A Nihilistic View of the Efficient Breach

Abstract

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.