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EfficientBreachTheory 8 - 02 Feb 2012 - Main.RohanGrey
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The following is an edited transcript of a Facebook conversation between Joseph Itkis (JI), Jonathan Brice (JB), Shaked Sivan (SS) and myself, Rohan Grey (RG) that was inspired by our class yesterday and we thought might be worth sharing. Apologies in advance for any edit-fails. | | | If the courts wholly adopted an efficient breach theory that assigned nominal or zero value to specific performance of contractual obligations, then the economy would ideally adjust to eventually place little or no reliance on actual performance in instances where the risk of efficient breach is high. Instead, individuals and firms would attempt to minimize the cost of resulting uncertainty by taking out insurance, developing more comprehensive contingency clauses, and/or assigning a lower value to the contract in the first place. While impossible to predict, it is possible that the costs imposed by such ameliorative measures, as well as the more general uncertainty regarding contractual performance, would end up being higher than the benefits gained from promoting intentional breach when it is deemed profitable to one party. | |
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< | On the other hand, courts could choose to assign a non-trivial value to specific performance over non-performance with compensation. There are three ways this could be done. Firstly, courts may attempt to calculate the expected marginal cost of greater contractual uncertainty represented by each individual act of intentional breach. Alternatively, courts may decide that such calculation is impossible, and deem the optimal solution to be an approximate or even arbitrarily determined Pigovian tax, in order to disincentivize all intentional breaches. Thirdly, courts may decide to presumptively favor specific performance and forced injunctions, and only carve out specific or general case exceptions when performance is unfeasible or unreasonable. Regardless of which particular approach was adopted, each one would result in a higher degree of certainty in contractual performance than in the same context under an efficient breach theory. However, the benefits gained from greater certainty in judicial enforcement of contractual obligations may be offset by excessive restrictions on the ability of contracting parties to opt-out when such an option has vastly greater benefits to all parties involved (including society), but unacceptable costs to the party that would directly suffer the breach. | >
> | On the other hand, courts could choose to assign a non-trivial value to specific performance over non-performance with compensation. There are three ways this could be done. Firstly, courts may attempt to calculate the expected marginal cost of greater contractual uncertainty represented by each individual act of intentional breach. Alternatively, courts may decide that such calculation is impossible, and deem the optimal solution to be an approximate or even arbitrarily determined Pigovian tax, in order to disincentivize all intentional breaches. Thirdly, courts may decide to presumptively favor specific performance and forced injunctions, and only carve out specific or general case exceptions when performance is unfeasible or unreasonable. Regardless of which particular approach was adopted, each one would result in a higher degree of certainty in contractual performance than in the same context under an efficient breach theory. However, the benefits gained from greater certainty in judicial enforcement of contractual obligations may be offset by excessive restrictions on the ability of contracting parties to opt-out when such an option has vastly greater benefits to almost all parties involved (including society), but unacceptable costs to the party that would directly suffer the breach. | | | | |
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< | Ultimately, the decision of which of these approaches to adopt depends on a value judgment. Perhaps there is an intrinsic tradeoff between the benefits of market efficiency and higher certainty in contractual enforcement. Perhaps the apparent tradeoff is in fact illusory and merely represents a failure by efficient breach theorists to fully internalize the external costs associated with encouraging breaches deemed profitable by the breaching party. Regardless, the process of determining the broader effect of a system of permissible intentional breaches is important, and shouldn’t be assumed away at the outset of economic analysis of contractual disputes. | >
> | Ultimately, the decision of which of these approaches to adopt depends on the potential risks and benefits the court chooses to acknowledge in their value calculus, and the particular values they assign to each. Perhaps there is an intrinsic tradeoff between the benefits of market efficiency and higher certainty in contractual enforcement. Perhaps the tradeoff is illusory; a mere failure by efficient breach theorists to fully internalize the external costs associated with encouraging breaches deemed profitable by the breaching party. Regardless of whether the answers can be conclusively determined, it is critical to address these issues when determining the broader effect of a system of permissible intentional breaches, rather than assuming them away at the outset of any economic analysis of contractual disputes. | | | -- RohanGrey - 1 Feb 2012 |
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