Efficient Breach: When a Purposeful Breach Might Make Sense

Breaching a contract is never a good idea. In fact, it can lead to a lawsuit and ultimately a judgment against you. But there may be times, when you crunch the numbers and do the calculations, that breaching a contract suddenly may seem like not such a bad idea.

Efficient Breach

It’s called efficient breach, and as the name suggests, it’s where someone purposely breaches a contract, because that breach will either gain them money, or reduce losses that they might incur, by fulfilling a contract.

Note that efficient breach is still a breach; it is not a defense to a contract or a legal excuse for a breach. Think of it more as a strategy or a strategic business decision.

A Typical Example

Let’s imagine, for example, that you are hired to build a home for a family. After you’re under contract for the build, a large commercial project becomes available, and they want your company to build it. That commercial project carries a much higher profit and payment, than the single family home building job does.

The problem is that you don’t have the manpower to do both jobs, as they both have to be done at the same time.

The answer? You might want to breach the contract with the resident, so that you can take the commercial job. Even paying damages to the resident, may end up in a net gain for you, depending on how much you are being paid to build the commercial property.

Is the Breach Profitable?

Of course, before you decide to purposely breach a contract, you may want to analyze the contract to see what your financial exposure is, for breaching the contract.

A contract with a huge liquidated damage clause, or a contract that allows for consequential damages, may end up costing you more to breach than you think. Consequential damages are often hard to calculate, and can easily spiral to higher numbers.

Liquidated damage clauses, if they are of a reasonable dollar figure amount, tend to be easier, because liquidated damages tell you exactly what you will pay in the event of a breach. With that number set in stone, you can make a more educated decision on whether breaching your contract makes financial sense or not.

Paying and Settling Quickly

In many cases with efficient breach, because you are breaching knowingly and intentionally, you may be more willing to immediately come to the table with a reasonable settlement offer, in order to pay the damages, and move on to your more profitable venture.

That of course means that you must have the assets or funds, to pay the breach. Otherwise, if litigation ensures, your efficient breach may not be so efficient, when attorneys fees and interest or other penalties that often come with protracted litigation, are involved.

Questions about your breach of contract case? Call our Fort Lauderdale business and commercial litigation attorneys at Sweeney Law P.A. at 954-440-3993 for help.

Source:

scholarship.law.georgetown.edu/facpub/1185/