The Myth of Efficient Breach: New Defenses of the Expectation Interest

75 Pages Posted: 23 Apr 2011 Last revised: 26 May 2011

Daniel Markovits

Yale Law School

Alan Schwartz

Yale Law School

Date Written: April 20, 2011

Abstract

We defend contract law’s preference to protect the expectation with a liability rule against prominent doctrinal and moral critics who argue that a promisee should have a right to specific performance or to a restitutionary remedy. These critics argue that liability rule protection limited to contractual expectations 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 the profit he would have realized had he received the goods or services the contract described. The critics prefer to vindicate contractual expectations with a property rule or restitution.

We show that a promisee’s gross payoff under the typical contract is invariant to the remedy the law accords him. Current defenders and critics focus on gross payoffs. In this analytic universe, no remedy can be shown to be superior to any other remedy. We argue below that the promisee’s net payoff, for transaction cost reasons, is higher under a contract that protects his expectation with a liability rule. This claim supports the dual performance hypothesis, which holds that promisees typically give their promisors 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. On this view of the law, 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; it is consistent with the law’s immanent normativity; and it is consistent also with the morality of promising.

Suggested Citation

Markovits, Daniel and Schwartz, Alan, The Myth of Efficient Breach: New Defenses of the Expectation Interest (April 20, 2011). Virginia Law Review, Forthcoming; Yale Law & Economics Research Paper No. 431. Available at SSRN: https://ssrn.com/abstract=1816295

Daniel Markovits

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States

Alan Schwartz (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4030 (Phone)
203-432-8260 (Fax)

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