Argument: AIG bonus contracts, like all contracts, are subject to change

Issue Report: AIG bonuses


Glenn Greenwald, a former constitutional lawyer and columnist at, wrote on the New York Times’ Room for Debate, on March 17, 2009 – As any lawyer knows, there are few things more common — or easier — than finding legal arguments that call into question the meaning and validity of contracts. Every day, America’s commercial courts are filled with litigations between parties to seemingly clear-cut agreements. Particularly in circumstances as extreme as those prevailing at A.I.G., there are arguments and legal strategies that any lawyer would immediately recognize that bestow A.I.G. with leverage either to be able to avoid these dubious payments or, at the very least, force substantial concessions.

There are almost certainly viable claims that the contracts were induced via fraud or that the bonus-demanding executives themselves violated their contractual obligations. Separately, there must be substantial counterclaims that A.I.G. could assert against any executives suing to obtain these bonuses, a threat which, by itself, provides substantial leverage to compel meaningful concessions. Many of these executives were, after all, the very ones responsible for the cataclysmic losses. The only reason for a company like A.I.G. to throw up its hands from the start and announce that there is simply nothing to be done is that it is eager to make these payments.

Legal strategies aside, just as a common business matter, one of the first steps taken by every company in severe distress is to go to its creditors, explain that it cannot make the required payments and force renegotiations of the terms. That is as basic as it gets (see, for instance, the forced contractual concessions from unionized autoworkers last month as a condition for government loans). If a company goes into bankruptcy, then contracts to pay executive bonuses are immediately rendered virtually worthless, and the payments made to executives thus far could even be declared invalid as a fraudulent attempt to evade payment obligations to creditors in bankruptcy. The mere threat of such events is, for obvious reasons, very compelling leverage to force substantial concessions.[1]

James P. Tuthill, a lawyer, is a lecturer at the law school at the University of California, Berkeley. “Those Contracts can Be Voided”. New York Times Room for Debate. March 17, 2009 – Every first-year law student learns that a court can invalidate a contract’s “unconscionable” terms, rescind it or reform it. If these bonus contracts benefiting the very people who have destroyed incalculable amounts of wealth in the pursuit of their own personal greed don’t warrant revision, rescission or reformation, then our legal system is seriously deficient.

Deborah W. Post, co-president of the Society of American Law Teachers. “Ask G.M. Union Workers About Binding Contracts”. New York Times, Room for Debate. March 17, 2009. – Over the weekend Lawrence Summers, President Obama’s chief economic adviser, described the United States as a nation of laws and claimed that the law will not allow anything other than the payment of these A.I.G. bonuses. Indeed, he used the legalistic term “abrogate,” giving the argument for payment of the A.I.G. bonuses more weight.

If the union workers at G.M. agreed to give up or modify their expectations, there is no reason that A.I.G. cannot be asked to do the same.

But there is another legalistic word that he failed to mention: modification. Modification is something most at-will employees know well. “Unilateral modification,” modification without employees’ consent, is standard procedure at most companies unless the workers have a union and a collective bargaining agreement — and in recent years, we have seen that a contract may not protect you even if there is a union and a collective bargaining contract. How much were those contracts worth when Congress objected to a bailout for the automobile industry on the ground that mismanagement meant the costs of labor were too high?

If the union workers at General Motors agreed to give up or modify their expectations, there is no reason the management at A.I.G. cannot be asked to do the same. There is nothing in the law that would prevent this. Intervention by the federal government should not be necessary. It is simply a matter of good business judgment.