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CRS Annotated Constitution

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“Contracts” Include Public Contracts and Corporate Charters.— The question, which was settled very early, was whether the clause was intended to be applied solely in protection of private contracts or in the protection also of public grants, or, more broadly, in protection of public contracts, in short, those to which a State is a party.1889 Support for the affirmative answer accorded this question could be derived from the following sources. For one thing, the clause departed from the comparable provision in the Northwest Ordinance (1787) in two respects: first, in the presence of the word “obligation;” secondly, in the absence of the word “private.” There is good reason for believing that Wilson may have been responsible for both alterations, inasmuch as two years earlier he had denounced a current proposal to repeal the Bank of North America’s Pennsylvania charter in the following words: “If the act for incorporating the subscribers to the Bank of North America shall be repealed in this manner, every precedent will be established for repealing, in the same manner, every other legisla[p.375]tive charter in Pennsylvania. A pretence, as specious as any that can be alleged on this occasion, will never be wanting on any future occasion. Those acts of the state, which have hitherto been considered as the sure anchors of privilege and of property, will become the sport of every varying gust of politicks, and will float wildly backwards and forwards on the irregular and impetuous tides of party and faction.”1890

Furthermore, in its first important constitutional case, that of Chisholm v. Georgia,1891 the Court ruled that its original jurisdiction extended to an action in assumpsit brought by a citizen of South Carolina against the State of Georgia. This construction of the federal judicial power was, to be sure, promptly repealed by the Eleventh Amendment, but without affecting the implication that the contracts protected by the Constitution included public contracts.

One important source of this diversity of opinion is to be found in that ever welling spring of constitutional doctrine in early days, the prevalence of natural law notions and the resulting vague significance of the term “law.” In Sturges v. Crowninshield, Marshall defined the obligation of contracts as “the law which binds the parties to perform their undertaking.” Whence, however, comes this law? If it comes from the State alone, which Marshall was later to deny even as to private contracts,1892 then it is hardly possible to hold that the States’ own contracts are covered by the clause, which manifestly does not create an obligation for contracts but only protects such obligation as already exists. But, if, on the other hand, the law furnishing the obligation of contracts comprises Natural Law and kindred principles, as well as law which springs from state authority, then, inasmuch as the State itself is presumably bound by such principles, the State’s own obligations, so far as harmonious with them, are covered by the clause.

Fletcher v. Peck,1893 has the double claim to fame in that it was the first case in which the Supreme Court held a state enactment to be in conflict with the Constitution, and also the first case to hold that the contracts clause protected public grants. By an act passed on January 7, 1795, the Georgia Legislature directed the sale to four land companies of public lands comprising most of what are now the States of Alabama and Mississippi. As soon became known, the passage of the measure had been secured by open and wholesale bribery. So when a new legislature took over in the[p.376]winter of 1795–1796, almost its first act was to revoke the sale made the previous year.

Meantime, however, the land companies had disposed of several millions of acres of their holdings to speculators and prospective settlers, and following the rescinding act some of these took counsel with Alexander Hamilton as to their rights. In an opinion which was undoubtedly known to the Court when it decided Fletcher v. Peck, Hamilton characterized the repeal as contravening “the first principles of natural justice and social policy,” especially so far as it was made “to the prejudice . . . of third persons . . . innocent of the alleged fraud or corruption; . . . moreover,” he added, “the Constitution of the United States, article first, section tenth, declares that no State shall pass a law impairing the obligations of contract. This must be equivalent to saying no State shall pass a law revoking, invalidating, or altering a contract. Every grant from one to another, whether the grantor be a State or an individual, is virtually a contract that the grantee shall hold and enjoy the thing granted against the grantor, and his representatives. It, therefore, appears to me that taking the terms of the Constitution in their large sense, and giving them effect according to the general spirit and policy of the provisions, the revocation of the grant by the act of the legislature of Georgia may justly be considered as contrary to the Constitution of the United States, and, therefore null. And that the courts of the United States, in cases within their jurisdiction, will be likely to pronounce it so.”1894 In the debate to which the “Yazoo Land Frauds,” as they were contemporaneously known, gave rise in Congress, Hamilton’s views were quoted frequently.

