Legal Commentary

AIG Bonuses: Moral Theory of Contract?

By Big Tent Democrat

When I was in law school, Grant Gilmore's 1974 book The Death of Contract was a part of the discussion of a theory of contract. Gilmore's work was answered by Charles Fried in his 1981 book Contract as Promise, in which Fried was critical of the theory of efficient breach.

In the NYTimes, it is argued that the AIG bonuses should be paid because "the “fundamental value” in question here is the sanctity of contracts. . . . If government officials were to break the contracts, they would be 'breaking a bond[.]' Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts." (Emphasis mine.) This is, in a word, nonsense. While I have argued here that, at first blush, the AIG bonuses agreements will be hard to break legally, it never would occur to me that there is some moral obligation to honor these contracts. Indeed, the "morality" of the situation, such as it is, would seem to militate towards not honoring the contract.

More . . .

But the important point here is that any commercial lawyer can tell you that this idea of a "contract is a bond" has no connection to contract law. The standard remedy for a breach of contract is damages, not specific performance (for which you have to demonstrate the inadequacy of money damages.)

There is something especially galling about seeing this rather nonsensical argument on behalf of the AIG bonuses on the front page of the New York Times. I have been trying to think about the legal issues involved in a dispassionate way. But it is this type of nonsense which pushes folks to outrage. Glenn Greenwald wrote:

Apparently, the supreme sanctity of employment contracts applies only to some types of employees but not others. Either way, the Obama administration’s claim that nothing could be done about the AIG bonuses because AIG has solid, sacred contractual commitments to pay them is, for so many reasons, absurd on its face.

As any lawyer knows, there are few things more common – or easier -- than finding legal arguments that call into question the meaning and validity of contracts. Every day, commercial courts are filled with litigations between parties to seemingly clear-cut agreements. Particularly in circumstances as extreme as these, there are a litany of arguments and legal strategies that any lawyer would immediately recognize to bestow AIG with leverage either to be able to avoid these sleazy payments or force substantial concessions.

I am not in agreement that it is quite as easy as Glenn makes it out to be, but there is no doubt that building legal arguments, oftentimes borderline (and not so borderline) frivolous arguments, is often part of the process of negotiating an "efficient breach" and the payment to be made by the party seeking to breach a contract.

But one thing is pretty clear, the idea that we practice a species of contract as moral bond is ludicrous. It is embarrassing to see it argued as such in the New York Times on behalf of these AIG bonuses. If morality had anything to do with this, the bonuses would not be paid.

Speaking for me only

Full post as published by TalkLeft on March 17, 2009 (boomark / email).