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CRS Annotated Constitution

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Vested Rights Not Included.—The term “contracts” is used in the contracts clause in its popular sense of an agreement of minds. The clause therefore does not protect vested rights that are not referable to such an agreement between the State and an individual, such as the right of recovery under a judgment. The individual in question may have a case under the Fourteenth Amendment, but not one under Article I, Sec. 10.1866

Public Grants That Are Not “Contracts”.—Not all grants by a State constitute “contracts” within the sense of Article I, Sec. 10. In his Dartmouth College decision, Chief Justice Marshall conceded that “if the act of incorporation be a grant of political power, if it creates a civil institution, to be employed in the administration of the government . . . the subject is one in which the legislature of the State may act according to its own judgment,” unrestrained by the Constitution1867—thereby drawing a line between “public” and[p.371]“private” corporations that remained undisturbed for more than half a century.1868

It has been subsequently held many times that municipal corporations are mere instrumentalities of the State for the more convenient administration of local governments, whose powers may be enlarged, abridged, or entirely withdrawn at the pleasure of the legislature.1869 The same principle applies, moreover, to the property rights which the municipality derives either directly or indirectly from the State. This was first held as to the grant of a franchise to a municipality to operate a ferry and has since then been recognized as the universal rule.1870 It was stated in a case decided in 1923 that the distinction between the municipality as an agent of the State for governmental purposes and as an organization to care for local needs in a private or proprietary capacity, while it limited the legal liability of municipalities for the negligent acts or omissions of its officers or agents, did not, on the other hand, furnish ground for the application of constitutional restraints against the State in favor of its own municipalities.1871 Thus, no contract rights were impaired by a statute relocating a county seat, even though the former location was by law to be “permanent” and the citizens of the community had donated land and furnished bonds for the erection of public buildings.1872 Similarly, a statute changing the boundaries of a school district, giving to the new district the property within its limits that had belonged to the former district, and requiring the new district to assume the debts of the old district, did not impair the obligation of contracts.1873 Nor was the contracts clause violated by state legislation authorizing state control over insolvent communities through a Municipal Finance Commission.1874

On the same ground of public agency, neither appointment nor election to public office creates a contract in the sense of Article I,[p.372]Sec. 10, whether as to tenure, or salary, or duties, all of which remain, so far as the Constitution of the United States is concerned, subject to legislative modification or outright repeal.1875 Indeed, there can be no such thing in this country as property in office, although the common law sustained a different view that sometimes found reflection in early cases.1876 When, however, services have once been rendered, there arises an implied contract that they shall be compensated at the rate in force at the time they were rendered.1877 Also, an express contract between the State and an individual for the performance of specific services falls within the protection of the Constitution. Thus, a contract made by the governor pursuant to a statute authorizing the appointment of a commissioner to conduct, over a period of years, a geological, mineralogical, and agricultural survey of the State, for which a definite sum had been authorized, was held to have been impaired by repeal of the statute.1878 But a resolution of a local board of education reducing teachers’ salaries for the school year 1933–1934, pursuant to an act of the legislature authorizing such action, was held not to impair the contract of a teacher who, having served three years, was by earlier legislation exempt from having his salary reduced except for inefficiency or misconduct.1879 Similarly, it was held that an Illinois statute that reduced the annuity payable to retired teachers under an earlier act did not violate the contracts clause, since it had not been the intention of the earlier act to propose a contract but only to put into effect a general policy.1880 On the other hand, the right of one, who had become a ‘permanent teacher” under the Indiana Teachers Tenure Act of 1927, to continued employment was held to be contractual and to have been impaired by the repeal in 1933 of the earlier act.1881

Tax Exemptions: When Not “Contracts”.—From a different point of view, the Court has sought to distinguish between grants of privileges, whether to individuals or to corporations, which are contracts and those which are mere revocable licenses, although on[p.373]account of the doctrine of presumed consideration mentioned earlier, this has not always been easy to do. In pursuance of the precedent set in New Jersey v. Wilson,1882 the legislature of a State “may exempt particular parcels of property or the property of particular persons or corporations from taxation, either for a specified period or perpetually, or may limit the amount or rate of taxation, to which such property shall be subjected,” and such an exemption is frequently a contract within the sense of the Constitution. Indeed this is always so when the immunity is conferred upon a corporation by the clear terms of its charter.1883 When, on the other hand, an immunity of this sort springs from general law, its precise nature is more open to doubt, as a comparison of decisions will serve to illustrate.

In State Bank of Ohio v. Knoop,1884 a closely divided Court held that a general banking law of Ohio, which provided that companies complying therewith and their stockholders should be exempt from all but certain taxes, was, as to a bank organized under it and its stockholders, a contract within the meaning of Article I, Sec. 10. The provision was not, the Court said, “a legislative command nor a rule of taxation until changed, but a contract stipulating against any change, from the nature of the language used and the circumstances under which it was adopted.”1885 When, however, the State of Michigan pledged itself, by a general legislative act, not to tax any corporation, company, or individual undertaking to manufacture salt in the State from water there obtained by boring on property used for this purpose and, furthermore, to pay a bounty on the salt so manufactured, it was held not to have engaged itself within the constitutional sense. “General encouragements,” said the Court, “held out to all persons indiscriminately, to engage in a particular trade or manufacture, whether such encouragement be in the shape of bounties or drawbacks, or other advantage, are always under the legislative control, and may be discontinued at any time.”1886 So far as exemption from taxation is concerned the difference between these two cases is obviously slight, but the later[p.374]one is unquestionable authority for the proposition that legislative bounties are repealable at will.

