Efficient Breach

Definition - What does Efficient Breach mean?

Efficient breach is a contracts theory that encourages a party to breach a contract, which will require the party to pay damages if breaching the contract and paying these damages is more economically efficient than honoring the contract.

Efficient breach is a controversial practice and widely debated among judges, economists and legal scholars.

Justipedia explains Efficient Breach

Typically, in a capitalist financial system, economic efficiency is encouraged, so efficient breach is viewed by some as simply a wise business decision. On the other hand, contract law is premised on the belief that the courts have a duty to ensure that contracts are honored and breaching parties penalized.

The debate surrounding efficient breach involves ethics, finance and business theory. Regardless, many businesses engage in efficient breach when it benefits them.

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