efficient breach theory

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Efficient breach theory is the idea that parties should feel free to breach a contract and pay damages because doing so is more economically efficient than performing under the contract. 

Under efficient breach theory, courts are encouraged to award parties compensatory damages for breaches of contract and discouraged from awarding punitive damages meant to punish the defendant for moral misconduct. Accordingly, the widespread adoption of efficient breach theory means that punitive damages are rarely available in breach of contract lawsuits. 

Efficient breach theory is in contrast with sanctity of contract.

[Last updated in October of 2022 by the Wex Definitions Team]