Review the following excerpt from Perillo Calamari Perillo

Review the following excerpt from Perillo, Calamari & Perillo On Contracts, 6th Ed., West Publishing Co. (2009) [ISBN-13: 9780314181435] at pages 537-39, §14.36:

“Should “Efficient Breaches” Be Encouraged?

The theory of efficient breach holds that if a party breaches [a contract to which he is a party], and is still better off after paying damages to compensate the victim of the breach, the result is Pareto superior, that is, considered as a unit, the parties are better off because of the breach and the breach makes no party worse off. Consequently, according to the theory, the party who will benefit from the breach should breach.

            Judge Posner, a principal proponent of efficient breach theory, states: ‘Even if the breach is deliberate, it is not necessarily blameworthy. The promisor may simply have discovered that his performance is worth more to someone else. If so, efficiency is promoted by allowing him to break his promise, provided he makes good the promise’s actual losses. If he is forced to pay more than that, an efficient breach may be deterred and the law doesn’t want to bring about such a result.’ If the law doesn’t want to deter efficient breaches, why does it so often subject the ‘someone else’ to tort liability for inducing the breach, with exposure to a tort measure of damages and punitive damages?

                Judge Posner has given this example of an efficient breach: ‘Suppose I sign a contract to deliver 100,000 custom-ground widgets at 10¢ apiece to A for use in his boiler factory. After I have delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will have to close his Pianola factory at great cost, and offers me 15¢ apiece for them. I sell him the widgets and, as a result, do not complete timely delivery to A, causing him to lose $1,000 in profits. Having obtained an additional profit of $1,250 on the sale to B, I am better off even after reimbursing A for his loss, and B is also better off. The breach is Pareto superior*.’

… Healthy business relationships help the market function efficiently and encourage market activity. Such relationships are almost always disrupted by a breach, whether it is efficient or otherwise. Of course, if a party can get a better deal elsewhere, there is no harm in asking the other party to accept a sum of money in substitution for performance; to talk is not to breach. However, if efficient breaches are encouraged, what effect does such encouragement have on trust among actors in the market. Efficient breach theory encourages ‘breach first, talk afterwards.’”

* Pareto Superior: Posner and Perillo in the above excerpt refer to a theory parlayed by Italian economist Vilfredo Pareto and utilized in several fields such as economy, business, and engineering. Essentially, Pareto Efficiency posits that given an initial allocation of resources it is impossible to make one better off without making another worse off in the event of a re-allocation of those resources. Pareto Superior or Improvement occurs where the re-allocation DOES make one better off without making anyone else worse off. {Note added by Prof. Rodgers}

Write reflection on the following topic: WHAT ARE THE ECONOMIC AND ETHICAL PROS AND CONS OF EFFICIENT BREACH; AND HOW SHOULD AN ETHICAL BUSINESSPERSON RESPOND TO AN OPPORTUNITY TO BREACH A CONTRACT ON THE GROUNDS THAT IT IS EFFICIENT TO DO SO?

Solution

The pros and cons of efficient breach are as follows:

1)The arguments that are in favour of efficient contract are

A) the resources shoul be allocated to those who value them the most. In the above example B needed the goods on urgent basis and he was ready was to pay more than usual amount therefore both the party would be benefited as the seller is gaining more profit than usual and the purchaser is getting his requirement fullfiled in no time

B)The main purpose of the contract is to facilitate efficiency . And if that pupose is being fullfiled then there is no harm in breaching the contract.

2)The arguments that are not in favour of efficient breach are

A)The transaction cost can be very high, due to which it would be inefficient to breach the contract

B)sometimes the expected damages tend to undercompensate

C)Breach of contract rewards individualistic , uncooperative behaviour , which is socially undesirable

D)undermines perception that law promotes fairness and justice

An ethical business man should respond in an very ethical manner if there is an opportunity to breach a contract and if it is efficient to do .He should take care of the following

Generally when performance will cost promisor more than it will benefit promisee contract should be breached. Both the parties will prefer breach if cost is greater than damages and damages are greater than value and the end result after damages will be pareto superior to performance. A promisor will prefer breach if cost is greater than damages and promisee wll prefer breach if damages are greater than value. if both the conditions as per the promisor and promisee are fullfiled then it is etical to breach a contract.