Contract Clause

Article I, Section 10, of the United States Constitution provides in part that “No State shall … pass any … Law impairing the obligation of Contracts.” Although largely neglected today, the contract clause was among the most litigated provisions of the Constitution throughout the nineteenth century. The significance of the provision was widely recognized. As Justice William Strong ( 1808–1895 ) observed in 1877, “There is no more important provision in the Federal Constitution than the one which prohibits the states from passing laws impairing the obligation of contracts, and it is one of the highest duties of this Court to take care the prohibition shall neither be evaded nor frittered away” ( Murray v. Charleston, 96 U.S. 432, 448 [1877] ).

ORIGINS AND EARLY INTERPRETATIONS

The origins of the contract clause can be traced to the troubled economic conditions of the postrevolutionary era. Responding to the depressed economic circumstances, state legislators enacted a variety of debt-relief laws designed to assist debtors at the expense of creditors. Critics charged that these measures hampered commerce by frustrating the enforcement of contracts and destroying credit. There was surprisingly little discussion of the contract clause at the Constitutional Convention of 1787, but the immediate impetus for the provision was to curb state interference with the debtor-creditor relationship. The clause did not figure prominently in the ratification debates over the proposed federal Constitution. Writing in The Federalist, however, James Madison ( 1751–1836 ) insisted that “laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation” ( No. 44, 1788 ). It is revealing that the Framers viewed the stability of contractual arrangements as sufficiently important to warrant a specific ban on state abridgement. Following the federal model, many states also adopted provisions guarding the security of contracts in their constitutions.

The intended scope of the contract clause has been the subject of extensive historical inquiry, and it is doubtful that all the Framers had the same understanding of the provision. Some scholars maintain that the Framers simply sought to protect private contracts between individuals from state interference. Yet the clause employs comprehensive language that seemingly covers all types of contracts, and some Framers clearly expected the provision to bar states from abridging their own agreements. In the late eighteenth century, several Supreme Court justices took the position that states as contracting parties were, like private parties, bound under the contract clause.

In a line of famous cases, starting with Fletcher v. Peck, 10 U.S. 87 ( 1810 ), the Supreme Court under Chief Justice John Marshall ( 1755–1835 ) ruled that the contract clause prevented states from impairing contracts between states and individuals. The Court held that the contract clause covered state land grants and agreements to extend tax exemptions. In Dartmouth College v. Wood-ward, 17 U.S. 518 ( 1819 ), the Court determined that state-granted corporate charters were protected under the contract clause from legislative amendment or repeal.

LIMITS TO THE REACH OF THE CONTRACT CLAUSE

Although Marshall developed a muscular contract clause jurisprudence to safeguard economic interests, there were limits to the extent of contract clause protection. By its terms, the provision applied only to the states. Congress was free to alter contracts through its bankruptcy power. Moreover, the contract clause did not apply to laws enacted before adoption of the Constitution, and only embraced contracts pertaining to property. Marriage contracts, for example, were not within the provision, and so states could grant divorces. It was also settled, over Mar-shall's objection, that the provision was directed against retroactive legislation that impaired existing agreements and did not bar state laws relating to contracts made in the future.

Another important limitation on the scope of the contract clause was the principle of strict construction of corporate charters. In Providence Bank v. Billings, 29 U.S. 514 ( 1830 ), Marshall insisted that surrender of a state's power of taxation could never be implied. Any tax immunity must be expressly set forth in the charter. Roger B. Taney ( 1777–1864 ), Marshall's successor as chief justice, built upon Marshall's opinion. In the landmark decision Charles River Bridge v. Warren Bridge, 36 U.S. 420 ( 1837 ), Taney emphasized that grants of corporate privilege must be strictly construed in favor of the public. He worried that the notion of implied corporate privilege would hamper technological innovation and stymie economic progress. In effect, the doctrine of strict construction allowed the states greater latitude to control business corporations. The Supreme Court under Taney's leadership also limited the ambit of the contract clause by declaring that states could not bargain away certain attributes of sovereignty, such as the power of eminent domain.

ERA OF VIGOROUS ENFORCEMENT

Although he was skeptical about claims of corporate privilege, Taney frequently stressed the stability of contractual rights against governmental interference and energetically enforced the contract clause with regard to both private agreements and public contracts. For example, in Bronson v. Kinzie, 42 U.S. 311 ( 1843 ), the Court struck down two Illinois laws that retroactively limited mortgage foreclosure laws and gave mortgagors broad rights to redeem foreclosed property. Taney remarked that the contract clause “was undoubtedly adopted as a part of the Constitution for a great and useful purpose. It was to maintain the integrity of contracts, and to secure their faithful execution throughout the Union.” In addition to protecting the rights of parties under mortgage contracts, the Supreme Court under Taney repeatedly invoked the contract clause to invalidate state laws that sought to abrogate tax exemptions, to control statechartered banks, or to repudiate bonded debt. It even intimated that a change of opinion by the state judiciary, as well as legislative activity, might constitute an impairment of contract.

