Contract Clause

Article I, section 10, clause 1 of the Constitution provides that “No State shall … pass any Law impairing the Obligation of Contracts.” On its face an absolute limitation on state power, the meaning of this clause has varied greatly in Supreme Court interpretation. In the early years of the nation, the Contracts Clause dominated the Supreme Court's case docket, and the Court's interpretations constrained state action, especially actions seeking to redistribute wealth. In modern times, the Court has all but forgotten the clause as a consequence of its substantial deference to state legislative judgment in economic matters.

The Contracts Clause fits neatly alongside constitutional prohibitions against state passage of ex post facto laws and bills of attainder. These provisions ensure the general application of the law in a manner that allows citizens a fair opportunity to adjust and plan their affairs.

At the Constitutional Convention, the Contracts Clause was introduced late in the proceedings by Massachusetts delegate Rufus King. King modeled the clause after a similar provision in the Northwest Ordinance of 1787, which had been adopted just six weeks earlier by the Congress of the Articles of Confederation. At the convention and during subsequent ratification debates, the objection was put forward that the clause would unduly constrain the states, precluding them from acting in times of emergency. James Madison admitted this “inconvenience,” but thought the “utility” of the clause outweighed these concerns. James Wilson of Pennsylvania noted that the unforeseen circumstance was still within the legislative power since the clause prohibited “retrospective interferences only.”

Because at the time the Constitution was written there was much concern with debtor relief laws, it has sometimes been suggested that the clause was singularly aimed at precluding this type of legislation. The general language of the clause, however, and its early application by the Supreme Court easily refute this limiting characterization. There was perhaps no greater proponent of the clause than Chief Justice John Marshall, who applied the clause broadly to public as well as private contracts. Thus, in Fletcher v. Peck (1810), Marshall denied the Georgia legislature power to revoke previous public land grants. Marshall conceived of the clause's protection as absolute, so even allegations that the prior grants had been tainted with fraud were not enough to justify an impairment. His opinion in Sturges v. Crowninshield (1819) firmly rejected social‐welfare arguments in favor of abrogating contracts in order to discharge the debts of insolvent debtors in bankruptcy. In Dartmouth College v. Woodward (1819), Marshall ruled that a corporate charter could be impaired as much by adding additional provisions to the charter or contract as by nullifying existing provisions. Marshall's expansive reading of the clause, however, was not enough to convince the Court to disregard the framers' original understanding and apply it to laws that operate prospectively; the Court rejected this interpretation in Ogden v. Saunders (1827).

While the Marshall period hewed closely to the text and history of the Constitution, its application of the clause to all public contracts caused difficulty. This problem surfaced in Stone v. Mississippi (1880), where the state sought to prohibit the sale of lottery tickets by a corporate entity that had a charter to conduct a lottery. To retroactively apply this prohibition to the corporate charter would seemingly run afoul of the clause as previously interpreted, but to deny the state the lottery prohibition would restrict the exercise of police power over health, safety, and morals. The Stone Court resolved the dilemma by articulating the reserved power doctrine that no state can contract away its police power. Since the nineteenth‐century conception of police power was limited to matters of health and safety, and did not cover modern redistributions of wealth, the Stone reservation constituted no more than a correction of Marshall's expansive reading of the clause.

Then, however, the clause fell into eclipse. From the Civil War until the 1930s, there was little need for the Court to rely upon the clause to negate overzealous state economic regulation since this objective was accomplished under substantive economic due process. Because it possessed a much weaker constitutional pedigree, however, substantive due process fell of its own weight during the Great Depression, when the freedom of contract policy it espoused went out of fashion.

The decline of the Contracts Clause is frequently associated with Home Building & Loan Association v. Blaisdell (1934). In Blaisdell, the Court upheld a Minnesota statute that extended the period of redemption for mortgage default. The Court's justification was entirely pragmatic. In the face of economic emergency, and given the temporary nature of the mortgage relief provided by the statute, the Court construed the clause “in light of our whole experience and not merely in view of what was said a hundred years ago” (p. 443). “Public needs,” said the Court, required that the “reservation of the reasonable exercise of the protective power of the State [be] read into all contracts” (p. 444). The Court tried to check the decline of the clause in a series of cases following Blaisdell, finding no pervasive emergency. The ever‐broadening conceptions of police power, however, eventually transformed the absolute prohibition of the clause into a matter to be balanced with reasonable judgment.

