BREAKING CONTRACTS : IT'S ALL ABOUT POWER

AN ESSAY

After the AIG scandal broke last week, I wrote an essay explaining that there is no legal barrier to breaking contracts. Recently, Americans have been horrified to see federal bailout money paying AIG executives whose conduct helped create the economic crisis. This popular outrage, in turn, sparked a debate as to whether the government can abrogate private contracts. Most Americans seem to think that private contracts are inviolable. They seem to think that contracts have a mystical power that makes them immune from State interference. President Obama’s economic adviser, Larry Summers, went so far as to say: “This is a country of laws. The government cannot just abrogate private contracts.”

Yes it can. Government enforces contracts by sovereign grace. If the sovereign decides that a particular contract will be enforced, there is nothing the aggrieved party can do about it within the law. Of course, this would not set a good precedent. After all, people only do business with each other if they know that the law will force the other guy to honor his promise. But this is a policy concern, not a legal one. In essence, the power to enforce contracts stems from pure political might. It has nothing to do with abstractions, principles or sacred vows. And it certainly has nothing to do with whether the United States is a “country of laws.”

In The Prince, Niccolo Machiavelli wrote: “The principal foundations of all states, whether new, old, or mixed, are good laws and good arms… [and]… there cannot be good laws where there are not good arms…[and] where there are good arms, there are bound to be good laws.” The Prince, Chapter 12 at p. 52. Machiavelli’s clear prose reminds us that a “nation of laws” cannot exist without “good arms,” namely, powerful executive authority. Law cannot exist without force, nor can it even come into being without an original coup. In the United States, there would be no Constitution or laws had the colonists not risen up and defeated the British army through “good arms.” Through “good arms,” the United States maintained the essential stability it required to establish “good laws.” Thanks to protection under “good arms,” commercial men could depend on stable laws. They could count on courts to enforce contracts against those who broke their promises. Americans grew accustomed to a “legal State” in which they could dependably rely on courts to enforce private bargains with neutral, reasonable laws.

That remains the case today. Larry Summers did not voice an insane sentiment when he said: “This is a Nation of laws.” Most Americans agree with him. They take pride in the fact that they live in a society in which courts neutrally apply legal principles that technically treat everyone equally. After all, a “Nation of laws” differs from a “Nation of men,” in which a legal rules flow from the wanton caprice of a single individual. In America, we have laws. In theory, the laws apply equally to everyone, and—as the logic goes—that is a good thing.

But these “defenders of the law” forget that their laws would mean nothing without executive power. Courts enjoy power because they can count on the executive to enforce their “principled” decrees. In contract law, they ruminate about abstract ideas like bargain, consideration, benefit, detriment, equality of exchange, restitution, rescission, reformation, mistake, parol evidence and reliance. They even attempt to allot money damages to aggrieved parties according to fixed, “neutral” rules. They then scribble out judgments and force the offending party to pay. If he does not, the court has no institutional power to do anything but write strongly-worded opinions. To enforce its decrees, it must turn to its institutional partner: The Executive. Only the executive has the billy clubs, guns, prisons and handcuffs to browbeat the offending party into paying up. If he does not obey the court, the executive takes away his property or his liberty. To avoid that fate, the offending party does what the court tells him. That is true power: The power to compel. Cf. Kant (“Law is linked to the authority to compel”). Introduction to Legal Doctrine, The Metaphysics of Morals (Einleitung in die Rechtslehre § D, Die Metaphysik der Moral). The executive is powerful because it can directly inflict pain on bodies and take away property. And as Machiavelli knew, nothing compels men more than threatening their property: “[B]ut above all, [a Prince] must abstain from taking the property of others, for men sooner forget the death of their father than the loss of their patrimony.” The Prince, Chapter 17, p. 72.

