Who Chooses and Who Gets What: Efficient Breach and Efficient Performance Hypotheses
The efficient breach hypothesis is often taken as formal support for the Holmesian optional contract approach, which gives promisors the right to perform or pay. However, the efficient breach hypothesis doesn’t speak directly of rights (and indeed a promisor’s power to perform or pay would work just as well as the right to do so), but it does implicitly constrain the rights of promisees. If promisees have the right to prevent breach, it is often argued, inefficiency will result. Moreover, the efficient breach hypothesis relies on the expectation damage remedy: “If [the promisor] is forced to pay more than that, an efficient breach may be deterred.” It is broadly believed that efficiency requires the expectation remedy. Because particular rights and remedies are often viewed as associated with the efficient breach hypothesis, one might be tempted to conclude that those particular rights and remedies are required for efficiency.
The purpose of my essay, The Efficient Performance Hypothesis, is to argue against this temptation. Efficiency embraces a broader scope of rights and remedies than that implied by the standard efficient breach hypothesis. To demonstrate this point the essay considers two distinct allocations of rights –the Holmesian option, which gives the promisor the right to perform or pay, and an alternative option, which gives the promisee the right to compel performance or receive payment for non-performance. These competing allocations are combined with a variety of damage remedies and shown to produce comparably efficient outcomes.
The efficient performance hypothesis works by giving the promisee the right to compel performance and to capture all or some of the profits when the promisor chooses not to perform. The key to this hypothesis is situating the promisee to weigh the costs and benefits of performance when choosing between performance and payment. That is exactly what the efficient breach hypothesis does with regard to the promisor. Under the efficient breach hypothesis, the promisor is situated to weigh the value (through expectation damages) against the cost (through specific performance) of the contract when deciding whether to perform. Similarly, under the efficient performance hypothesis, the promisee is made to compare the value (through specific performance) to the cost (through disgorgement) of contract performance. Trading off value and cost in this way, the promisee will elect contract performance only if it is efficient.
Efficiency results under both hypotheses because the decision-maker—the promisor, in the efficient breach hypothesis, or the promisee, in the efficient performance hypothesis—weighs the social costs and benefits of performance. Ethics may tell us that the promisee should be the chooser —that is, that she should have the right to determine performance—or that the promisor should have that right, or that neither should, and further moral considerations may constrain the remedies associated with these rights. My essay suggests that various ethical and moral considerations may be made consistent with efficiency considerations.
Finally, I must emphasize that the essay is not intended to advance any particular ethical or moral conception of contractual rights. While I do find the promisor’s right to perform or pay suspect, to say the least, I do not think that simply reversing the entitlement (i.e., giving the promisee the right to compel performance or receive payment) is ethically ideal either. The reversal is offered simply to show that efficiency can be achieved with competing allocations of legal rights and with distinct distributions of the gains from non-performance through various remedies. Of course, efficiency cannot accommodate all ethical constraints—at some point one might be forced to choose—but the tension between efficiency and other normative justifications for contract enforcement is significantly less acute than that suggested by the efficient breach hypothesis.
Richard R.W. Brooks is Professor of Law at Yale Law School.
Preferred Citation: Richard R.W. Brooks, Who Chooses and Who Gets What: Efficient Breach and Efficient Performance Hypotheses, 116 Yale L.J. Pocket Part 414 (2007), http://yalelawjournal.org/forum/who-chooses-and-who-gets-what-efficient-breach-and-efficient-performance-hypotheses.