Following United States Trust v. New Jersey (1977), where the Court invalidated an abrogation of a covenant in a public bond contract, there was speculation that the clause might have regained some of its prior importance. Yet the test applied in U.S. Trust bore little resemblance to the text of the Constitution. Writing for the Court, Justice Harry Blackmun stated that contractual impairments might be upheld if they were “reasonable and necessary to serve an important public purpose” (p. 25). Curiously, that ill‐defined standard was to be applied more rigorously where state law impaired public, rather than private, contracts. Nevertheless, with rare exception, the Contracts Clause has been routinely subordinated to the modern Court's substantial deference to state legislative judgment in matters of economics. In Keystone Bituminous Coal Association v. DeBenedictis (1987), Justice John Paul Stevens stated, “It is well‐settled that the prohibition against impairing the obligation of contracts is not to be read literally” (p. 502).

— Douglas W. Kmiec

Article 1, Section 10, of the U.S. Constitution says, “No State shall … pass any … Law impairing the Obligation of Contracts.” This contract clause prohibits any state government from passing a law that would interfere with contracts made by citizens, either by weakening the obligations assumed by parties to a contract or by making a contract difficult to enforce. The Supreme Court's decisions in Fletcher v. Peck(1810) and Dartmouth College v. Woodward (1819) were landmark decisions that used the contract clause to uphold the sanctity of contracts.

The contract clause applies to contracts between private individuals or contracts made by a state government. However, if a contract endangers the health, safety, or welfare of the public, the state may regulate or void it. The state's authority to protect the public in this way is known as its police power. During the 20th century, the Court has often ruled in favor of state regulation or modification of contracts in the public interest.

See also Dartmouth College v. Woodward; Fletcher v. Peck

Article I, Section 10, of the U.S. Constitution provides that no state shall pass any law "impairing the Obligation of Contracts." Broad interpretation of this clause by the Supreme Court under Chief Justice John Marshall made it the basic constitutional instrument for the protection of private property in the nineteenth century—a primary link between law and economic growth and a basic source of national authority over the states. The framers and ratifiers of the Constitution paid little attention to this clause, and what they said about it at the constitutional and ratifying conventions suggests that the clause was intended to supplement the prohibition in Article I, Section 10, against state-issued paper money. More important, the clause was thought to embrace only private contracts. Even interpreting the clause in this limited sense, the Court was able to impose controls on state bankruptcy, insolvency, and laws that threatened to undermine the reliability of private contracts or redistribute wealth. Two basic principles guided judicial interpretation in this area, both designed to protect property rights: (1) state laws touching private contracts must be prospective (Ogden v. Saunders [1827]); and (2) such laws may alter only the remedy and not the substance of the contract (Sturges v. Crownin-Shield [1819] and Ogden v. Saunders).

By extending the clause beyond the intent of the framers to embrace public contracts—an interpretation begun on the circuit level in the 1790s and completed by the Marshall Court in Fletcher v. Peck (1810) and Dartmouth College v. Woodward (1819)—the Court gained jurisdiction over state land grants and tax exemptions, municipal bonds, and agreements between the state and its political subunits. Especially crucial in shaping national economic development was the Dartmouth College decision, which held that a corporate charter was a contract, the terms of which constituted a property right that the state could not subsequently impair. Over the course of the nineteenth century, the Court limited this protection for private property in four ways: (1) by the state's power to take property by eminent domain; (2) by the right of the state to explicitly reserve the power to amend or rescind a charter; (3) by the inability of charter rights to pass by implication (Charles River Bridge v. Warren Bridge [1837]); and (4) by the state's inability to contract away its Police Power (Stone v. Mississippi [1880]). Despite these limits, the overall impact of judicial interpretation of the clause was to hold the state to its promises, thus providing the rational and stable environment essential to corporate growth.