What good is it to be a “nation of laws” if the laws themselves are stupid or degrading? That was the question Americans asked when they found out that federal bailout money paid multimillion-dollar bonuses to scallywag AIG executives last week. In my view, waving your hands in the air and pontificating about “our Nation of laws” is absurd. Quite simply, the whole rhetoric about the United States as a “nation of laws” is a vacuous talisman. If it is necessary to allow brigands to take money that would not have been available without their skullduggery because that is what “the law dictates,” then I say the “rule of law” is just as stupid as the law itself. During his confirmation hearings in the United States Senate, Chief Justice John G. Roberts repeatedly pledged that he would issue opinions: “Consistent with the Constitution and the rule of law in the United States,” as if the “rule of law” were synonymous with goodness. What is all this nonsense about the “rule of law?” Laws come from men. Men can be stupid. So can their laws. Therefore, to use a lawyer’s logic, the “rule of law” can be stupid, too. I reserve no exalted place in my heart for the “rule of law.” There once were laws that permitted slavery. Under the “rule of law,” men could own other men in this country. If a law is bad, so is “rule under the law.” For that reason, I reject this hypnotic, reflexive insistence on the “rule of law” in every single situation in which legal rules come into question. For me, it is no answer to mouth the words “rule of law” when defending legal principles that lead to intuitive mischief.

Yet there is no need to even reach the question. We need only worry about the “rule of law” if we assume that the executive will enforce legal decrees. In essence, law is about power. Our constitutional system arose from power and does its best to diffuse power across several institutions. In theory, our legislative, executive and judicial branches are supposed to be “equal” in power. In practice, however, we see how artificial and wooden this distinction truly is. After all, who really has power? Only the branch with the power to compel men’s bodies and take their property has real power. Courts have the power to write erudite opinions on archaic constitutional provisions. Legislatures have the power to draft voluminous bills that attempt to better society with new rules and regulations. But only the executive has the power to shoot, kill, take, invade, imprison, threaten and enforce. Without the executive, neither legislative nor judicial “power” would mean anything. Courts and legislatures are like powerless children who depend on their father to do the muscle work. Only the executive has real power, because it is the branch with the “good arms.” And, in Machiavelli’s parlance: “There are no good laws without good arms.” The Prince, Chapter 12, p. 52. Only real power assures that the law has any force at all. On this point, Machiavelli again puts it best: “For, between an armed man and an unarmed one there is no comparison whatsoever, and it is not reasonable that one who is armed should willingly obey one who is unarmed.” The Prince, Chapter 14, p. 63. In this light, should the executive in this country really listen to carping about the “rule of law” in enforcing abhorrent private contracts for AIG executives? No. In Machiavelli’s terms, it would not even be “reasonable” for the “armed” executive to obey an “unarmed” court.

My sentiments here will undoubtedly cause discomfort among legal “process lovers.” Indeed, my article last week prompted a response that: “This is no way to run a government.” On this point I agree. Laws should be followed. Laws provide stability and comfort to commerce, and that inures to everyone’s benefit. When men know that they can obtain a peaceful remedy from a court, they will refrain from private retribution and “collection.” In almost every case, the executive should enforce legal decrees that compel private obligations. But that does not alter the fact that executive enforcement is essentially discretionary. Only the executive is armed; the court has no real power to compel anything. In rare cases—as here with the AIG bonus fiasco—the executive has the institutional discretion to refuse to honor legal decrees. After all, if private contract law leads to a result so repugnant that it reaffirms Charles Dickens’ famous dictum from Oliver Twist: “If this be the eye of the law, sir, then the law is an ass,” then the executive can step in to reverse the outcry. True, some may say that such “indulgences” to popular sentiment are the first step on the road to dictatorship and capricious government. But I say that it is worse to allow perverse “legal” results than to suspend the law in an exceptional case to avoid public indignation.

I have little patience for those who fanatically put their faith in law. Positive law—meaning written laws passed by popular majorities for majority purposes, ostensibly according to logic and human reason—does not invariably lead to good results or justice. In Hitler’s Germany, for instance, positive law—passed by democratic majorities—forbade marriages between Jews and Gentiles. Later German laws made it “legal” to exterminate Jews at concentration camps. This is an extreme example, but it shows that positive law should not be a talisman. Positive law can be bad. For that reason, trust in the “rule of law” can also be misplaced.

We all want our bargains protected. But that does not mean we should allow AIG Executives to scream “rule of law” to create a result at fundamental odds with our common sensibilities. Our common sensibilities may not be written down in a statute or casebook, but they still matter. On this point, we can turn to the executive to exercise its inherent power to deny enforcement.