Kahnfusion: Contract law says AIG need not pay bonuses

UPDATE:

Wall Street Journal, via TPM, reports a plan is in the works.

Glenn Greenwald has an excellent analysis of the issue on Salon. Likewise, a Yale Law Journal editor gives a great take here.


This is one of an occasional series of posts from CCLP's Special Counsel Ed Kahn, on topics ranging from public policy to the economy to politics to the media. Note that Ed actually drafted this post on Sunday, prior to this Associated Press report. We're not saying Ed can predict the future, but we're not saying he can't either. Enjoy:

About a year or two ago, apparently before the full adverse economic effect of derivatives was known, AIG entered into bonus retention contracts with employees in the unit which bought or sold unhedged derivative contracts – a dubious high leverage transaction. Now AIG is poised to pay, or has paid, those employees hundreds of millions of dollars in retention bonuses. Both AIG and the Obama Administration claim there is nothing they can do – they are legally bound to pay.

But they are wrong. An elementary principle of contract law allows them to void the contract or seek the money back. It is called "mutual mistake of fact." In the textbook used to teach contract law, the example is: one farmer sells to another a breeding cow. But it turns out the cow is sterile and cannot breed after all. The farmer who purchased the cow is entitled to his money back.

Take the example to AIG. AIG entered into retention bonuses on the premise that the contracts being sold by its employees would be profitable. They were disastrous. There has been a mutual mistake of fact. The contract is not enforceable. AIG need not pay or is entitled to its money back.

It's time for the Obama Administration officials and the AIG lawyers to get through a first year contracts course, or talk to someone who knows contract principles.

--Ed Kahn, CCLP Special Counsel