In February, the United States Supreme Court handed down a decision in Kansas v. Nebraska, ___ U.S. ____ (2015). In an opinion involving downstream water rights under an interstate compact, the Court touched on an issue of profound importance to business-people trying to navigate the law in their every-day practice: the freedom to engage in an efficient breach of contract.
At issue in Kansas v. Nebraska was Nebraska's breach of an interstate compact between Kansas and Nebraska regarding the apportionment of water in the Republican River Basin. In short, Nebraska took more water than it was entitled to take, and at issue was whether it was appropriate for a special master to have ordered Nebraska – in addition to paying compensatory damages of $3.7M – to "disgorge" an additional $1.8M in gains obtained through breach of the compact.
As Justice Thomas noted in his dissent, the majority's willingness to entertain disgorgement as a remedy raises important issues of contract law. Traditionally, the measure of damages for breach of contract is the amount of money required to put the plaintiff in the position it would have occupied but for the breach. This rubric permits of "efficient breach," which occurs when a party can breach a contract and – because of a benefit to the breaching party by way of the breach – come out ahead of where it otherwise would be, even after paying damages to make the non-breaching party whole.
You can imagine a scenario where a manufacturer might chose to breach an exclusive supply agreement for widgets because it can purchase widgets elsewhere at such a steep discount that the manufacturer can both make its old supplier whole, and profit nonetheless. To many in the business world, this is an important consideration because the freedom to engage in efficient breach helps to avoid stale contractual arrangements that result in an inefficient allocation of capital.
To be sure, the Supreme Court did not rewrite the law on contractual remedies, and there are a number of grounds on which to distinguish this case from a run-of-the-mill contract dispute (e.g., the contract at issue was an interstate compact, which triggers the Supreme Court's original jurisdiction and equitable powers, and the matter involved the allocation of scarce natural resources among sister-states). But, for those dealing every day with the task of making business decisions against an ever-changing legal landscape, this decision helps to highlight an important issue.
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