Efficient Breach? — Greg Klass

Post by Greg Klass

I just read Robert Scott’s 2015 Boden Lecture at Marquette Law School, “Contract Design and the Shading Problem.” For anyone interested in what’s happening in the economic, instrumental and empirical analysis of business-to-business contracts, this is a great place to start.

There is a lot of interesting stuff in this piece, but here I want to mention only Scott’s argument that we’ve all been paying too much attention to the theory of efficient breach. This is a remarkable claim from the scholar who, together with Charles Goetz on 1977, coined the term “efficient breach,” and did as much as anyone to promote the theory early on. Scott now considers it unsatisfactory for an empirical reason: the theory does not describe most breaches. Rather than one party deciding it is in its interest to breach and pay damages, most breach of contract cases involve disputes—sincere or opportunistic—as to what the contract requires. The breach did not increase the size of the pie, but resulted from disagreement about how the pie was supposed to be divided. Theories that emphasize efficient breach therefore ignore what parties, at the time of contracting, really care about: avoiding disagreement in the gray zone, or what Scott calls “shading.” Scott concludes that, “while we meant well, Goetz and I are probably primarily responsible for leading a generation of scholars down the wrong garden path.”

I think Scott’s observation about what’s happening in most breach cases is probably correct, though it would be nice to more systematic empirical work on the question. Scott does not mention it, but a vast post-1977 economic literature has also cast doubt on many of the theory’s foundational claims. For those interested, I provide an introductory overview of that theoretical work in a chapter in The Philosophical Foundations of Contract Law, from OUP.

Coming from a very different direction, I just posted an essay that argues that the theory of efficient breach is a good example of how narrative works in legal theory. I try to get at the idea, and a few others about the theory, through an extended comparison to Jean Renoir’s 1939 film, The Rules of the Game. (If you’ve never seen it, you should. The film is fantastic.) Just as the efficient breach theory suggests that the law should encourage some contract breaches, the film depicts a society in which marital infidelity is a permissible transgression. The film is interesting not only for that parallel, but because Renoir’s critique of upper class Parisian society suggests alternative ways of thinking about the morality of the efficient breach theory—ways that go beyond, “It celebrates the wrong of promise breaking.” The essay’s method—using a film to illuminate a theory—is a new one for me, and it is still a work in progress. So I’d very much appreciate hearing from anyone who reads the draft and has thoughts.

We murder to dissect. But even if, as Scott writes, “efficient breach is both a null set as well as an oxymoron,” we should not think of it as dead letter. For one thing, the theory remains a great teaching tool—a way to disrupt 1Ls’ untutored expectations about what contract law should do and about what sophisticated parties want from it. It also remains an important thought experiment for contract theorists. Theorists should think about, inter alia, what remedies parties want, how remedial rules can affect other contract terms, whether parties should be given the power to choose the remedy, and if so the right mechanisms for exercising that choice. The efficient breach theory force one to think hard about such questions, whether or not its answers to them correct.

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