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Wednesday, June 06, 2012

The Doctrine of Efficient Breach: Faculty/Student Edition

Dan has graciously allowed me to extend my May guest-stint in order for me to explore a couple of topics that I had intended to -- but did not -- cover in May.  I hope these remaining two posts are interesting to readers and do not lead Dan to regret his order granting me late-check out. 

Perhaps the most talked about post on this site from the month of May was Rick’s discussion of a student’s decision to back-out on a commitment to serve as his research assistant.  The student, it seems, secured another opportunity that was more consistent with his or her professional aspirations.  Rick addressed the frustrating position the decision left him in, and also the sufficiency of the manner in which the decision was communicated.  First, I think Rick deserves a lot of credit for sharing his very thoughtful reflections triggered by the significant -- and largely critical -- reaction to his initial post.  I do not want to focus at all the contents of the initial post or the subsequent reflective post.  Rather, what struck me was a comment to the initial post, suggesting that the student’s decision is akin to an efficient breach, and that defenders of the doctrine should have no problem with the student’s decision.

While the analogy isn’t perfect, I think the commenter was on to something.  In both situations, performance was expected and the non-breaching party is compelled to scramble to find someone to take the place of the breaching party.  The breaching party now has an entity that he or she values more and thus social welfare is supposed to be enhanced in this respect, assuming there is some compensation to the non-breaching party. 

As a matter of full disclosure, I have my doubts about the doctrine of efficient breach.  The doctrine was the subject of my first law review article.  In it, I argued that an efficient breach is morally problematic because it degrades contracts, which are an instrument of social cooperation and mutual trust, and are not “efficient” because compensatory damages do not place the non-breaching party in the place he or she occupied in the absence of the breach and because such breaches lead to a discounting of that which is exchanged the market due to the possibility that a contracting party may not perform.  A student’s decision to renege on a commitment to work for a faculty member, to the extent it has any relationship to the doctrine, seems to cut in favor of arguments against the doctrine.  Indeed, an efficient breach is said to work only if the non-breaching party is made “indifferent” to the breach through the receipt of compensation.  But I am not sure that a faculty member could be made truly “indifferent” in this situation.  While an efficient breach is very difficult to find in real-life, a question that I examine in a more recent law review article is whether we, as professors, should be engaged in an active effort to promote the doctrine.  My sense is no, because its theoretical benefits are an almost practical impossibility in real life, and because, on balance, the supposed benefits are outweighed by costs to contracting as a reliable form of social cooperation and by costs that are not compensated for and are thus borne by the non-breaching party. 

I invite readers to explore this link between a decision by a student to refuse to perform an agreed-upon and voluntarily assumed obligation with an efficient breach.  I suspect that, as faculty members, we may have encountered a situation similar to Rick’s and can appreciate how much it would, for lack of a better term, “suck.”  This more accessible and relatable situation may provide us with a helpful lens through which to view and assess the value of an efficient breach in society and the propriety of its open promotion by law faculty.

I hope readers will excuse me for any typos or errors in this post, which was written rather quickly as I am attending the Law and Society conference.  I hope to meet readers attending the conference at the AALS Law & the Social Sciences Section Happy Hour (tonight at Tropics from 4-6pm) and/or the Faculty Lounge-Prawfs Happy Hour (tonight, at the Tapa Bar starting at 9pm and ending as soon as Hilton wisely places us on "double secret probation").

Posted by Dawinder "Dave" S. Sidhu on June 6, 2012 at 07:26 PM in Legal Theory | Permalink


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Leaving the morality aside, I am always interested when people argue efficient breach is insufficient in theory and/or practice because it doesn't fully compensate the non-breaching party. That is a reality of nearly all contract litigation of any kind. While, in certain circumstances, specific performance is an option---assuming you can get it---it still will almost uniformly fall short of placing the non-breacher in the position he/she would have held if full performance would have occurred.

