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Simple English definitions for legal terms
efficient breach theory
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A quick definition of efficient breach theory:
Efficient breach theory is the idea that it can sometimes be better for someone to break a contract and pay for the damages than to keep the contract. This is because it might be more efficient and cost less money. When someone breaks a contract, they should only have to pay for the damages they caused, not extra punishment. This is different from the idea that contracts should always be followed no matter what, which is called sanctity of contract.
A more thorough explanation:
Efficient breach theory is a concept that suggests that it is more economically efficient for parties to breach a contract and pay damages than to perform under the contract. This theory encourages courts to award compensatory damages for breaches of contract rather than punitive damages meant to punish the defendant for moral misconduct.
For example, imagine that a company has a contract to deliver goods to another company. However, due to unforeseen circumstances, the cost of delivering the goods has increased significantly. The company may decide that it is more economically efficient to breach the contract and pay damages rather than to perform under the contract and incur significant losses.
Efficient breach theory is in contrast with the sanctity of contract, which suggests that contracts should be upheld regardless of the economic consequences. However, the widespread adoption of efficient breach theory means that punitive damages are rarely available in breach of contract lawsuits.