Efficient Breach – When You Should Breach Your Contract, And Why The Law Is Designed To Encourage Certain Kinds Of Breach By Bob Miles At Isnare.com Ezine Articles

Breaching a contract is bad, bad, bad…isn’t it? Well, not always, at least not in the eyes of the law. The purpose of contract law is not to spank naughty promise-breakers, but to increase economic efficiency.

Suppose, for example, that you own some real estate. Buyer 1 wants to live in your house and offers you what you consider to be a good price for it, and you enter into a contract with Buyer 1 to sell it to him. Then Buyer 2 calls you. He wants to buy your real estate to build a shopping center on it, and he is willing to pay you twice as much as Buyer 1. You contact a lawyer and he tells you that even if you pay full damages to Buyer 1, with what Buyer 2 is paying you you’ll still come out way ahead. You respond by breaching the contract with Buyer 1, paying him the amount he lost on account of your breach (known as “expectation damages”), and selling the house to Buyer 2. Should you contact a priest to confess your sin?

Not necessary. By paying Buyer 1 full expectation damages, you put him in as good a position as he would have been in had you performed your contract with him. Therefore he has no legitimate complaint. Furthermore, by selling your real estate to a developer whose development will increase the economic value of your real estate far more than Buyer 1 would have, you have done your part to increase economic efficiency. So pat yourself on the back, take a trip to Maui, whatever. You have just committed what is known as efficient breach, and Uncle Sam is happy with you because the property taxes on your former real estate will undoubtedly increase, and so will your income taxes.

The point is that when it comes to civil law (as opposed to criminal law), morality takes second place to economic efficiency. That is why someone who robs a house is guilty, but someone who breaches a contract to sell a house is merely liable (of course, you can be guilty and liable at the same time!).

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