Background

Against a background where commercial trading is growing and becoming more complex in modern society, private parties are appealing for more flexibility and freedom in taking commercial decisions, rather than strictly abiding by the documents they have signed. Correspondingly, the traditional study of contract law, which offers a fundamental legal structure for trade, has received more theoretical debate. The traditional legal idea that breach of contract is wrong and should be avoided has been challenged. Law and Economics, with its efficient breach theory, obviously provides one of the strongest voices and provides a utilitarian approach to explain contract and promissory obligations, which have been influenced greatly by the traditional notion of pacta sunt servanda and the moralistic nature of obligations. In 1897, Judge Oliver Wendell Holmes wrote in his well-known book “The Path of the Law’ that: “The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, and nothing else.” Afterwards, this illustration of contract became a strong support for the theory of efficient breach, which is assumed to have been clarified first in Birmingham in 1970 and received its name by Goetz & Scott 1977.

Structured on the contract's functions of optimally allocating goods and factors of production as well as enhancing social welfare, the theory of efficient breach is stipulated to count all gains and losses in monetary value in the period between the birth and death of a contract. In the early stage, after the theory was born, it was used mainly to describe a desirable kind of breach, where the promisor's gain from breach, after paying expectation damages, exceeds his profit from performance. This sort of breach was assumed to be a movement toward economic efficiency and consistent with the contract parties’ economic preference. Scholarly efforts were made to justify this theory from an economic perspective. Before that, there was Coase's statement that “once the costs of carrying out market transactions are taken into account it is clear that such a rearrangement of rights will only be undertaken when the increase in the value of production consequent upon the rearrangement is greater than the costs which would be involved in bringing it about.” Birmingham reached a similar conclusion when illustrating the case where an employee gets a better job.

In law and economics, the theory of efficient breach arises from a situation where non-performance of a contract, compared to its performance, might produce higher payoffs to the parties after the contract has been concluded. Under this situation, it is assumed that non-performance of the contract is economically more desirable than performance. Breach is one of the approaches to realizing non-performance. In order to achieve non-performance, the party who has to perform (promisor, obligor or seller) could either breach the contract or negotiate with the other party for a release from the contract. If the party contemplating breach is able to take the benefit and the cost of breach into account, he will breach only when the profit of doing so is higher than other choices. His choice of breach is considered to be efficient as long as he could still make profits after paying damages and the damages he pays could put the non-breaching party in as good a position as he could enjoy had the contract been performed.

The central question in this thesis is to what extent the sales law in different legal systems can promote efficient breach and efficiency. Efficiency is the central concept for evaluating remedy rules in different legal systems. In the real world, it is costly for contracting parties to draft perfect contracts ex-ante, which have considered all possible risks, as well as the other party's opportunistic behaviour that might occur after the conclusion of the contract. By the same token, achieving settlements ex-post might also be discouraged by the high negotiation costs. By providing various default rules as well as mandatory rules in relation to different risks, contract law may thus facilitate transactions for instance by filling the contract gap, disambiguating contract terms, motivating efficient behaviour as well as preventing opportunistic behaviour. According to the efficient breach theory, efficient contract rules should enable contracting parties to behave efficiently, for example to only breach a contract when it is efficient to do so but otherwise to take proper measures of performing their contract. This thesis focuses on how different contract law rules shape a seller's incentives to breach efficiently, or more broadly, to take efficient solutions in the situation when strictly performing a sales contract is less efficient than not performing it.