Contracts Now Seen as Being Rewritable
By MARY WILLIAMS WALSH and JONATHAN GLATER
Published: March 30, 2009
Contracts everywhere are under assault.
The depth of the recession and the use of taxpayer dollars to bail out companies have made it politically acceptable for overseers to tinker with employment agreements.
So federal and local governments are looking for ways to pare payouts, endangering the promises made before the financial storm to people like Wall Street traders, automobile workers and garbage collectors.
“We run roughshod over some contracts and not over others,” said David A. Skeel, a law professor at the University of Pennsylvania, about economic downturns. “Right now, employment contracts seem to be the type of contract that is viewed as eminently rewritable.”
The Treasury Department is seeking broad powers to seize troubled companies and rewrite contracts like the ones promising bonuses at the American International Group. Some A.I.G. employees, meanwhile, have been pressured by officials into repaying their bonuses to the giant insurance company rescued by the government.
Across the country, Vallejo, Calif., just got permission in bankruptcy court to tear up its contracts with firefighters and other workers. In Stockton, the city manager is studying whether to follow Vallejo’s lead.
In Michigan, Gov. Jennifer M. Granholm just ordered the city of Pontiac put under emergency financial management, after it failed, among other things, to rein in the cost of police, fire and trash collection services.
And President Obama’s auto task force, after replacing the top management at General Motors, is looking for ways to overhaul the contracts that G.M. and Chrysler have signed with unionized workers.
This month, the town of Vallejo demonstrated not only that it was possible for a city to tear up its union contracts in bankruptcy, but that it was even easier for a city to do so than for a company. The precedent may matter.