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The Efficient Breach

April 28, 2015

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Here’s something that probably happens all the time.

A longtime client called me the other day with this story: He found a used car that he really loved: a 2005 PT Cruiser Convertible in perfect condition with 17,000 miles on it. He agreed to buy the car on Thursday. The dealer signed the purchase agreement, but refused to take a deposit even though my client offered twice. On Monday, the dealer told him that they sold the car to someone else. My client called me to explore this options.

This is an interesting case because of the contractual doctrine of Specific Performance. (At least, I thought it was interesting). Usually, when a buyer agrees to buy something and the seller doesn’t deliver, the buyer is required to buy the good elsewhere and, if she pays more or incurs other expenses, can sue the defaulting seller for the difference. This is derived from the aggrieved party’s duty to mitigate damages when a contract is breached.

However, an exception to this rule exists with a unique good. The classic example of a unique good is real estate, since no two parcels are exactly the same. Other unique goods would include original art work as there is only one Mona Lisa.

But, is car a unique good?

Here are the two extremes:

1. Yes, if it’s the car that the Secret Service confiscated from Al Capone and was used a few time by FDR as a limousine (Shout out to the History Channel for that one!).

2. No, if it’s the new car you bought last year.

Unfortunately, the deliberation ends here, because my client had no interest in pursuing the car; He didn’t trust what the dealer would do to the car is they had to deliver it to him.

My client’s best option was to try to find a similar car and then sue for the difference, assuming he paid more for the substitute.

Which brings me to the subject of this post? Is the remedy and method to reach that remedy enabling dishonesty?

Here’s how that works: the dealer agrees to sell a car. Until the customer picks it up, the dealer holds the car for sale to any higher bidder. If the dealer gets a better he just breaches the first sale contract and makes more on the sale. Besides being dishonest, what’s the dealer’s downside? The aggrieved seller has to find another car and then sue the dealer for the difference. There is a good chance the customer will find a car for a similar price and even if the customer pays more, he still has to sue the dealer in court and prove that there were damages. (The dealer will likely argue that the difference in price was due to the second car being superior in some way- less miles, better condition, better options, etc.)

So, the dishonest dealer can put a few extra dollars in his pocket and worry about the legal fallout later.

And the law doesn’t care??!!

The answer is yes, the law doesn’t care. The law isn’t about making people behave well, honestly or decently; It’s about administering an efficient marketplace/society and this is the optimal result.

This phenomenon even has a name; it’s called – “The Efficient Breach”.

Do you think it’s fair?

Avrum Aaron, Esq. is the COO of Legal Outsourcing Partners, LLC. http://www.lop-llc.com. You can write to him at avrum@lop-llc.com and let him know if you have an efficient breach story.

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