You will probably want to read Andrew Sorkin’s commentary in the New York Times on the sanctity of contracts first:
I’ve reproduced my New York Times comment to the Sorkin piece here:
To read Mr. Sorkin, it’s as if the parties have only two dramatically opposed choices: “tear up a contract” or “perform promises exactly to the letter.” The reality of US commercial law is, of course, not so dramatic (or moralistic). Companies breach, reinterpret, and rewrite contracts all the time, and the US legal system is structured to allow them to be able to do so deliberately. The ability to decide whether to breach a contract is a basic tenet of capitalism. There is a well-developed law of damages in US commercial law for a reason: it allows companies to function efficiently with their available resources.
Failing to pay *all* compensation as contracted for while still paying *some* compensation as contracted for (salary but not bonuses) is not “tearing up” a contract. It may not even be a breach of the contract. That depends on the specific contract language, in its entirety. Professionally prepared, highly complex commercial contracts don’t say, “I agree to pay X to Y on Z date, no matter what.” If that were true, all contracts would fit on one page. To the contrary, most contracts are full of contingencies and exceptions and qualifications to each party’s obligations, which exempt or exonerate or excuse some of the parties’ duties, depending on circumstances. This is precisely because the parties’ lawyers have contemplated that some things, or many things, will not go as planned. (My goodness, the economy is not going as planned. Bummer.)
As a business and commercial transactions attorney, I have prepared and negotiated hundreds of contracts. I’m highly skeptical that AIG’s “hands are tied.” Every professionally negotiated contract has something called a “force majeure” clause, which provides that in exceptional situations, the parties to the contract won’t have to perform as they promise (or maybe not at all) because for some reason beyond their control, they can’t perform. Here’s an example of force majeure language:
“Neither party shall be liable in damages or have the right to terminate this Agreement for any non-performance of this Agreement, if such delay or default is caused by conditions beyond a party’s control, including but not limited to acts of God, government actions or restrictions, strikes or labor difficulties, acts of war, insurrections, natural disasters, or any other cause beyond the reasonable control of the party whose performance is affected (including mechanical, electronic, or communications failure).” If AIG did not negotiate for these very standard terms, it would be because the AIG legal team was not trying very hard to protect the company’s best interests (as opposed to the best interests of the risk-happy rock stars).
Taking $170B of bailout money from US taxpayers in an economic crisis which threatens to bring down the global financial system is certainly an exceptional situation. In my view, it’s a reasonable commercial legal argument to say that these circumstances qualify as a force majeure to excuse AIG from paying its employees as it may have agreed in its contracts back when “things were different.”
It is particularly ironic that the government calls for the auto companies to cram down the pay of those overpaid autoworkers on Main Street in order to allow GM to qualify for a few paltry billions of bailout money — but when it comes to derivatives traders on Wall Street being rewarded with millions of dollars for playing dice with the global financial system — here, nothing can be done.
Carol Shepherd, Attorney
Ann Arbor, MI