The Myth of Efficient Breach

Abstract

We defend contract law’s preference for the expectation remedy against economic, doctrinal, and moral critics, who argue that a promisee should have a right to specific performance. It follows from this claim of right that the expectation remedy unjustifiably favors promisors, by allowing a promisor to capture the entire gain from unilaterally exiting a contract as long as she compensates her promisee for whatever profit he would have realized had he received the goods or services the contract described. We show, however, that a promisee’s gross payoff under the typical contract is invariant to the remedy the law accords him, but that his net payoff, for transaction cost reasons, is higher under a contract that protects his expectation. This showing supports the dual performance hypothesis, which holds that the promisee typically gives his promisor discretion either to trade the goods or services at issue or to make a transfer to the promisee in lieu of trade. A promisor who transfers rather than trades therefore does not breach; rather, she breaches only when she rejects both trade and transfer. Moreover, a promisee’s suit to recover his expectation is a specific performance action to enforce the contract’s transfer term. We further explain that this approach renders contract law coherent; is consistent with the law’s immanent normativity; and is consistent also with the morality of promising.