Efficient Breach Research Articles

The Efficient Breach Theory under Jordanian Civil Law

This study examined the ‘efficient breach’ theory and its possible application under Jordanian Civil Law. The theory says the promisor has the right to breach a contract and pay damages whenever his profit from breach exceeds his expected profits from performance. As a prerequisite for its application, the theory requires the general remedy for breach to be the payment of damages, rather than forced performance. Thus, the main area for its application is the common law system, since it favours damages as a primary remedy. This study reached the conclusion that the theory cannot work under Jordanian Civil Law, where the primary remedy for breach of contract is specific performance, that forces the promisor to complete the contract. In addition, it contradicts the good faith principle that Jordanian law is based upon, amongst other principles, and goes against the history of Jordanian legal rules.

The Moral Impermissibility of Efficient Breach

Recently, some economic theorists have argued that efficient breach is in fact morally justified. This paper demonstrates that these arguments employ chameleons, to use a term from Paul Pfleiderer. Chameleons are theoretically interesting but patently unrealistic models which are used to draw real-world conclusions. The arguments fail once the unrealistic assumptions are removed, vindicating the common-sense notion that intentionally breaching a contract is (prima facie) wrong.

The Developing and Least Developed Countries' Challenges on Countering Subsidies at the WTO

The WTO system to counter specific subsidies has been an issue for developing and least developed countries, which ineffectiveness leads to losses that go beyond the strictly economic area. To prevent damage caused by subsidies, the WTO provides its members two mechanisms: the countervailing measures and the retaliation authorized by the DSB. Although the first one is the most rapid, it cannot be imposed when the competition occurs in a third market. In this case, governments may only counter subsidies by the dispute settlement where, at the end, countries may force the elimination of the subsidy by the threat of retaliation, but only after innumerous discussions over implementation, compensation, request for cross-retaliation and its calculus. This procedure has gaps that contribute to governments' political and economic strategies in order to gain time and trade until, the effective withdraw of their subsidy programs, further expanding the differences between developing and developed countries. Whereas the social harm caused by subsidies are irreparable, it is necessary to include in the multilateral trading system an instrument able to prevent opportunistic behavior by rich countries and avoid the perpetuation of the damage over time. From the premises of the Economic Analysis of Law perspective, in particular, the principle of social and economic efficiency, the social costs of the subsidies must be considered and in this case, there is no efficient breach. The propose of the article is to find a mechanism able to give these countries more power to counter subsidies or at least to provide them more bargaining power. In this sense, it was examined the possibility of imposing cross countervailing measures when specific subsidies cause the shift from exports that were supposed to be sent to third market.

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.

Unbundling Efficient Breach: An Experiment

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 total surplus for the parties. However, by simplistically grouping efficient breach cases as of a single kind, the prior literature overlooks that gain-seeking breaches might be different from loss-avoiding breaches. To capture these different motives, we designed a novel game called Contract-Breach Game where we exogenously varied the reasons for the breach — pursuing a gain or avoiding a loss — under a specific performance remedy. Results from an incentivized laboratory experiment indicate that the motives behind the breach induce sizable differences in behavior; subjects are less willing to renegotiate when facing gain-seeking than loss-avoiding breaches, and the compensation premium obtained by the promisee is higher. Our analysis suggests that inequality aversion is an important driver of our results; indeed, inequality-averse subjects accept low offers more often in cases of loss-avoiding breaches than gain-seeking breaches. These results give us insight into the preferences and expectations of ordinary people in a case of a breach.

Thinking Like (Law-and-) Economists Efficient Legal Rules and Moral Intuitions of Fairness

Using vignettes that are based on seminal cases in law and economics, I find that judicial decisions across different areas of the common law are considered to be fairer when they are also more efficient. Vignettes describe legal disputes and require respondents to rate the fairness of a judge’s resolution. Fairness ratings are compared across a lower-efficiency version and a higher-efficiency version of each vignette, with efficiency differences generated by subtle changes in context that are motivated by the economic logic relevant to the case’s actual judicial opinion. The results suggest that the economic logic that underlies the Coase theorem, the Hand rule and the foreseeability doctrine, and generates prescriptions for efficient use of strict product liability and efficient breach of contract, aligns with everyday intuitions of fairness. The results also identify two areas, fugitive property and punitive damages, where prescriptions for efficiency do not align with perceptions of fairness.

