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Wednesday, April 1, 2009

The Sanctity of Contracts

You may recall that a couple of weeks ago amidst the furor over the AIG bonuses, that I wrote a post entitled the world fiddles about the potential for this to set a precedent to undermine the confidence in contracts. Yesterday’s New York Times, has an article “Contracts Now Being Seen as Rewritable” regarding just this concern.

The Times article is generally focused on discussing the issue from the standpoint of city/state governments utilizing bankruptcy or the threat of bankruptcy to get unions to the negotiating table. However, of particular concern for business owners and professionals working on contracts is this statement from the article:

“The Treasury secretary, meanwhile, is working on a much broader initiative to give the federal government the power to modify the contracts of the financial institutions it takes over. The proposal raises several new issues, because it would eliminate the judicial oversight of bankruptcy proceedings and the opportunity for affected parties to challenge the changes.

If we’ve learned nothing from this current financial disaster we should at least understand that there is a reason for rules and regulation. By contemplating action that will allow the Federal government to modify contracts it is being as irresponsible as the previous administration which turned a blind eye to the basic principals of finance and accounting. Contracts entered into in good faith are the foundation of our financial and legal system, undermining them, for any reason is even more dangerous than allowing NINJA loans and the like to proliferate the balance sheets of our financial institutions. I would rather see a process be burdensome than trample on the sanctity of a contract negotiated in good faith.

The Obama administration has pledged to be different. Hopefully, they will come to their senses and put this issue to bed.

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