Legal Definitions - efficient breach theory

Efficient breach theory is a concept that suggests that it is more economically efficient for parties to breach a contract and pay damages than to perform under the contract. This theory encourages courts to award compensatory damages for breaches of contract rather than punitive damages meant to punish the defendant for moral misconduct.

For example, imagine that a company has a contract to deliver goods to another company. However, due to unforeseen circumstances, the cost of delivering the goods has increased significantly. The company may decide that it is more economically efficient to breach the contract and pay damages rather than to perform under the contract and incur significant losses.

Efficient breach theory is in contrast with the sanctity of contract, which suggests that contracts should be upheld regardless of the economic consequences. However, the widespread adoption of efficient breach theory means that punitive damages are rarely available in breach of contract lawsuits.