AIG Contracts Questions
posted by Lawrence Cunningham
Under what legal theories may an employer refuse to perform promises to pay bonus compensation to employees? That is the contract law question that US President Barak Obama and New York Attorney General Andrew Cuomo pose to the country today. Both seek to prevent AIG, the beleaguered and possibly criminal enterprise, now nearly 80% owned by the US government after its $170 billion bailout, from AIG’s planned payment of $165 million in cash bonuses to various employees.
AIG says it is contractually obligated to make these payments. The President instructs his Treasury Secretary to “pursue every single legal avenue to block these bonuses.” The New York Attorney General is doing so. His letter to AIG today requests copies of the contracts, background on how they were negotiated and descriptions of the job performance of covered employees.
In the spirit of President Obama’s call and Attorney General Cuomo’s quest, following are some admittedly spontaneously developed and potentially speculative legal avenues to block payment of the bonuses. Please feel free to add or subtract from these preliminary notations.
Conditions. It is important to see the contracts. What express provisions govern? Are there conditions, express, implied or constructive, to AIG’s duty to pay? For example, contractual provisions expressing obligations of the employees may certainly be seen as promises but they also may operate as conditions.
Parol Evidence. Notably, determining what conditions exist may be ascertained not solely from an inspection of the written contracts. They may also be ascertained by evidence concerning the negotiations that preceded them. Such evidence would be admissible despite the parol evidence rule, which restricts admitting evidence in the face of a complete, final, integration of a bargain into a written expression.
Breach/Excuse. Have such promises/conditions been met? This will depend upon comparing such provisions to the job performance of the covered employees. Have they discharged their obligations? Was failure to discharge a breach of contract? Does that breach of contract excuse AIG’s duty to pay? This may depend upon whether any such breach is total (material) or partial. It may depend on interpretation or construction of the language to determine whether promises, conditions or both have been created.
Termination. Do the contracts contain any express termination or cancellation provisions? Under what circumstances may AIG fire employees, without continuing duties, at least any duty to pay bonuses?
Non-Disclosure. A wide variety of traditional excuses from contract performance may be available. These include non-disclosure of material information by the employee to AIG. Ordinarily, of course, arms’-length contracting parties owe one another very limited duties of candor and may exploit comparative information advantage. But employees owe their employees fiduciary duties, including that of candor. Employee failure to discharge such duties may excuse AIG from its duties
Misrepresentation; Fraud. Even in arms’-length transactions, misrepresentation can excuse a counterparty’s duties. Certainly, as Attorney General Cuomo’s letter suggests, findings of fraud on the part of an employee would excuse AIG’s duty to perform.
Mistake, Warranty, Impossibility. It seems less likely that other traditional contract law excuses such as mistake or warranty or impossibility would apply.
Impracticability; Frustration. But there is at least some chance, given AIG’s functional insolvency and government takeover, that these employment agreements may be rescinded on the basis either of impracticability or frustration of purpose. Payment of $165 million by a company that suffered losses this period alone of $65 billion is at least a credible ground for asserting both doctrines. Frustration of purpose has been recognized when governmental action essentially destroys the original purpose of a contract—and government’s takeover of AIG is a more extreme sort of governmental action than appears in such cases.
Formation? In the spirit of President Obama’s mandate, there could even be doubt about formation, including lack of consideration or misunderstanding, so as to impair mutual assent, or possibly even indefiniteness of terms.
Fraudulent Conveyance. Attorney General Cuomo also mentions fraudulent conveyance law. This is an advanced commercial law subject, beyond standard contract law. It generally restricts an enterprise’s right to transfer assets to favored claimants when doing so would impair the reasonable or contractual expectations of other claimants.
Efficient Breach? Finally, there may be some question about whether, even if the contracts are enforceable in accordance with their terms, AIG should breach anyway. Certainly it has some credible defenses that it would be in breach. Further, employee damages would be reduced under the mitigation doctrine. They’d be subject to reduction measured by alternative employment, so long as not different in character or inferior in kind.
Employee Restitution? On the other hand, if the employees are in breach, may they nevertheless recover off contract? Probably, in restitution for the portion of the contract price that they have earned, or the value of the benefit conferred.
Information Needed. Again, I emphasize and acknowledge the foregoing as preliminary and speculative. Nevertheless, even these notations show that relevant questions cannot be answered without reading the contracts and obtaining the other information that Mr. Cuomo requests. It does not seem unreasonable for the President or Attorney General to refuse to rely upon AIG’s or its lawyers’ interpretations of these arrangements.
Whose Judgment? On the other hand, of course, a further issue appears: who should make the ultimate business and legal judgments here, the CEO and Board of AIG or President Obama and Attorney General Cuomo and their colleagues?