Reserved Police Power

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If a state reserves a power to alter, amend, or repeal a charter of incorporation before or when granting that charter, the contract clause is not necessarily a bar to the exercise of the state police power. In home building and loan association v. blaisdell (1934), the Court ruled that a state may modify or abrogate contracts because existing laws, by becoming part of the contracts, limit their obligations and because "the reservation of essential attributes of sovereign power is also read into contracts." That principle had originated in the concurring opinion of Justice joseph story in dartmouth college v. woodward (1819), when he declared that a corporate charter could not be changed unless a power for that purpose were reserved in the charter itself. Thereafter the states began to reserve such a power not only in charters, but in general acts of incorporation and in state constitutions, which applied to all charters subsequently granted. In 1877, when the court sustained a rate-fixing statute enacted under the reserved police power, it declared that the power must be reasonably exercised, consistent with the objects of the charter, and must not violate vested rights. In a 1936 case in which the Court repeated that formulation, as it had many times before, it stated that the reserved power prevented reliance on the contract clause. Never has the Court clarified its standards to explain why it has struck down some regulations under the reserved power yet has sustained others.

The reserved power nevertheless weakened the contract clause's service as a bastion of inviolable corporate charters. In 1884, for example, the Court held that because a private water works company was a public utility, its rates could be fixed by government authority under a reservation clause enacted after the state granted a charter giving the company an equal voice in the fixing of rates. The rise of the doctrine of the reserved police power and the related doctrine of the inalienable police power forced the defenders of property rights to seek a more secure constitutional base than the contract clause, thus contributing to the emergence of substantive due process of law in the 1890s. Dozens of cases involved the application of the reserved police power even after the fourteenth amendment replaced the contract clause as the main basis for invalidating state regulations. These cases did not, however, produce consistent principles that fixed ascertainable limits on the reserved power. The Court reserved to itself the final power to decide when it will enforce constitutional limitations on the reserved police power. Today the Court speaks of "the reserved powers doctrine" without making the "formalistic distinction" between powers that are reserved and those that are inalienable. Home Building and Loan Association v. Blaisdell (1934) obliterated a distinction between the reserved police power and the inalienable police power.

Leonard W. Levy


Wright, Benjamin F. 1938 The Contract Clause of the Constitution. Pages 195–213. Cambridge, Mass.: Harvard University Press.