The judicial exegesis of the contract clause reflected nineteenth-century American emphasis on economic individualism and free enterprise. During the twentieth century, the contract clause lost its central place in U.S. constitutional law. Beginning in the 1890s, the more flexible due process clause of the Fourteenth Amendment progressively replaced the contract clause as the constitutional bulwark of property. More important, the complexities of urban, technological society necessitated legislative modification of absolute property rights. In the early 2000s, the Court would uphold regulations if the state could demonstrate that the impairment of contract was a "reasonable and necessary" means of achieving an important public benefit. (United States Trust v. New Jersey [1977]). The contract clause had not disappeared as a source of limitation on state economic legislation, but it was no longer the dynamic legal force it had been in the nineteenth century.

Bibliography

Buckley, Francis H., ed. The Fall and Rise of Freedom of Contract. Durham, N.C.: Duke University Press, 1999.

Ely, James W., Jr. Property Rights in American History from the Colonial Era to the Present. Vol. 4, The Contract Clause in American History. New York: Garland, 1997.

Scheiber, Harry N., ed. The State and Freedom of Contract. Stanford, Calif.: Stanford University Press, 1998.

Wright, Benjamin F. The Contract Clause of the Constitution. Cambridge, Mass.: Harvard University Press, 1938.

—Kent Newmyer/C. P.

This article relates to an article of the United States Constitution. For terms of a legal contract, see Contractual term.

This article is in need of attention from an expert on the subject. WikiProject Law or the Law Portal may be able to help recruit one. (November 2008)

The Contract Clause appears in the United States Constitution, Article I, section 10, clause 1. It states:

“

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

”

The Framers of the Constitution added this clause due to fear that states would continue a practice that had been widespread under the Articles of Confederation—that of granting "private relief." Legislatures would pass bills relieving particular persons (predictably, influential persons) of their obligation to pay their debts. It was this phenomenon that also prompted the framers to make bankruptcy law the province of the federal government.

During and after the Revolution, many states passed laws favoring colonial debtors to the detriment of foreign creditors. Federalists, especially Alexander Hamilton, believed that such a practice would jeopardize the future flow of foreign capital into the fledgling United States. Consequently, the Contract Clause, by insuring the inviolability of sales and financing contracts, encouraged an inflow of foreign capital by reducing the risk of loss to foreign merchants trading with and investing in the former colonies. (See generally James W. Ely Jr., The Guardian of Every Other Right (Oxford Univ. Press 1998).)

Contents 1 Origins 1.1 Treaties, Alliances, or Confederations 1.2 Bills of Credit 1.3 Legal Tender 1.4 Bills of Attainder 2 The Contract Clause Since Blaisdell 2.1 Modification of Private Contracts 2.2 Modification of Government Contracts 2.3 Application of the Contract Clause (2004) 3 Private Contracts 4 See also 5 References

Origins

Treaties, Alliances, or Confederations

At the time of the Civil War, this clause was one of the provisions upon which the Court relied in holding that the Confederation formed by the seceding States could not be recognized as having any legal existence.^[1] Today, its practical significance lies in the limitations which it implies upon the power of the States to deal with matters having a bearing upon international relations. In the early case of Holmes v. Jennison,^[2] Chief Justice Taney invoked it as a reason for holding that a State had no power to deliver up a fugitive from justice to a foreign State. More recently, the kindred idea that the responsibility for the conduct of foreign relations rests exclusively with the Federal Government prompted the Court to hold that, since the oil under the three mile marginal belt along the California coast might well become the subject of international dispute and since the ocean, including this three mile belt, is of vital consequence to the nation in its desire to engage in commerce and to live in peace with the world, the Federal Government has paramount rights in and power over that belt, including full dominion over the resources of the soil under the water area.^[3] In Skiriotes v. Florida,^[4] the Court, on the other hand, ruled that this clause did not disable Florida from regulating the manner in which its own citizens may engage in sponge fishing outside its territorial waters. Speaking for a unanimous Court, Chief Justice Hughes declared; “When its action does not conflict with federal legislation, the sovereign authority of the State over the conduct of its citizens upon the high seas is analogous to the sovereign authority of the United States over its citizens in like circumstances.”^[5]

