Professor Lawrence Cunningham, the King of Contracts himself, read the Sunday New York Times with his Contracts students in mind.  He said that the front-page story repeatedly mentioned American International Group's legal obligation to perform its contractual promise to pay bonuses to its executives, but the article failed to mention any potential excuses from this obligation.  Professor Cunningham thought of his students reading this story, and wrote a post on Concurring Opinions to demonstrate how the concepts from their Contracts course pertained to the issue.

Professor Cunningham was merely doing his job as a professor of Contracts when the New York Times contacted him and asked if he would recast the piece as an op-ed article for the paper.  Professor Cunningham speculates that "they saw the brewing national anxiety and thought the perspective I contributed was missing from the public record or discourse and was important to it. I hope they thought that it would lend a more rational view to the discussion."

On Wednesday, March 18, 2009, the New York Times published Lawrence A. Cunningham's article: "A.I.G.'s Bonus Blackmail." The piece explained that the President had instructed the Treasury Department to work towards finding a legal way to recover the $165 million in bonus payments A.I.G. paid to its executives after the company received $170 billion in federal bailout funds.

To remedy this issue, Professor Cunningham went on to mention, lawmakers have threatened to tax the A.I.G. bonuses; an important point to make as the very next day, the House overwhelmingly approved a 90% tax on these types of bonus payments.

So where does Contracts come into play?  The insurance giant insisted that its employment contracts obligated these bonus payments and that failure to pay would mean the company was in breach of these contracts.  A breach could subject A.I.G. to law suits, cause default on other business contracts, and result in even more losses than the company is currently experiencing.

While Professor Cunningham noted that there was "an explosion of outrage against perceived excessive compensation to those who precipitated the financial crisis," he reasoned that, "moral outrage and public rebuke do not provide legal grounds for backing out of a contract." Thus, government officials and A.I.G. must look to the law of Contracts and the numerous bases it provides for legally excusing a party's performance.

Most importantly, the actual written employment contracts must be examined so to identify the specific promises and conditions surrounding these bonus payments.  A condition would "likely offer more wiggle room in A.I.G.'s duty to pay," and this discovery requires only reading the written instrument and understanding the parties' negotiations in forming these agreements.  Professor Cunningham offered a variety of excuses rooted in Contract law that would provide A.I.G. with legitimate grounds for refusing these bonus payments.  For example, employment contracts generally contain provisions regarding performance goals, and if these employees failed to meet these objectives, the employees would be in breach of contract and A.I.G. would be excused from paying any bonuses.

A.I.G. might also look to provisions that permit termination for cause, as the company could then terminate deserving employees and deny their bonus payments.  Other than finding a legal basis for non-performance in specific contractual terms, A.I.G. might pursue rescinding the bonus payments on grounds of nondisclosure of important material information, fraud, impracticability, frustration of purpose, or under fraudulent conveyance law.  Professor Cunningham stressed, however, that without "reading the contracts, understanding their background, and learning about employee performance, one cannot say whether A.I.G. is legally bound to pay or legally excused from paying these bonuses."

When asked what he thought the best outcome would be, Professor Cunningham replied, "the country should put the hysteria over this question behind it and pay closer attention to the larger stakes in the steps that government officials are taking in their mission to stabilize large financial institutions and the economy."

As for the confiscatory tax, Professor Cunningham thinks it should be aborted.  He commented that if an employee wishes to return the payment, he should, and an employee representative should publicly state why the employee was entitled to it and why he is choosing to return it.  For all other employees, the "company, working with public officials, should conduct the required legal analysis," and explain why certain payments should be permitted or rescinded.

When asked if he thought this would have an impact on employee contracts in the future, Professor Cunningham confidently responded, "yes." He stated that "the entire national discussion, concerning these bonuses and other payments to executives, has focused attention on compensation packages and resulting incentives." He suspects that this heightened awareness will improve the ability of the small group of serious investors and students of corporate governance to "advance reform proposals that they have been making for some time, including giving shareholders more voice over compensation to senior corporate executives."

Whatever the outcome, Professor Cunningham has certainly offered an important perspective to a significant issue and has successfully demonstrated the applicability of Contracts to this national dilemma.  Are you with me?!?!