Furthermore, exemptions from taxation have in certain cases been treated as gratuities repealable at will, even when conferred by specific legislative enactments. This would seem always to be the case when the beneficiaries were already in existence when the exemption was created and did nothing of a more positive nature to qualify for it than to continue in existence.1887 Yet the cases are not always easy to explain in relation to each other, except in light of the fact that the Court’s point of view has altered from time to time.1888


1866 Crane v. Hahlo, 258 U.S. 142, 145–146 (1922); Louisiana ex rel. Folsom v. Mayor of New Orleans, 109 U.S. 285, 288 (1883); Morley v. Lake Shore Railway Co., 146 U.S. 162, 169 (1892). That the obligation of contracts clause did not protect vested rights merely as such was stated by the Court as early as Satterlee v. Matthewson, 2 Pet. (27 U.S.) 380, 413 (1829); and again in Charles River Bridge v. Warren Bridge, 11 Pet. (36 U.S.) 420, 539–540 (1837).
1867 Dartmouth College v. Woodward, 4 Wheat. (17 U.S.) 518, 629 (1819).
1868 In Munn v. Illinois, 94 U.S. 113 (1877) a category of “business affected with a public interest” and whose property is “impressed with a public use” was recognized. A corporation engaged in such a business becomes a “quasi–public” corporation, the power of the State to regulate which is larger than in the case of a purely private corporation. Inasmuch as most corporations receiving public franchises are of this character, the final result of Munn was to enlarge the police power of the State in the case of the most important beneficiaries of the Dartmouth College decision.
1869 Meriwether v. Garrett, 102 U.S. 472 (1880); Covington v. Kentucky, 173 U.S. 231 (1899); Hunter v. Pittsburgh, 207 U.S. 161 (1907).
1870 East Hartford v. Hartford Bridge Co., 10 How. (51 U.S.) 511 (1851); Hunter v. Pittsburgh, 207 U.S. 161 (1907).
1871 City of Trenton v. New Jersey 262 U.S. 182, 191 (1923).
1872 Newton v. Commissioners, 100 U.S. 548 (1880).
1873 Michigan ex rel. Kies v. Lowrey, 199 U.S. 233 (1905).
1874 Faitoute Co. v. City of Asbury Park, 316 U.S. 502 (1942).
1875 Butler v. Pennsylvania, 10 How. (51 U.S.) 402 (1850); Fisk v. Jefferson Policy Jury, 116 U.S. 131 (1885); Dodge v. Board of Education, 302 U.S. 74 (1937); Mississippi ex rel. Robertson v. Miller, 276 U.S. 174 (1928).
1876 Butler v. Pennsylvania, 10 How. (51 U.S.) 420 (1850). Cf. Marbury v. Madison, 1 Cr. (5 U.S.) 137 (1803); Hoke v. Henderson, 154 N.C. (4 Dev.) 1 (1833). See also United States v. Fisher, 109 U.S. 143 (1883); United States v. Mitchell, 109 U.S. 146 (1883); Crenshaw v. United States, 134 U.S. 99 (1890).
1877 Fisk v. Jefferson Police Jury, 116 U.S. 131 (1885); Mississippi ex rel. Robertson v. Miller, 276 U.S. 174 (1928).
1878 Hall v. Wisconsin, 103 U.S. 5 (1880). Cf. Higginbotham v. City of Baton Rouge, 306 U.S. 535 (1930).
1879 Phelps v. Board of Education, 300 U.S. 319 (1937).
1880 Dodge v. Board of Education, 302 U.S. 74 (1937).
1881 Indiana ex rel. Anderson v. Brand, 303 U.S. 95 (1938).
1882 7 Cr. (11 U.S.) 164 (1812).
1883 The Delaware Railroad Tax, 18 Wall. (85 U.S.) 206, 225 (1874); Pacific Railroad Company v. Maguire, 20 Wall. (87 U.S.) 36, 43 (1874); Humphrey v. Pegues, 16 Wall. (83 U.S.) 244, 249 (1873); Home of the Friendless v. Rouse, 8 Wall. (75 U.S.) 430, 438 (1869).
1884 16 How. (57 U.S.) 369 (1854).
1885 Id., 382–383.
1886 Salt Company v. East Saginaw, 13 Wall. (80 U.S.) 373, 379 (1872). See also Welch v. Cook, 97 U.S. 541 (1879); Grand Lodge v. New Orleans, 166 U.S. 143 (1897); Wisconsin & Michigan Ry. Co. v. Powers, 191 U.S. 379 (1903). Cf. Ettor v. Tacoma, 228 U.S. 148 (1913), in which it was held that the repeal of a statute providing for consequential damages caused by changes of grades of streets could not constitutionally affect an already accrued right to compensation.
1887 See Rector of Christ Church, Phila. v. County of Philadelphia, 24 How. (65 U.S.) 300, 302 (1861); Seton Hall College v. South Orange, 242 U.S. 100 (1916).
1888 Compare the above cases with Home of the Friendless v. Rouse, 8 Wall. (75 U.S.) 430, 437 (1869); Illinois Central Railroad v. Decatur, 147 U.S. 190 (1893), with Wisconsin & Michigan Ry. Co. v. Powers, 191 U.S. 379 (1903).
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