Contracts Clause

Contracts 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