach of contract. It is shown that Addis v Gramophone provides weak authority for this assumption. The paper considers whether there is a logically coherent argument for retaining punitive damages in tort, while denying them for breach of contract, and it is shown that there is not. The main arguments advanced against punitive damages in civil proceedings are examined and shown to be unpersuasive. Finally, the efficient breach theory is considered and rejected on the ground that it significantly underestimates the costs associated with breach. In conclusion, the paper recommends that punitive damages should be exceptionally awarded to deter outrageous breaches of contract in cases where compensatory damages are inadequate and gain-based damages are unavailable.

A Case Study of Legal Transplant: The Possibility of Efficient Breach in China

This article hypothetically places the theory of efficient breach in the context of Chinese society. Assuming that the Chinese lawmakers accept the idea of efficient breach and are willing to change the laws accordingly to carry out this idea, the article examines factors that may influence the viability of efficient breach as a legal transplant in China. It seeks to particularize the relevant context in which the theory of efficient breach as a legal transplant is embedded. Elements of the relevant context include: the social attitude on litigation, the availability of information, the competence of the judiciary, and the traits of judicial practice in granting contractual remedies. It shows that even if lawmakers are willing to make every change in rules to suite the theory of efficient breach, whether efficient breach-or-perform decisions can be made in practice and whether efficiency can be achieved through breach of contract depend on many factors external to the theory and legal rules designed accordingly.