March 18, 2009
Everyone — not just President Barack Obama — is outraged at the American Insurance Group. The company, which has received $170 billion in United States taxpayer bailout money, paid $165 million in bonuses to its employees last week — including $1 million or more each to 73 employees who were part of the business unit that brought the insurance giant to the brink of collapse.
The company, 80 percent of which the government now owns, said the bonuses were needed to retain skilled professionals, and that the contracts for the bonuses were binding. In response, President Obama has instructed the Treasury Department to “pursue every single legal avenue to block these bonuses.”
How ironclad are those contracts? Is there no way to get the money back?
Harvard Law School Professor Charles Fried answers that question.
Show Us the Contracts
Faithful performance of contractual obligations is certainly a keystone of a well-functioning system of business and credit — especially where the alternative to performance, paying damages, is no alternative at all since the performance and the damages are the same. But that surely does not mean the money should have been paid out no matter what.
Could the well-known doctrine of change in underlying assumptions have been invoked to abrogate the obligation? Since the alternative to the government bailout would have been bankruptcy with a resulting abrogation of these bonus promises along with other contractual obligations, was management remiss in not pressing for a renegotiation and were any of the recipients themselves involved in a self-dealing way in deciding not to renegotiate? And most pertinently, as these bonuses appear to have been related to performance of services, is it clear that the recipients faithfully performed the services for which they were being compensated?
These and other such questions cannot be answered without seeing the actual contracts that are being invoked. And even then, there are questions about whether the performance of these individuals matched the performance set out in the contracts. As we all own 80 percent of the company, we ought to be able to see the text of these contracts. They should be posted on our company’s — that is, A.I.G.’s — Web site. Then we can discuss whether the recipients of that money really earned it.
Charles Fried teaches contract and constitutional law at Harvard Law School and this year is a visiting professor at Columbia Law School. He is the author of “Contract as Promise: A Theory of Contractual Obligation.”