Contracts clause

Article 1, section 10, of the U.S. Constitution prohibits states from impairing contractual obligations. Through Supreme Court interpretation, the prohibition extends to state impairment of contracts not only among private parties but also between private parties and the states themselves.

The Framers drafted the contracts clause because they were concerned with various attacks of the debtor class on property interests. In a variety of ways, state legislatures enacted laws that effectively relieved debtors of their contractual obligations. However, the first important Supreme Court interpretations of the contracts clause involved a legislative grant of land and the terms of a corporate charter, not a state impairment of contractual relations between private parties.

Protection from the States

In Fletcher v. Peck[case]Fletcher v. Peck[Fletcher v. Peck] (1810), Chief Justice John Marshall found that public grants by a sovereign state are subject to the same limitations as are contracts among private parties. Once a contract is granted, the grantors imply they will not reassert their original rights, and therefore, a state does not possess the authority to revoke its own grants. Marshall applied this same absolutist mode of constitutional interpretation to Dartmouth College v. Woodward[case]Dartmouth College v. Woodward[Dartmouth College v. Woodward] (1819). He held that a charter granted to the trustees of Dartmouth College in 1769 by the British crown could not be amended after the Revolutionary War by the New Hampshire legislature. In Sturges v. Crowninshield[case]Sturges v. Crowninshield[Sturges v. Crowninshield] (1819), the Court held that in the absence of congressional legislation, states may enact bankruptcy lawsBankruptcy law. If a state bankruptcy law exists at the time when a contract is consummated, the Court held in Ogden v. Saunders[case]Ogden v. Saunders[Ogden v. Saunders] (1827) that the state bankruptcy provisions are implied, and therefore, the contract is not impaired by the state law. Despite this particular setback for the doctrine of vested property rights, Marshall presided over a Court that created the judicial precedents protecting individual creditors and business organizations from the states’ regulatory power.

The Court led by Chief Justice Roger Brooke Taney continued to apply the contracts clause to a wide array of disputes, including debtor-creditor relations, state legislation regulating and taxing banks, and even an agreement between the federal government and the states. The most noteworthy decision of the Taney Court is Charles River Bridge v. Warren Bridge[case]Charles River Bridge v. Warren Bridge[Charles River Bridge v. Warren Bridge] (1837). Although the ruling in the case permits the exercise of state power, Taney’s decision stands for the proposition that only those rights explicitly spelled out in corporate charters are protected by the contracts clause.

Stronger States

After the Civil War (1861-1865) to the 1880’s the Court continued to render decisions generally favorable to propertied interests. For example, during this period municipalities attempted to repudiate their bonded indebtedness. The Court ruled against them in all but a few of the two hundred cases that came before it. However, late in this period the Court began to recognize the legitimate use of state police powersPolice powers as a limitation on private power in the economic marketplace. It permitted states to change the terms of bond issues and to regulate the rates railroads charged their customers. The Court also refused to apply the contracts clause to the federal government. The most celebrated pronouncement of this period is found in Chief Justice Morrison R. Waite’s opinion in Stone v. Mississippi[case]Stone v. Mississippi[Stone v. Mississippi] (1880): “No legislature can bargain away the public health or the public morals. The people themselves cannot do it, much less their servants.”

Chief Justice Charles Evans Hughes’s majority opinion in Home Building and Loan Association v. Blaisdell[case]Home Building and Loan Association v. Blaisdell[Home Building and Loan Association v. Blaisdell] (1934) marks the start of a rapid decline in the Court’s willingness to strike down state laws in the name of the contracts clause. Minnesota sought to ease the economic hardships associated with the Great Depression by slowing farm and home foreclosures by temporarily delaying the period of loan repayments. Hughes established criteria for when a state may interfere with the obligation of contracts among private parties. Because the state law did not alter the basic integrity of the contractual obligation and because the alteration was designed to apply in a temporary fashion, the Court’s 4-3 majority was able to distinguish this case from the abuses that took place before the 1787 Constitutional Convention.

By the mid-1960’s, the Court completed the process of rejecting constitutional absolutism in favor of a balancing-of-interests approach to contract clause interpretation. For example, Texas amended in 1941 a 1910 public land sale law. The original law allowed purchasers who had missed their payments to reinstate their claims at any time upon payment of the missed interest but before a third party obtained title to the land in question. The 1941 amendment limited the repayment option to five years. Upholding the unilateral change, Justice Byron R. White in El Paso v. Simmons[case]El Paso v. Simmons[El Paso v. Simmons] (1965) explicitly rejects the absolutism of the past with the observation that not every modification of a contractual promise impairs the obligation of contract.

The Resurgence

In a pair of cases, the Burger Court created the necessary precedents for a resurgence of the contracts clause. In United States Trust Co. v. New Jersey[case]United States Trust Co. v. New Jersey[United States Trust Co. v. New Jersey] (1977) and Allied Structural Steel Co. v. Spannaus[case]Allied Structural Steel Co. v. Spannaus[Allied Structural Steel Co. v. Spannaus] (1978), a majority of justices employed a balancing-of-interests approach in a way that favored the interests of private litigants over states’ interests. After the contractual impairment in question was demonstrated to be significant and not minor, the Court carefully scrutinized whether the impairment was both necessary and reasonable. Using this version of the balancing test, the Burger Court found in both cases against the state and in favor of private property.

Subsequently, the Court was asked to extend its reasoning to eminent domain and equal protection matters, but it consistently refused to do so. The contracts clause does not appear to be destined to a resurgence reminiscent of the days of John Marshall. However, because the balancing-of-interests test by its nature is highly subjective, a sufficiently property-minded Court may employ it at any time.

Contracts clause Summary