Janice A. Oser, Esq.

We’ve all been getting lessons in contract law these days, unless we’ve somehow managed to remain unaware of the brouhaha over those A.I.G. (American International Group) bonuses.

One of the first lessons was offered on March 15 by Lawrence Summers, Director of the President’s National Economic Council. With respect to the A.I.G. bonuses, he said on TV in an interview on ABC’s program, “This Week,” that, “We are a country of law. There are contracts. The government cannot just abrogate contracts.” (“Abrogate"—that’s a legal term meaning, briefly, to annul or repeal.)

Support for Mr. Summers’ view was reported a few days later by Andrew Ross Sorkin in The New York Times on March 17 (“The Case for Paying Out Bonuses at A.I.G.”). According to Mr. Sorkin, for “Wall Street types and compensation consultants,” the fundamental value in question here was the sanctity of contracts.

Then the lawyers weighed in. (Neither Mr. Summers nor Mr. Sorkin is a lawyer, to the best of my knowledge and belief.)

A bevy of lawyers was gathered by the Times to proffer their views on the matter in its online Room for Debate Blog of March 17. The next day an analysis by yet another legal expert appeared on the Times’ Op-Ed Page. That’s a total of seven legal experts. By my count, the score was five in favor of the possibility of there being legal grounds for A.I.G. to break the contracts, one against, and one punt, a recommendation of “modification” of the contracts by the bonus recipients—i.e., givebacks, analogous to the concessions made by unionized auto workers.

On the Times March 17 Room for Debate Blog, Tom Baker, a professor at the University of Pennyslvania Law School, and Glenn Greenwald, a former constitutional lawyer, took the general position that “Contracts get repudiated, renegotiated, modified, delayed, worked out, managed . . . all the time” (Professor Baker). Or, in especially lawyerly language, “[T]here are few things more common—or easier—than finding legal arguments that call into question the meaning and validity of contracts” (Mr. Greenwald).

Charles Fried, a professor at Harvard Law School and this year a visiting professor at Columbia Law School, wants to see the contracts to come to a conclusion about various legal grounds on which A.I.G. might have been able to refuse to pay the bonuses. These grounds include the “well-known doctrine of change in underlying assumptions” (the contracts pre-dated the government bailout) and questions relating to whether or not the performance of the bonus recipient was as required under the contract.

James P. Tuthill, a lawyer and lecturer at the law school at the University of California, Berkeley, comes out with a ringing argument for the defense of unconscionability—a court can invalidate a contract’s “unconscionable” terms or rescind the contract or reform it (modify it), on grounds of fairness.

In his article on the Times’ Op-Ed Page (“A.I.G.’s Bonus Blackmail, March 18, 2009), Lawrence A. Cunningham, a professor at George Washington University Law School, offers a primer of legal principles on the basis of which A.I.G. might have been excused from performing the bonus contracts.

First, the professor says, the contracts must be read to examine the specific promises the employees made. In addition, the contracts must also be read and any negotiations that preceded them must be understood to identify agreed-upon conditions for performance of the contract.

There are other possible reasons, Professor Lawrence writes, for A.I.G. to rescind the bonuses, including nondisclosure of important material information, such as if the employee failed to be candid about the size and risk of trading positions taken on the company’s behalf. Findings of fraud on the part of the employee would excuse A.I.G.’s duty to pay the bonus.

There is also a chance, according to the professor, given A.I.G.’s “functional insolvency” and the government bailout, that the bonus agreements could be rescinded either on the basis of impracticality or by virtue of unforeseeable and uncontrollable circumstances.

Finally, Professor Lawrence suggests that a relevant question for the government to probe would be whether or not fraudulent conveyance law could provide a legal basis for rescinding the contracts. Such law generally limits the right of a financially troubled company to transfer property to favored claimants on unduly favorable terms when this would hurt the interests of other claimants, like lenders and shareholders, and, in the A.I.G. case, perhaps even taxpayers.

That makes five legal experts who are not ready to concede that A.I.G. was legally bound to pay the bonuses. A sixth featured on the Times March 17 Room for Debate Blog has a different view. Frank Snyder, a law professor at Texas Wesleyan University, notes that contract law and state labor law restrict an employer’s right to withhold wages, and often provide for double or triple damages if the employee sues.

The government’s lawyers appear to have agreed with Professor Snyder. David Stout and Brian Knowlton report on the Times’ March 24 DealBook Blog that in testifying on that day before the House Financial Services Committee, Federal Reserve Chairman Ben S. Bernanke said that he had wanted to sue A.I.G. to prevent the bonus payments, "but he was talked out of it by lawyers who warned that if the lawsuit failed, the government might have to pay double or triple damages in addition to the bonus.” The law in Connecticut, where A.I.G.’s financial services unit has a base, provides for punitive damages if such a suit is unsuccessful.

The legal expert on the Times March 17 Room for Debate Blog who punted was Deborah W. Post, interim associate dean for academic affairs at Touro Law School in Central Islip, New York. Ms. Post suggests “modification” of the A.I.G. bonus contracts. “If the union workers at General Motors,” Ms. Post writes, “agreed to give up or modify their expectations, there is no reason the management at A.I.G. cannot be asked to do the same.”

Ms. Post’s view has prevailed to some extent. New York Attorney General Andrew Cuomo has reported that of the top 20 A.I.G. bonus recipients in the U.S., 15 have made a commitment to repay their bonuses.

That’s $50 Million, out of a total of $165 Million. Not much, but even $165 Million begins to seem like less and less in the current world of government bailouts. To paraphrase the oft-quoted late Senator Everett Dirksen, a trillion here, a trillion there, and pretty soon you’re talking about real money.