Thursday, March 19, 2009

Those Bonuses

The big news is that AIG has outraged everybody by paying $165 million in bonuses to the very employees who brought the company to the brink of bankrupty, necessitating a $180 billion federal bailout.

I won't comment on the outrageousness of it -- that's clear enough, I think -- but I am surprised by the outpouring of commentary from lawyers and law professors (including one of my own colleagues, Lawrence Cunningham) who claim that AIG could have gotten out of its alleged contractual obligation to pay the bonuses.

Now, as Cunningham rightly points out, it's impossible to be sure about this issue without seeing the contracts and knowing a lot more facts. Also, contract law is not my area. But really, I am surprised at some of this commentary. You can't just throw out the names of contract doctrines that apply in rare cases. Some of the authors have suggested the defense of "impracticability." But it's not impracticable to pay the money -- AIG has the money. Yes, if AIG had gone bankrupt, things would be very different. But it didn't. And "frustration of purpose" is even more remote. The classic case for that doctrine was one where someone rented a room for the purpose of viewing a coronation, and the coronation got cancelled. Now that's frustration of purpose. Here, as far as I can tell, employees were promised bonuses for continuing to work for the company until a certain date, which they did. I can't see the doctrine's applicability. Even "change in underlying assumptions" seems a stretch.

I'm not saying that there might not be a defense. Maybe there is. There could have been some fraud involved, I suppose. But it seems to me that some of the authors are doing what we law professors criticize courts for doing sometimes -- getting caught up in the political aspect of the situation and failing to apply the law neutrally. The starting point is that if you've promised to pay money, you should do it. You can't go flailing around for a defense just because your promise to pay was kinda dumb in the first place. Maybe there is a defense, but we shouldn't go grabbing defenses that don't apply.

In fairness, some of the authors, particularly Cunningham, are perhaps more just trying to point out that one should think carefully about possible defenses than they are saying that the defenses would necessarily apply. It's hard to disagree with that. But I am highly skeptical about some of the suggested defenses.

And I definitely disagree with the suggestion that AIG should just breach the contracts, let the employees sue, and coerce them into settling for less. Remember, AIG is now effectively a U.S. government agency -- we own 80% of the company. How would we feel if any other government agency did this? If the Department of Justice, during the U.S. Attorneys scandal, had said, "yeah, we have some people we'd like to get rid of, so we've decided to stop paying their salaries. Sure, we owe them the money. But let them sue us. We figure they'll be willing to settle for half rather than fight us for years to get what we really owe them." We'd be outraged. The government in particular should honor its contracts.

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