Why Use Requirement Contracts? The Tradeoff between Price Premium and Breach

A requirements contract is a form of exclusive dealing in which the buyer promises to buy a particular product only from one seller. This paper models a common-sense motivation for such contracts: that the buyer wants to ensure a reliable supply at a pre-arranged price without the need for renegotiation. The model requires that the buyer be unsure of his future demand, that a seller make an investment specific to the buyer, and that the transaction costs of revising or enforcing contracts be high. Transaction costs are key, because without them a better outcome can be obtained with a fixed-quantity contract. The fixed-quantity contract, however, can result in breach. If transaction costs make efficient breach too costly, option and requirements contracts have the advantage of not inducing inefficient performance. A requirements contract has the further advantage that it balances the profits of the seller across states of the world and thus allows for an average price closer to marginal cost.

The Inefficiency of Efficiency: Retaliation, Equivalence and Efficient Breach in the World Trade Organisation

The international law of world trade is cemented on principles of economic logic that are themselves based on rational choice and public choice theory. As a system constructed on notions of market equilibrium, procedural mechanisms such as dispute settlement and the authorization of retaliation are intended to reinstate the proper functioning of competitive markets in line with the wording of the GATT. However some research suggests that retaliation, equivalence and the notion of efficient breach in the WTO falls far from its objective. This essay will argue that as it is currently stands efficient breach, retaliation and equivalence within the WTO not only contradicts basic tenets of the GATT but in doing so creates a market dysfunction that situates world commerce further away from the intended equilibrium and the functioning of competitive markets commanded by multilateral trade law.

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.

When do international economic agreements allow countries to pay to breach?

What explains how some international agreements allow countries to buy their way out of violations? In some regimes, offering to compensate affected parties renders a violation permissible; in others, compensation serves at most a provisional function, with full compliance the only satisfactory outcome. While allowing for breach-and-pay in instances where it leaves all parties better off appears optimal, institutions vary a great deal in the extent to which they tolerate such “efficient breach.” To account for this variation, we consider how the design of the agreement affects the odds of mobilization of domestic groups. We argue that when the benefits from violations accrue mainly to government itself, efficient breach does leave governments better off. Yet when governments benefit only indirectly, through the political support offered by interest groups who are the direct beneficiaries of violations, the possibility of efficient breach increases the payoffs from mobilization. In those cases, allowing for efficient breach strengthens the domestic opposition to the very liberalization pursued by the treaty. Our model predicts that international trade agreements should spurn efficient breach, while investment agreements should favor it. We test these implications by considering dispute settlement and enforcement mechanisms in both regimes.

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?

Demand for Breach

These studies elicit behavioral evidence for how people weigh monetary and non-monetary incentives in efficient breach. Study 1 is an experimental game designed to capture the salient features of the efficient breach decision. Subjects in a behavioral lab were offered different amounts of money to break the deal they had made with a partner. 18.6% of participants indicated willingness to break a deal for any amount of profit, 27.9% were unwilling to breach for the highest payout, and the remaining subjects identified a break-point in between. Study 2 is an online questionnaire asking subjects to take the perspectives of buyers or sellers considering a profitable breach of contract. The results were consistent with Study 1, yielding a demand curve for breach. I conclude by proposing a research agenda that investigates in a systematic way how individuals make legal decisions in the face of competing norms.

Intellectual Property and the Law of Contract: The Case Against 'Efficient Breach'

In general sound general principles of contract law should carry over more or less seamlessly to the licensing of intellectual property. Those basic principles caution against attacks on standard form contracts that often contain liquidated damage provisions. This paper shows why over a broad range of cases involving two or more parties these liquidated provisions, properly calibrated, avoid the many disadvantages of using the theory of “efficient breach” to set damages. Chief among these difficulties are the high administrative costs of finding these damages, and the perverse incentives that they place on the defendant before breach and the plaintiff afterwards. Intellectual property licenses are not exempt from these many principles, which implies that these clear damage rules are typically optimal in first avoiding breach and then in resolve post-breach disputes.

A Compromise Approach to Compromise Verdicts

Although one of the legal system’s most salient attributes is its insistence that a civil jury choose the story of one party over that of another, scholars have thus far paid almost no attention to the possibility of replacing the preponderance-of-the-evidence rule with an alternative that is not “winner-take-all.” This Article focuses on the issue of uncertainty about what the defendant did or whether the plaintiff was injured, offering an alternative to the extremes of all-or-nothing and compromise verdicts. It considers the possibility that, while sometimes an all-or-nothing verdict is appropriate, at other times a compromise verdict would be better. It also proposes a compromise approach in the form of a system of mixed verdicts, distinguishing between cases in which the trier of fact has a relatively high degree of confidence in its liability determination and those in which there is much less certainty. As I will show, arguments for all-or-nothing verdicts are most powerful when the trier’s estimate of the probability of liability is either quite low or quite high, and arguments for compromise verdicts are strongest for cases in which the balance of evidence is relatively even. In Part I of this Article, I consider a variety of general arguments about compromise verdicts, arguments that seek to discern the best verdict structure for all cases without asking how verdict structure will advance various aims of law. In Part II, I consider several such aims directly, including deterrence, efficient breach, restitution, retribution, and equality. The impact of compromise verdicts and a system of mixed verdicts on litigation costs is examined in Part III, which focuses on incentives to file and settle lawsuits. Part IV switches from an examination of factual uncertainty to a preliminary assessment of legal uncertainty. Though the prospect of compromise solutions to legal uncertainty introduces some additional issues, a system of mixed verdicts may be a promising way to accommodate a diversity of normative approaches to legal decision making. In Part V, I briefly consider some implementation issues and conclude.

