February 20, 2009
An Intriquing Legal Issue
Some banks who took TARP I money did so under a clause that allows the government to unilaterally change the terms of the deal. What is the legal effect of such a clause. Assume the government now wants to cap salaries and bonuses and demands that the bank do so; the bank does not take any new TARP money. Must the bank comply? I would say not. Either the clause is unenforceable (no standards for evaluating whether the government is in breach) or there is no contract at all (no mutual agreement on significant terms). The bank could refuse and the government cannot vote its non-voting preferred (or common, if it exercises its warrants) stock to force compliance. In the extreme case, there is no contract and the bank can even ignore the terms of TARP I's deal and force the government to sue for restitution and rescission of the funds (with the result no obvious). In any event, none of this will happen as the government has the banks running scared of its other regulatory authority.
February 20, 2009 | Permalink
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Posted by: Miriam | Feb 23, 2009 5:20:52 AM
I am not familiar with the terms of the TARP I unilateral clause but absent fraud, duress or some other defense, parties are bound to the terms of their contracts, even unilateral contracts. Therefore, in this case, I would expect the unilateral contract to be enforceable.
Posted by: Art | Feb 26, 2009 1:49:54 PM