AIG Contracts Questions

Contract.jpgUnder 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?

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23 Responses

  1. A.W. says:

    Scary to see the full power of the federal government brought down on some people, who are after all, entitled to this money, just because they are a popular political punching bag.

    Mind you, if they were criminal that is one thing.

    Of course if Obama is trying to discourage companies from taking TARP money, its brilliant! Genius! make it clear to everyone what a complete nightmare taking this money is, and they won’t want anything to do with it. Its like throwing a float to a drowning man and then shooting at him as you pull him in. its kind of a mixed message.

  2. Vladimir says:

    I like the legal analysis, Lawrence, but I’m wondering if we, and the Administration, are thinking of this problem too narrowly. Let’s say that it would definitely be a breach not to pay these folks their obscene bonuses. Shouldn’t the Administration nonetheless order them not to be paid, and then let those who still want the bonuses sue. They’d win in court, to be sure, but they’d have to stand up and humiliate themselves in the process, focusing more attention on their greed and the lousy job they’ve done.

    Isn’t this publicity/symbolic use of the law not only legitimate, but a function that we too often neglect in our legal thinking?

  3. A.W. says:


    In most states, the lawyers would have to certify that they have a non-frivolous defense, so at the very least they have to be ready with one of those theories, or face sanctions.

    I doubt the AIG guys would feel any shame at all, btw.

  4. Margo says:

    Any thoughts on whether the bonus provisions could be unenforceable because contrary to pubic policy? Or perhaps even unconscionable?

    On the public policy point:

    We might understand the limitations on executive compensation under TARP as a statement of public policy, to the effect that bailout funds should be used to shore up the solvency of these financial institutions for the benefit of the economy as a whole, and should not be diverted to executives in the form of humongous bonuses. While AIG is not technically receiving TARP funds, the public policy considerations are the same.

  5. Rosa says:

    This seems like something legislators should have thought of before the made a mad dash to hand money over to the banks. Stipulations should have been made up front. Thanks for the legal breakdown.

  6. onaride says:

    If AIG had no bail out and were to go belly up NO ONE would get bonuses! They would be in bankruptcy court! This needs to be a key point!

  7. Vladimir says:

    A.W. — Do you really think a judge would impose Rule 11 sanctions on the Gov’t for not paying AIG? I strongly doubt it. But even if the defense were sanctionable, there are times when violating Rule 11 is worth it.

  8. kathryn says:

    This may be an absurd question : Are not most bonus payouts through contracts based on merit and profitability of the company by which the employee was acknowledged. How can there be a bonus paid to someone who manages/runs/operates the very company that is failing/failed. Appreciate the input.

  9. Margo says:

    @ A.W. & Vladmir–

    There’s no way Rule 11 sanctions are in play here. If AIG and the Government refuse to pay, the AIG employees’ only remedy is to sue for damages. Even if the Government and AIG have no defense against the lawsuit whatsoever, sanctions wouldn’t be awarded–the court would just calculate and award damages.

    Sanctions only come into play in the very unlikely event that the Gov’t actually tries to put forward a frivolous defense, and even then a lot of other things have to go wrong in order for a court to actually sanction the attorneys. (The attys would have to fail to take advantage of the safe harbor, etc.)

  10. SP says:

    Was AIG trading in insolvancy prior to bailout, should it have gone to Chapter 11 or outright bankruptcy. In either case it would not have been able to afford any bonus payments without the governments bailout funds to allow continued trading. Did the government renegoiate bonus contracts as in effect owning 80% puts it in control. AIG seems to have taken the attitude that the bailout using taxpayer monies are in effect a free gift. Lets get Judge Judy on this, she just loves these “gift” cases between broken love….

  11. Dan R. says:


    This depends entirely on the circumstances of the bonus situation. If a stockbroker brings in 20million of new business, vs. an industry average of 5million, he will get a bonus regardless of company profitability.

    The same thing may exist if a trader exceeds his profit targets and volatility goals. Now, if your speaking of the executives (vs. the line employees), it should be based on the profitability of the entire company. But if you don’t give bonuses to highly performing employees, regardless of the company’s profitability, they will leave — and in this industry that is very easy to do and carry your customers with you.

  12. Dan R. says:

    As to the question about sanctions. There may not be sanctions — but there are penalties under CT law for failing to pay wages equal to 100%. See for a further discussion.

  13. Brown Ram says:

    Assuming that the government is a shareholder, how about a derivative suit for corporate waste? Now that we know that officers of a Delaware corporation have fiduciary duties, you can probably sue the directors and the officers. I think that the government would ultimately lose on this theory, but the dirty laundry that would come out would be vast.

  14. HSV says:

    Perhaps there is an issue as why strings or conditions were not expressly attached to the taking of the TARP money. However, it is fundamental to our system and the world, that the rule of law prevails. Is there a risk that if the US/AIG can break contracts, that everyone else can now do the same? Would not the consequences of everyone breaking contracts result in unraveling of order?

  15. A.J. Sutter says:

    Thanks for the thorough analysis. I was thinking the fraudulent conveyance angle seemed like a natural line to pursue, so I’m glad to hear Cuomo is doing so. Most or all of these are state law causes of action, though, prompting what may be a dumb question: other than in a shareholder derivative suit, what would give the Feds standing to sue?