Bills of Credit

Within the sense of the Constitution, bills of credit signify a paper medium of exchange, intended to circulate between individuals, and between the Government and individuals, for the ordinary purposes of society. It is immaterial whether the quality of legal tender is imparted to such paper. Interest bearing certificates, in denominations not exceeding ten dollars, which were issued by loan offices established by the State of Missouri and made receivable in payment of taxes or other moneys due to the State, and in payment of the fees and salaries of state officers, were held to be bills of credit whose issuance was banned by this section.^[6] The States are not forbidden, however, to issue coupons receivable for taxes,^[7] nor to execute instruments binding themselves to pay money at a future day for services rendered or money borrowed.^[8] Bills issued by state banks are not bills of credit;^[9] it is immaterial that the State is the sole stockholder of the bank,^[10] that the officers of the bank were elected by the state legislature,^[9] or that the capital of the bank was raised by the sale of state bonds.^[11]

Legal Tender

Relying on this clause, which applies only to the States and not to the Federal Government,^[12] the Supreme Court has held that where the marshal of a state court received state bank notes in payment and discharge of an execution, the creditor was entitled to demand payment in gold or silver.^[13] Since, however, there is nothing in the Constitution prohibiting a bank depositor from consenting when he draws a check that payment may be made by draft, a state law providing that checks drawn on local banks should, at the option of the bank, be payable in exchange drafts was held valid.^[14]

Bills of Attainder

Statutes passed after the Civil War with the intent and result of excluding persons who had aided the Confederacy from following certain callings, by the device of requiring them to take an oath that they had never given such aid, were held invalid as being bills of attainder, as well as ex post facto laws.^[15]

Other attempts to raise bill-of-attainder claims have been unsuccessful. A Court majority denied that a municipal ordinance that required all employees to execute oaths that they had never been affiliated with Communist or similar organizations, violated the clause, on the grounds that the ordinance merely provided standards of qualifications and eligibility for employment.^[16] A law that prohibited any person convicted of a felony and not subsequently pardoned from holding office in a waterfront union was not a bill of attainder because the “distinguishing feature of a bill of attainder is the substitution of a legislative for a judicial determination of guilt” and the prohibition “embodies no further implications of appellant’s guilt than are contained in his 1920 judicial conviction.”^[17]

The Contract Clause Since Blaisdell

During the New Deal Era, the Supreme Court began to depart from the Lochner era constitutional interpretation of the Commerce Clause, Due Process, and the Contract Clause.

In Home Building & Loan Association v. Blaisdell 290 U.S. 398 (1934), the Supreme Court upheld a Minnesota law that temporarily restricted the ability of mortgage holders to foreclose. The law was enacted to prevent mass foreclosures during a time of economic hardship. The kind of contract modification performed by the law in question was arguably similar to the kind that the Framers intended to prohibit. The Supreme Court held that this law was a valid exercise of the state's Police Power. It found that the temporary nature of the contract modification and the emergency of the situation justified the law..^[18]

Further cases have refined this holding, differentiating between governmental interference with private contracts and interference with contracts entered into by the government. Succinctly, there is more scrutiny when the government modifies a contract to alter its own obligations. (See United States Trust Co. v. New Jersey, 431 U.S. 1 (1977).)^[18]

Modification of Private Contracts

The Supreme Court laid out the test for whether a law violates the Contract Clause in Energy Reserves Group v. Kansas Power & Light 459 U.S. 400 (1983). The test is a three part test. First, the state regulation must substantially impair a contractual relationship. Second, the State "must have a significant and legitimate purpose behind the regulation, such as the remedying of a broad and general social or economic problem." 459 U.S. at 411-13 Third, the law must be reasonable and appropriate for its intended purpose. This test is similar to rational basis review.^[18]

