The Economic Logic of Efficient Breach in International Contracts
The doctrine of efficient breach remains one of the most contested yet analytically powerful concepts in contract law. Its application in international commerce deserves careful examination through the lens of economic analysis.
The Basic Proposition
When Breach Creates Value
A breach is efficient when the breaching party can compensate the non-breaching party for all losses and still retain a surplus. Consider a supplier who contracts to deliver goods at $100,000 but receives a subsequent offer of $150,000 from another buyer. If the original buyer's expectation damages amount to $30,000, breach generates $20,000 in net social gain.
The Compensation Principle
The critical constraint is full compensation. Expectation damages—placing the non-breaching party in the position they would have occupied had the contract been performed—serve as the mechanism ensuring that breach occurs only when it creates genuine value.
International Complications
Jurisdictional Arbitrage
Cross-border contracts introduce complexity. Parties may strategically select governing law to minimize breach costs, potentially undermining the efficiency rationale. The CISG's approach to damages, emphasizing foreseeability, creates different incentive structures than common law regimes.
Enforcement Uncertainty
The efficiency calculus depends on reliable damage awards. Where enforcement is uncertain—as in many emerging markets—parties may breach opportunistically, knowing that compensation is unlikely. This transforms efficient breach doctrine into a license for exploitation.
Practical Implications
Liquidated Damages Clauses
Sophisticated parties increasingly specify damages ex ante. Such clauses reduce litigation costs and provide certainty, though courts in various jurisdictions differ markedly in their willingness to enforce penalty clauses.
Specific Performance
Civil law jurisdictions' preference for specific performance reflects skepticism about courts' ability to calculate accurate damages. This preference may prevent some efficient breaches but also reduces strategic behavior.
Conclusion
The efficient breach doctrine illuminates the economic function of contract remedies. International practitioners must understand both its analytical power and its limitations in cross-border contexts where enforcement mechanisms vary substantially.