"Efficient Breach"
Economic theory suggests that when the benefits of breaching an agreement exceed the costs of complying with an agreement, the system governing the agreement should allow a party to breach the agreement. On the other hand, when the costs of breach outweigh the benefits of breach, the governance mechanisms should create an incentive for a party to comply with the agreement. Efficient breach of contract is a theory, which has now turned into law in the United States. It mandates that a party must breach his contract, whenever the gains from breach are larger than performance of the contract, provided that he only pays the other party’s expectation damages. Or in other words, as Judge Richard Posner has formulated it:
“a breach of contract is more efficient than performance of the contract when the costs of performance exceed the benefits to all the parties." (in: Cooter, R. & Ulen, T., Law and Economics, Harper Collins Pub.1988, p.. 290.)
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