The Civil War and Reconstruction generated a number of contract clause issues. Following the abolition of slavery, several southern states adopted constitutional provisions barring the enforcement of contracts to purchase slaves entered before emancipation. The Supreme Court ruled that these slave purchase contracts were valid when made, and that the state constitutional language impaired the obligation of contract by depriving the seller of all remedy. The Civil War brought economic devastation to the states of the former Confederacy, prompting a wave of debt-relief measures. A particularly controversial form of relief was the legislative enlargement of homestead exemptions, which exempted a family residence from the reach of creditors. The Supreme Court invalidated the retroactive application of the enlarged homestead exemptions to antecedent debts as a violation of the contract clause.

WANING OF THE CONTRACT CLAUSE

In the late nineteenth and early twentieth centuries, the Supreme Court rendered a number of decisions that marked the start of a gradual decline of the contract clause. The Court ruled that states could not, even by express language, relinquish the police power to safeguard the health, safety, and morals of the public. Further, the Court adhered to the rule that corporate charters were to be strictly construed. Although courts continued to pay lip service to Dartmouth College, business corporations lost most contract clause cases before the Supreme Court. As corporations increasingly turned to the due process clause of the Fourteenth Amendment as a vehicle to protect economic rights, the contract clause receded in importance.

By the early twentieth century, the Supreme Court began a slow retreat from vigorous protection of private contracts as well. It extended the police power exception to agreements between private parties. Upholding municipal rent-control laws, the Court further held that the authority of the states to address perceived emergencies prevailed over private contracts. The contract clause received a near-fatal blow in the controversial case of Home Building & Loan Association v. Blaisdell, 290 U.S. 398 ( 1934 1862–1948 ), writing for the Court, pictured the moratorium as a temporary response to an economic emergency, but he in effect enlarged the police power exception to include economic regulations. With the coming of New Deal constitutionalism, with its stress on heavy deference to legislative determinations about economic policy, the Supreme Court read the contract clause virtually out of the Constitution.

In the late 1970s the Supreme Court again invoked the contract clause in two cases, and it briefly appeared that the Court was poised to reinvigorate the provision. However, the justices devised a malleable multi factor test for determining violations of the contract clause, and subsequently reverted to a deferential attitude toward state infringement of contracts.

CURRENT STATUS

The contract clause remains at the margins of modern constitutional law. The Supreme Court hears few contract clause cases, and has not voided a state law on contract clause grounds for more than thirty-five years. It has adopted a rather toothless standard of review that permits a contractual impairment if reasonable and necessary to serve an important public purpose. It should be noted, however, that some state courts continue to rely on the contract clause in federal and state constitutions to strike down abridgements of contracts.

At present, the most lively contract clause issue involves efforts to reduce health and pension benefits of public-sector employees. Facing severe financial pressures, many local governments have begun to unilaterally trim generous benefits for their employees. Since such benefits are often treated as contracts, these steps have triggered litigation alleging a violation of the contract clause in both federal and state constitutions. Federal and state courts have reached conflicting decisions as to the power of localities to curtail employee contractual rights, and the matter remains a subject of controversy.

SEE ALSO Article I, United States Constitution ; Contract ; Marshall, John ; New Deal Constitutional Revolution ; Property ; Taney, Roger .

BIBLIOGRAPHY

Boyd, Steven R. “The Contract Clause and the Evolution of American Federalism, 1789–1815.” William and Mary Quarterly 44, no. 3 (1987): 529–48.

Ely, James W., Jr. “The Marshall Court and Property Rights: A Reappraisal.” John Marshall Law Review 33 (2000): 1023–61.

Ely, James W., Jr. “The Protection of Contractual Rights: A Tale of Two Constitutional Provisions.” NYU Journal of Law er Liberty 1, no. 1 (2005): 370–401.

Ely, James W., Jr. “Whatever Happened to the Contract Clause?” Charleston Law Review 4 (2010): 371–94.

Epstein, Richard A. 1984. “Toward a Revitalization of the Contract Clause.” University of Chicago Law Review 51 (1984): 703–51.

Kmiec, Douglas W., and John O. McGinnis. “The Contract Clause: A Return to the Original Understanding.” Hastings Constitutional Law Quarterly 14 (1987): 525–60.

Madison, James. “Restrictions on the Authority of the Several States.” Federalist No. 44. 1788. http://thomas.loc.gov/home/histdox/fed_44.html .

Olken, Samuel R. “Charles Evans Hughes and the Blaisdell Decision: A Historical Study of Contract Clause Jurisprudence.” Oregon Law Review 72 (1993): 513–602.

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

James W. Ely Jr.
Vanderbilt University