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Applicability of Contract Law Theory to the AIG Executive Bonus Scandal

The outrage over the millions in taxpayer dollars paid in bonuses to AIG employees induced a frantic search to discover ways to address this putative injustice. Leading contract law authority Dr. John Murray, Jr. examines several tenets of contract law raised in connection with the contracts, including mistake, fraud, and unconscionability. Despite the outcry, Dr. Murray stresses the critical importance of the institution of contract. Dr. Murray writes:

The initial outrage over the millions in taxpayer dollars paid in bonuses to certain employees of American International Group (AIG) induced an almost frantic search to discover ways in which this putative injustice could be cured. Lawyers and law professors proficient in contract law were pursued to produce theories that would allow the contracts between AIG and the bonus-receiving employees to be broken. Notwithstanding the absence of facts such as verifiable copies of the very contracts that were the subject of the outcry, the rush to judgment was complete. The political chant made it clear that no recipient of an AIG bonus deserved it; indeed, the frenzy inspired the public belief that these greedy AIG employees were the quintessential cause of the entire financial crisis. Calls for their identities were demanded with threats of subpoenas. The possibility of personal injury to them and their families was dismissed out of hand. Any recipient of an AIG bonus reflected no redeeming virtue.

One state official had suggested that AIG stop payment on bonus checks only to learn that there is something called direct deposit which he had not considered. Meanwhile, the contract theory machine was at work on potential arguments that would remedy the unjust enrichment of the bonus recipients. The publication of a 2008 document said to be the AIG contract provided no solace. Whether it constituted a wise agreement as a matter of business judgment, the document provided precious little room for claiming the contracts were voidable or otherwise unenforceable. Later revelations indicated earlier emphatic legal advice to AIG to pay the bonuses that were due as a matter of contract law and, a fortiori, avoid statutory penalties in places such as Connecticut for failure to make the payments.

Nonetheless, the legal imagination never ceases. The law of mistake was visited. ... Fraud is always an inviting possibility, but it suffers from the necessity of proving it. ...

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