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.

Intellectual Property and the Law of Contract: The Case Against ‘Efficient Breach’

In general, sound general principles of contract law should carry over more or less seamlessly to the licensing of intellectual property. Those basic principles caution against attacks on standard form contracts that often contain liquidated damage provisions. This paper shows why over a broad range of cases involving two or more parties these liquidated provisions, properly calibrated, avoid the many disadvantages of using the theory of “efficient breach” to set damages. Chief among these difficulties are the high administrative costs of finding these damages, and the perverse incentives that they place on the defendant before breach and the plaintiff afterwards. Intellectual property licenses are not exempt from these basic principles, which implies that these clear damage rules are typically optimal in first avoiding breach and then in resolving post-breach disputes.

Biological Aspects of Contract Breach

Cooperation is an occurrence, which can be observed amongst humans and other organisms and is often viewed as an essential tool for survival, because when individuals cooperate, overall risks are reduced and mutual benefits are maximised. To sustain large groups of unrelated people, cooperation and reciprocity are a necessity. Free riding may undermine cooperation. To counterbalance the individual urge to free ride and the competing group interest, during evolution humans (and apes), developed morals. However, within large groups of unrelated people, unexpressed morals do not suffice. Rules have to be communicated to improve cooperation. From this point of view, the law is a vehicle that helps people to act as if their society is a small and cohesive group. The area of law, which is quintessentially underpinned by cooperation and reciprocity, is contract law, aptly described as the law of obligations. This body of law binds and enforces agreements between parties to ensure that individual interests are protected and mutual benefits are enhanced. The way in which the law enforces these agreements and remedies for breaches of contract is through incentives and disincentives, which are often referred to in biological texts as control mechanisms. Clearly, biology offers a number of helpful insights to this area of law and may account for why contractual remedies are structured the way they are. As contracts enhance cooperation and cooperation improves safety and availability of resources, which will in turn serve survival, reproduction and thus also the spreading of genes, contracts serve cooperation. Therefore, if a contract is breached by a party to pursue a greater individual benefit, detriment to the innocent party will result. As biological game theory tells us, the genes of the latter individual will then have lesser chances to spread if the damage is not compensated. This article surveys contractual remedies utilising a biological lens, especially efficient breaches, i.e. situations where there is an incentive to breach, which will effectively make breaching the contract more worthwhile than performing it. This method will assist us in understanding and checking human behaviour in a manner conducive to maximising societal gains.

A Nihilistic View of the Efficient Breach

This article began as a reaction to an article by Daniel Makovits and Alan Schwartz in the Virginia Law Review, “The Myth of the Efficient Breach. . . .” In their article they offer what they call “new defenses” of the expectation interest as a contract remedy. Much of their analysis has been anticipated by others. Plus, in my view the law and economics concepts they seem to rely on lost their legitimacy years ago. Their article was the catalyst for this broader examination of forty years of writing about the efficient breach and an assessment of where it has gotten us. The answer: not far. This article demonstrates that no contract remedy is consistent with efficient breach and, more importantly, that no remedy can be consistent with the efficient breach. Although this offering relies somewhat on new teachings from behavioral economics and happiness studies, it relies primarily on the fact that an efficient breach requires internalization of the harm caused. The harm caused by a breach is not simply difficult to measure but is fluid. Legal scholars who persist in refining the analysis actually get further from a practical solution. The article closes with what may be regarded as some good news. While scholars have written thousands of pages over decades on the issue, the courts have largely ignored those writings.

Bodum USA, Inc. v. La Cafetière, Inc. - Three Notes About Proving The Foreign Law, The Remedies for Breach of Contract and The Concept of Efficient Breach

This paper analyzes the ruling passed by the Seventh Circuit of the Court of Appeals of USA in the case Bodum USA, Inc. v. La Cafetiere, Inc. Several subjects are examined. Firstly, the interpretation of foreign Law by domestic Courts and how to prove the right meaning of it; secondly, the different remedies for breach of contract in the Common Law and in the Civil Law. Finally, this paper contains a critical review of the concept of efficient breach, following the thread of the concurring opinion of Judge Posner.