New Jersey Employment Lawyer Blog

The law firm of Paul Hastings advised AIG that it had a clear contractual obligation to pay the AIG employee bonuses. One of my earlier blogs held the same opinion that AIG would have to honor the AIG employment contracts under New Jersey employments laws. I suspect that most New Jersey employment lawyers will agree that the contract need to be honored from a pure legal perspective.

Admittedly, I have never reviewed the AIG employment contracts. And this leads to a question I have been pondering about this issue. Do the AIG contracts contain force majeure clauses? A force majeure clause is contained in many boilerplate agreements. New Jersey courts recognize force majeure clauses. The clause allows a party to be released from a contract for an extraordinary reason. Most lawyers equate such reasons to acts of god or wars, riots and other unforeseen acts. But will a force majeure clause allow AIG to avoid honoring the employment contracts with the big bonuses? It just might be worth a shot if the agreements have the clauses. After all, is an unprecedented federal bailout of AIG that much different than a war? And, couple the Federal Government's extraordinary decision to bailout AIG with the fact that AIG would have collapsed had United States Government not intervened. This certainly seems extraordinary.

Now, assuming the AIG contracts contain these clauses, and assuming that the Treasury Department insisted that the contracts be voided, what could AIG have done to resolve the matter quickly? The first thought that comes to mind is that AIG could have sought a declaratory judgment in court seeking an immediate ruling on an emergent basis that the contracts should be avoided or they would have to face the consequences of not receiving the bailout funds. The result of not receiving the bailout funds is obviously catastrophic.

I guess there may be a way out for AIG. But it all depends on what is contained in the contracts. We will have to wait and see.

News departments are buzzing about AIG's decision to honor the bonuses to its employees after receiving billions in TARP funds from the federal government. The President has expressed outrage over AIG's decision and has asked the Treasury Secretary to explore all legal options to stop the bonus payments. Talk radio hosts are livid. But all the outrage in the world fails to consider basic contract principles. The Wall Street employment contracts were executed before the TARP funds were available and a deal is a deal. A court of law in the State of New Jersey is likely to rule in favor of the big bonus employees if AIG fails to make the payments.

Employment contracts are rare because most employees are considered "at will", but not on Wall Street and across the Hudson in New Jersey for top brokers at New York and New Jersey's preeminent investment firms. It is very common for these firms to offer what is known as a retention bonus to its better performing brokers. Retention bonuses are given to employees as a means of retaining their services and keeping them from moving to a competitor. These bonuses, as well as other bonuses contained in the Wall Street employment contracts, are binding on the parties. In the State of New Jersey, employment contracts are binding like all other contracts. In New Jersey, basic contract principles will apply and an employer's failure to honor the payment of a bonus pursuant to an employment contract because of pressure from the federal government is not likely to convince a court that the breach was justified.

In the end it is highly unlikely that a New Jersey court will abrogate the Wall Street employment contracts. Of course, the employee can voluntarily reject the bonus, but this isn't likely. Political pressure and the public disclosure of the names of the recipients of the big bonuses may be the only way Washington will win this war.