In the present "hypothetical," it seems to me the professor is better off having the student breach. That is, the student obviously thought he/she could prosper better in greener pastures. Had he/she retained the position, he/she would have likely underperformed---at least in terms of comparative potential. Now, the professor is "free" to find another student who is honored to have the opportunity.

Posted by: Wayfarer | Jun 7, 2012 4:36:29 PM

I am not sure what gratuitous means in this context unless you mean unnecessary. And if so, it is totally unnecessary because it is but one way to pose the issue.So let's make Rick, Bubba, a rich egotistical Texan who bought a new Mercedes and discovered that the dealer had efficiently breached causing great loss to Bubba because he had bragged to his friends about being a great negotiator and how he "ruled" at the dealership and is never never told no. Do we compensation Bubba so the breach really makes him indifferent -- that is do we institute the truly efficient breach or do we use the standard efficient breach?

Posted by: Jeff | Jun 7, 2012 11:31:22 AM

I suspect that "Rick", hypothetical or otherwise, might well prefer to have this scenario put to rest. Further contemplation of it for academic purposes seems gratuitous.

Posted by: Brian Tamanaha | Jun 7, 2012 10:19:23 AM

First, I mostly agree with you on the efficient breach perhaps for different reasons. I do not think you promote morality by requiring people to do something that they would prefer not to do or by awarding damages that are at one level or another. In fact, I am not sure contract law can do much about morals. I also am not sure what is meant by "promoting" the idea or actually whether law professors should be promoting anything that concerns their views of what is moral. Courts use the term "efficient breach" frequently and, thus, I think students need to understand what it means warts and all. From my perspective the problem with the so-called efficient breach is that the recovery is based typically on market values which may or may not compensate the non breaching party. In short, it may not be efficient at all. In effect, it allows the breaching party to buy his or her way out of performing at a price that might or might not have been acceptable if the defendant had simply asked "What would you charge me to let me out of this contract and to feel fine about it." [Let's put aside issues of bilateral monopoly and assume the non breaching party gives an honest answer. In the case of the student (who I assume was terminable at will and, thus, I am not sure broke any promise other than perhaps to show up the first day and not even that in most states)the issue gets sticky and the idea of efficient breach may become more attractive. Let's say whatever benefit the student received as a result of breaching would not be enough to compensate "Rick" so that he is "indifferent." (Rick in quotes since this is a hypothetical Rick.)Not efficient, right? OK, let's suppose that part of the reason Rick does not feel so great with no recovery or a minor one is that he has a sense of entitlement as in "What, I dare you to resign." He is insulted or fears he will lose face. Or, he did not feel an emailed letter showed the deference to which he is entitled. And let's further suppose Rick has been over affirmed his whole life having lead a privileged existence. Here it seems the idea of the truly efficient breach depends on Rick. The point is that most of the criticism of the efficient breach is that it ignores subjective values. And, I actually agree with that. But, are all subjective values equally legitimate? If not, what do we do other than look for what would be reasonable to the average person? And then we are stuck with the efficient breach. I am not happy about it but critics (like me) may tend to view all subjective values as deserving of respect in the context of contracts. Perhaps the (not really) efficient breach allows us to escape making decisions about the value of others.[Please excuse the typos. I took a really long time to read this and reread it but I am the worlds worst proof reader. In fact, worlds should probably be world's but that would mean another cycle of hitting preview and so on. . . .]

Posted by: Jeff | Jun 7, 2012 12:27:04 AM

* Indeed, an efficient breach is said to work only if the non-breaching party is made “indifferent” to the breach through the receipt of compensation. But I am not sure that a faculty member could be made truly “indifferent” in this situation. *

The normal means of compensation is money. Are you saying that if the student had come to Rick's office with a check in addition to his resignation (suppose he had won the lottery rather than gotten a different job), that no matter how large the size of the check, he would rather have had the summer RA? That seems rather far fetched.

Posted by: Brad | Jun 7, 2012 12:25:00 AM

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