Difference between revisions of "Contract Clause"

Latest revision as of 04:28, 8 August 2018

Article I, Section 10, of the Constitution provides, “No state shall . . . pass any law impairing the Obligation of Contracts.” Often overlooked today, the Contract Clause occupied a pivotal place in constitutional law until the early twentieth century and served as a key protection for property rights. The clause evidenced the commitment of the framers to private economic ordering.

Following the American Revolution, state legislatures regularly intervened in debtor-creditor relations with laws designed to impede the collection of debts. The Contract Clause was little discussed at the Constitutional Convention, but the provision was clearly intended to curb state debtor relief laws that undermined the sanctity of private agreements and threatened to disrupt credit relationships. The clause was modeled after a similar provision in the Northwest Ordinance of 1787 that barred legislative interference with private contracts. It bears emphasis that the framers selected broader language that seemingly covered all types of public as well as private contracts. Many state constitutions also included language forbidding the impairment of contracts.

The Contract Clause early assumed a major role in constitutional development. In 1792 a federal circuit court struck down a state debtor relief law as an impairment of contract. During the tenure of John Marshall as chief justice (1801–35), the Contract Clause was the principal vehicle by which the Supreme Court vindicated the rights of property owners against state abridgement. A champion of private property, business enterprise, and the national market, Marshall viewed skeptically state interference with private economic arrangements.

In the landmark case of Fletcher v. Peck (1810), Marshall ruled that the Contract Clause covered every type of contract and prevented a state from breaching its own agreements. Consequently, the Georgia legislature could not rescind a land grant despite allegations of bribery in the original sale. In Fletcher, Marshall tellingly characterized the Contract Clause as a “bill of rights for the people of each state.” Thereafter the Marshall Court applied the Contract Clause to a variety of public contracts, including state tax exemptions to business. More importantly, the Court in Dartmouth College v. Woodward (1819) concluded that the grant of a corporate charter was a constitutionally protected contract, and that legislative alterations of the charter violated the Contract Clause. This decision encouraged the growth of corporate enterprise by affording constitutional safeguards against legislative abridgement of charters of incorporation.

In the absence of a national bankruptcy law, the states continued to enact debt relief legislation. In Sturges v. Crowninshield (1819), Marshall held that New York’s bankruptcy law was invalid because it relieved debtors of the obligation to pay debts contracted before the measure was passed. On the other hand, in Ogden v. Sanders (1827), over a rare dissent by Marshall, the Court maintained that the Contract Clause did not operate prospectively. Hence, state laws could reach debts incurred after the date of enactment.

Despite differences in outlook between Marshall and his successor as chief justice, Roger B. Taney (1835–64), the Supreme Court continued to apply the Contract Clause vigorously. To be sure, Taney was inclined to give the states greater latitude in fashioning economic policy. In Charles River Bridge v. Warren Bridge (1837), for example, Taney insisted that state grants and charters must be strictly construed to facilitate economic growth, and he rejected the notion that implied corporate privileges were protected by the Contract Clause. Yet the Court under Taney strictly enforced the Contract Clause in cases involving debtor relief laws and grants of tax exemption. In the leading case of Bronson v. Kinzie (1843), the justices found two Illinois statutes that retroactively limited the foreclosure rights of mortgagees to be an unconstitutional abrogation of contractual obligations.

The attempted repudiation of bonded debt by localities in the late nineteenth century was repeatedly challenged as a violation of the Contract Clause. Drawing upon principles derived from the Contract Clause, in Gelpche v. City of Dubuque (1864) the Taney Court protected the legitimate expectation of bondholders from a subsequent state court decision that previously sustained that bonds were invalid under state law. In effect, the Court decided that a state court could not divest the rights of bondholders by a retroactive change in the law. Thereafter, the Waite and Fuller Courts repeatedly invoked the Contract Clause to uphold local government bonds in the hands of creditors against repudiation.

Despite the high regard shown for the sanctity of contract manifest in these decisions, the Contract Clause gradually waned in importance during the late nineteenth and early twentieth centuries. In part this was because other constitutional provisions, such as the Due Process and Taking Clauses, emerged as stronger guarantees of property rights. But other factors were also at work. By its terms, the Contract Clause applied just to the states and afforded no protection from federal interference with contractual arrangements. Moreover, the clause precluded only retroactive impairment of existing contracts, leaving the states free to regulate the terms of future contracts.

Of greater significance was recognition by the Supreme Court of exceptions to the Contract Clause. In Stone v. Mississippi (1880), the justices concluded that a state could outlaw the sale of lottery tickets despite the fact that a charter had previously granted the right to operate a lottery. The Supreme Court reasoned that a state legislature could not bargain away its authority to guard the health, safety, and morals of the public. The concept of an alienable police power opened the door for state legislatures to modify or revoke public contracts.

Still, the Supreme Court in the early twentieth century continued to rely on the Contract Clause to strike down debt relief laws and measures designed to frustrate the payment of state bonds. The eclipse of the Contract Clause is linked with Home Building and Loan Association v. Blaisdell (1934). At issue was the validity of a state mortgage moratorium statute enacted during the Great Depression. Although this was the very type of law that appeared to fall within the purview of the Contract Clause, a sharply divided Supreme Court upheld the statute as a reasonable response to emergency economic conditions. The Court in Blaisdell did not intend to wound the Contract Clause fatally, and in fact, the justices applied the clause several times to invalidate state debtor relief laws in the late 1930's. But after the constitutional revolution of 1937, the Supreme Court ceased to scrutinize economic regulations meaningfully, and the once potent Contract Clause was neglected for decades.

It would be premature, however, to dismiss the Contract Clause as a dead letter. In the 1970's the Supreme Court revived the clause to a limited extent, invalidating state laws in United States Trust Co. v. New Jersey (1977) and in Allied Structural Steel Co. v. Spannaus (1978). Some lower federal and state courts have also invoked the Contract Clause to curb state legislative interference with private and public contractual arrangements. The Contract Clause therefore retains a modest degree of vitality as a safeguard for economic rights.

James W. Ely Jr.

Last updated: 2006

SEE ALSO: Bronson v. Kinzie; Charles River Bridge Company v. Warren Bridge Company; Dartmouth College v. Woodward; Fletcher v. Peck; Home Building and Loan v. Blaisdell; Marshall, John; Stone v. Mississippi; Substantive Due Process; Taney, Roger Brooke; United States Trust Company v. New Jersey