Sometimes the economically correct thing to do is break your contract—and contract law is designed to let you.
This is the theory of “efficient breach,” and it explains why courts award expectation damages (what you would have gained) rather than forcing performance or punishing the breacher.
Here’s the classic example:[1]
You manufacture widgets. Riverside Boilers contracts to buy them at one price. Halfway through delivery, Summit Piano Co. shows up desperate—they’ll pay significantly more per widget or their factory closes.
You divert production to Summit, breaching your contract with Riverside. Riverside’s damages are the sum of: (1) refund for any prepaid widgets not delivered, (2) their lost profits from not having the widgets for production, and (3) any premium they pay sourcing replacements elsewhere.
If what you gain from Summit exceeds Riverside’s total damages, the breach creates value. You profit, Riverside is made whole, and Summit’s factory survives.
Why does the law allow this?
Contract remedies are deliberately set at expectation damages—enough to make the non-breaching party whole, but no more. This creates a natural efficiency test: breach only makes sense when the gains exceed the costs. If you can pay full damages and still profit, the breach creates value.[2]
Punitive damages or mandatory performance would eliminate this flexibility. Parties would be locked into contracts even when better opportunities emerge for everyone.
The counterargument: Contracts are promises, and promises carry moral weight beyond economics. Charles Fried argued that honoring commitments is an obligation independent of efficiency calculations.[3]
The practical takeaway: When structuring a deal, consider what happens if circumstances change. Expectation damages are the default—if you want stronger enforcement, negotiate for it explicitly.
Footnotes
[1] Posner, Richard A., Economic Analysis of Law (9th ed., 2014), p. 131.
[2] Birmingham, Robert L., “Breach of Contract, Damage Measures, and Economic Efficiency,” 24 Rutgers L. Rev. 273 (1970).
[3] Fried, Charles, Contract as Promise (1981). https://en.wikipedia.org/wiki/Efficient_breach