What is Efficient Breach of Contract?

Breaching a contract will lead to a judgment against you for breach of contract, and that could cost you a lot of money. It is always better to abide by the terms of a contract, than to breach the contract. Except, sometimes, financially, that’s not exactly true.

There are times when breaching a contract and facing whatever damages may stem from that breach of contract may actually save you money–when breaching and paying associated damages would cost less than fulfilling your obligations under the contract.

Examples of Efficient Breach

Imagine for example that you will get paid $40,000 to provide construction materials on a construction site. However, it turns out that your supplier has raised its prices, and it will cost you $100,000 to get the supplies that you need to fulfill your obligations under the contract.

It may be a better idea to just breach the contract rather than lose the money on the suddenly increased cost of the materials that you were supposed to provide.

Imagine that you were supposed to lease property to someone and you have a signed lease. At the last minute, someone else offers you twice the money for that same property. It may be better to breach the contract to the first potential tenant, and pay those damages, so that you can lease to the second tenant, which is now offering you twice the amount you would have made.Your net profit would be more, considering what you owe to the first tenant, and what you’ll make leasing to the second.

In sum: there are some times when you make more money breaching a contract, or at least, you lose less money by breaching the agreement than you would lose by complying with it.

Still Technically a Breach

All of these situations are still illegal in that you can still be sued for breach of contract. Efficient breach does not excuse the breach. In some sense, efficient breach is little more than an economic theory, or a business decision. And nobody is suggesting that it is good practice to routinely breach contracts.

But that doesn’t stop you from making a tactical, economic and educated decision to breach a contract should you feel that economically it is in your best interest.

How and When

Often, efficient breach is best where the damages for the breach are set in the contract itself. For example, if there is a liquidated damages clause, where your damages are capped at a sum certain, you can evaluate whether complying with, or breaching the contract, are the better options.

Contracts where consequential damages may be awarded may not be good candidates for efficient breach, given that there is no limit or cap on what kind of damages may stem from the breach.

Additionally, be aware that even if damages are capped in a contract, attorneys fees often are not. That means that if you are considering efficient breach, it’s better to negotiate the breach beforehand, and try to agree on contractual damages, before a breach of contract action is filed against you and attorneys fees start to accrue.

Negotiating a business contract? Let us help. Call our West Palm Beach business litigation attorneys at Pike & Lustig to help you.

Source:

upcounsel.com/efficient-breach