Modification of Government Contracts

In United States Trust Co. v. New Jersey, the Supreme Court held that a higher level of scrutiny was needed for situations where laws modified the government's own contractual obligations. In this case, New Jersey had issued bonds to finance the World Trade Center and had contractually promised the bondholders that the collateral would not be used to finance money losing rail operations. Later, New Jersey attempted to modify law to allow financing of railway operations, and the bondholders successfully sued to prevent this from happening.^[19]

Application of the Contract Clause (2004)

The Contract Clause prohibits states from enacting any law that retroactively impairs contract rights. The Contract Clause applies only to state legislation, not court decisions.

Private Contracts

This section overlaps with other sections too much. It should be combined with the rest of the article. Please improve this article if you can.

The Contracts Clause prevents only substantial impairments of contract, i.e. destruction or loss of most or all of a party's rights under an existing contract. However, not all substantial impairments violate the Contracts Clause.

To determine whether state legislation is valid under the Contracts Clause, the following three part test applies:

(i) Does the state legislation substantially impair a party's rights under an existing contract? If it does not, the state legislation is not invalidated by the Contracts Clause. If it does, such impairment will be valid only if it:

(ii) Serves an important and legitimate public interest; and

(iii) Is a reasonable and narrowly tailored means of promoting that public interest.

See also

• Fletcher v. Peck
• Dartmouth College v. Woodward
• Charles River Bridge v. Warren Bridge
• Federalist No. 10, complete text at Wikisource.
• Contract law

References

1. ^ Williams v. Bruffy, 96 U.S. 176, 183 (1878).
2. ^ 39 U.S. (14 Pet.) 540 (1840).
3. ^ United States v. California, 332 U.S. 19 (1947).
4. ^ 313 U.S. 69 (1941).
5. ^ 313 U.S. at 78–79.
6. ^ Craig v. Missouri, 29 U.S. (4 Pet.) 410, 425 (1830); Byrne v. Missouri, 33 U.S. (8 Pet.) 40 (1834).
7. ^ Virginia Coupon Cases (Poindexter v. Greenhow), 114 U.S. 269 (1885); Chaffin v. Taylor, 116 U.S. 567 (1886).
8. ^ Houston & Texas Central R.R. v. Texas, 177 U.S. 66 (1900).
9. ^ ^{a b} Briscoe v. Bank of Kentucky, 36 U.S. (11 Pet.) 257 (1837).
10. ^ Darrington v. Bank of Alabama, 54 U.S. (13 How.) 12, 15 (1851); Curran v. Arkansas, 56 U.S. (15 How.) 304, 317 (1854).
11. ^ Woodruff v. Trapnall, 51 U.S. (10 How.) 190, 205 (1851).
12. ^ Juilliard v. Greenman, 110 U.S. 421, 446 (1884).
13. ^ Gwin v. Breedlove, 43 U.S. (2 How.) 29, 38 (1844). See also Griffin v. Thompson, 43 U.S. (2 How.) 244 (1844).
14. ^ Farmers & Merchants Bank v. Federal Reserve Bank, 262 U.S. 649, 659 (1923).
15. ^ Cummings v. Missouri, 71 U.S. (4 Wall.) 277, 323 (1867); Klinger v. Missouri, 80 U.S. (13 Wall.) 257 (1872); Pierce v. Carskadon, 83 U.S. (16 Wall.) 234, 239 (1873).
16. ^ Garner v. Board of Public Works, 341 U.S. 716, 722–723 (1951). Cf. Konigsberg v. State Bar of California, 366 U.S. 36, 47 n.9 (1961).
17. ^ De Veau v. Braisted, 363 U.S. 144, 160 (1960). Presumably, United States v. Brown, 381 U.S. 437 (1965), does not qualify this decision.
18. ^ ^{a b c} Chemerinsky, Erwin (2002) (in English). Constitutional Law. New York, United States: Aspen Publishers. p. 1276 pages. ISBN 0-7355-2428-9. 
19. ^ 431 U.S. 1. (1977)

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