Opportunistic Breach of Contract

Abstract

Law and economics scholarship has traditionally analyzed efficient breach cases monolithically. The standard analysis holds that breach is efficient when performance of a contract would generate a negative total surplus for the parties. By grouping efficient breach cases together, this literature treats the subjective motives and the distributive effects of the breach as immaterial (Posner, 2009). The Restatement (Third) of Restitution and Unjust Enrichment (2011) §39 introduced a distinction based on the intent and the effects of the breach, allowing courts to use disgorgement remedies in cases of “opportunistic” breach of contract (i.e., “deliberate and profitable” breaches). The introduction of disgorgement remedies for opportunistic breach of contract has been met with mixed reactions by legal academics. In this paper, we carry out an analysis of the limits and merits of the Restatement’s innovation, focusing on the effects of disgorgement remedies on allocative and productive efficiency, information-forcing and competitive effects, and restraint of breach-searching incentives. We show that, even from a purely consequentialist perspective, disgorgement remedies may be normatively warranted. Recent experimental evidence revealed that the preferences and reactions of ordinary people are in line with our evaluation of the effects of opportunistic breach.

Keywords: disgorgement damages, opportunistic breach, efficient breach

JEL Classification: K12, D86, C9