  16. Lawrence Cunningham says:

    Public Policy. Margo (3/16 4:28 PM) offers a credible public policy argument to render the contracts void. The TARP policy statement may be a legislative expression of policy that the judicial branch should recognize. Yet, in general, contractual freedom is subordinated to public policy in narrow circumstances. Standard examples are contracts concerning gambling or adultery, whether or not these are crimes, and the commission of crimes generally. A few state courts refuse to enforce surrogacy contracts on grounds of public policy. The general rule of at will employment that entitles employers to discharge employees without cause is limited in the case of discharge made in retaliation for employee exercise of fundamental rights. This is not an incredible theory, but presents limits.

  17. Lawrence Cunningham says:

    Unconscionability. (Again, Margo 3/16 4:28 PM.) Cases rendering contracts void as unconscionable are rare, but exist. The standard test is whether a provision or contract is so unreasonable that no fair minded person would propose it and no rational person would assent to it. An impressionable person under the influence of a domineering mate who sells an annuity contract for ¼ its undisputed market value qualifies. But most bargains that involve considerable risk are enforced, even if the value of the agreed equivalents is strikingly disproportionate (such as a grubstake loan made for a contingent payment 80 times greater). Procedural aspects of the exchange often matter a great deal, such as the sophistication of the parties. It may be difficult to imagine a credible claim that AIG was an unsophisticated party entering into its employment agreements.

  18. elee says:

    Kathryn & SP, I believe, have a valid point. Let’s say nobody bailed out AIG. Given what we know now for hindsight, it would be interesting to calculate where AIG would be now financially (I’m sure there are lots of financial simulations out there – or grad students tugging at their reins to create them). Use these financial forecasts to determine the rewards or PENALTIES (am I biased?). Then, let each potential receiver (bonus or penalty) petition the courts at their own cost(s) for any pecuniary compensation.

  19. Lawrence Cunningham says:

    Interpretation. (kathryn 3/16 5:56 PM). Helpfully inquires whether contractual bonuses are commonly performance-based, payable according to some measure of merit or profitability, and wonders how such standards can be met within a failing enterprise. Dan R. (6:12 PM) rightly explains that the terms of contract bonuses vary and contract provisions may be met even within a failing enterprise. This excellent colloquy invokes the need for an interpretation of the contracts and comparison of their requirements to employee performance.

  20. Des Moines Lawyer says:

    How will AIG hire and retain the best and the brightest if these bonuses are not paid?

    I’ve worked at a public company for more than ten years now. My bonus is based largely on the financial performance of the company and is not guaranteed, nor locked in. It goes up and down with the company’s fortunes. It’s never been zero, but then the company’s not lost money in any of the years I’ve work here. I’ve always thought the company to be reasonably well managed. (BTW, salaries are frozen this year due to forecasted financial results due to general economy conditions–no word yet on whether bonuses will be paid but they probably won’t be big if they are.)

    At a minimum management at this little company knows enough not to lock bonuses in contractually no matter how poorly the company performs.

    “Best and the brightest” My behind!

    Perhaps we don’t really need the best and the brightest. If this is what they serve up, give me mediocre, honest, and commonsensical any day. For too long we’ve had a bunch of people operating in business and government who were born on third and thought they hit a home run.

    Now, they squeal and whine like pigs when their entitlements are challenged. Perhaps some wholesale taken-down-a-few-notches needs to occur so some more realistic perspectives can take hold.

  21. Brenda,Texas says:

    If AIG is in such need of bailout, then when they received money the first time, why did all of the high executives use it to take an expensive trip with high priced luxuries. Now they want to give out bonuses. Ha! That is a joke to me. Let the government give the american people all this money so we can put it back into the economy and bail our own families out in this recessoin. We the american people are loosing everything we have in this recession, while people like this are getting bonuses.

  22. Ben Barros says:

    I have a hard time believing that these contracts don’t have some sort of provision that eliminates the entitlement to a bonus if the employees could be terminated for cause. Imagine one of these employees stole a bunch of money from AIG – surely the contract would not require a bonus payment. (If the contract does not have that limitation, then maybe there should be a derivative suit against the directors for breach of fiduciary duty in allowing such absurd contracts). If there is such a provision, then it seems like there would at least be a colorable claim that all of these employees could be terminated for cause, and therefore are not entitled to a bonus.

  23. A.W. says:


    Rule 11 comes into play when they have to decide whether to present a defense. Maybe they have one that passes muster and maybe they don’t, but its an issue. Of course, the government could pay nothing and then just throw themselves on the mercy of the court, but really what is the point in that? I would also note that even a valid defense can still be in violation of Rule 11 if your intent is bad. the intent here is questionable to say the least.

    This is mob mentality, pure and simple. These deals were made before the bailout was even on the horizon, and a company that doesn’t honor its deals is in serious trouble after a while.

    The company I work for has several massive loans from well-known lenders. In its contracts, it has a clause that the banks have a right to review our conduct in any financial dispute, to see if we did right by our alleged creditors or debtors. If they don’t like our conduct, however legal it might be, they can take away our loans and basically sink the company.

    If we tried anything this shady, the banks would throw us out on our asses. A deal is a deal, they would say. AIG made a deal with these people and those of us who bought them out should honor it. Don’t like it? Then don’t bail these companies out in the first place (which, all told, is a better solution anyway).

    And if this is the behavior of the government now, what will happen if AIG needs to make other “deals.” Large businesses won’t feel like they could trust them, which will, at the very least, be priced into the deals they offer. So again, Obama administration’s economic illiteracy comes through.