So far as it invoked the obligation of contracts clause, Marshall’s opinion in Fletcher v. Peck performed two creative acts. He recognized that an obligatory contract was one still to be performed—in other words, was an executory contract, also that a grant of land was an executed contract—a conveyance. But, he asserted, every grant is attended by “an implied contract” on the part of the grantor not to claim again the thing granted. Thus, grants are brought within the category of contracts having continuing obligation and so within Article I, Sec. 10. But the question still remained of the nature of this obligation. Marshall’s answer to this can only be inferred from his statement at the end of his opinion. The State of Georgia, he says, “was restrained” from the passing of the rescinding act “either by general principles which are common to our[p.377]free institutions, or by particular provisions of the Constitution of the United States.”1895

The protection thus thrown about land grants was presently extended, in the case of New Jersey v. Wilson,1896 to a grant of immunity from taxation that the State of New Jersey had accorded certain Indian lands, and several years after that, in the Dartmouth College case,1897 to the charter privileges of an eleemosynary corporation.

In City of El Paso v. Simmons,1898 the Court held, over a vigorous dissent by Justice Black, that Texas had not violated this clause when it amended its laws governing the sale of public lands so as to restrict the previously unlimited right of a delinquent to reinstate himself upon forfeited land by a single payment of all past interest due.

Corporate Charters: Different Ways of Regarding.—There are three ways in which the charter of a corporation may be regarded. In the first place, it may be thought of simply as a license terminable at will by the State, like a liquor–seller’s license or an auctioneer’s license, but affording the incorporators, so long as it remains in force, the privileges and advantages of doing business in the form of a corporation. Nowadays, indeed, when corporate charters are usually issued to all legally qualified applicants by an administrative officer who acts under a general statute, this would probably seem to be the natural way of regarding them were it not for the Dartmouth College decision. But, in 1819, charters were granted directly by the state legislatures in the form of special acts and there were very few profit– taking corporations in the country. The later extension of the benefits of the Dartmouth College decision to corporations organized under general law took place without discussion.

Secondly, a corporate charter may be regarded as a franchise constituting a vested or property interest in the hands of the holders, and therefore as forfeitable only for abuse or in accordance with its own terms. This is the way in which some of the early[p.378]state courts did regard them at the outset.1899 It is also the way in which Blackstone regarded them in relation to the royal prerogative, although not in relation to the sovereignty of Parliament, and the same point of view found expression in Story’s concurring opinion in Dartmouth College v. Woodward, as it did also in Webster’s argument in that case.1900

The third view is the one formulated by Chief Justice Marshall in his controlling opinion in Dartmouth College v. Woodward.1901 This is that the charter of Dartmouth College, a purely private institution, was the outcome and partial record of a contract between the donors of the college, on the one hand, and the British Crown, on the other, and the contract still continued in force between the State of New Hampshire, as the successor to the Crown and Government of Great Britain, and the trustees, as successors to the donors. The charter, in other words, was not simply a grant—rather it was the documentary record of a still existent agreement between still existent parties.1902 Taking this view, which he developed with great ingenuity and persuasiveness, Marshall was able to appeal to the obligation of contracts clause directly, and without further use of his fiction in Fletcher v. Peck of an executory contract accompanying the grant.

A difficulty still remained, however, in the requirement that a contract, before it can have obligation, must import consideration, that is to say, must be shown not to have been entirely gratuitous on either side. Moreover, the consideration, which induced the Crown to grant a charter to Dartmouth College, was not merely a speculative one. It consisted of the donations of the donors to the important public interest of education. Fortunately or unfortunately, in dealing with this phase of the case, Marshall used more sweeping terms than were needed. “The objects for which a corporation is created,” he wrote, “are universally such as the government wishes to promote. They are deemed beneficial to the country; and this benefit constitutes the consideration, and in most cases,[p.379]the sole consideration of the grant.” In other words, the simple fact of the charter having been granted imports consideration from the point of view of the State.1903 With this doctrine before it, the Court in Providence Bank v. Billings,1904 and again in Charles River Bridge v. Warren Bridge,1905 admitted, without discussion of the point, the applicability of the Dartmouth College decision to purely business concerns.


Footnotes

1889 According to Benjamin F. Wright, throughout the first century of government under the Constitution “the contract clause had been considered in almost forty per cent of all cases involving the validity of State legislation,” and of these the vast proportion involved legislative grants of one type or other, the most important category being charters of incorporation. However, the numerical prominence of such grants in the cases does not overrate their relative importance from the point of view of public interest. B. Wright, The Contract Clause of the Constitution, (Boston: 1938), 95.
Madison explained the clause by allusion to what had occurred “in the internal administration of the States” in the years preceding the Constitutional Convention, in regard to private debts. Violations of contracts had become familiar in the form of depreciated paper made legal tender, of property substituted for money, of installment laws, and of the occlusions of the courts of justice. 3 M. Farrand, The Records of the Federal Convention of 1787 (New Haven: rev. ed. 1937), 548; The Federalist, No. 44 (J. Cooke ed. 1961), 301–302.
1890 2 The Works of James Wilson, R. McCloskey ed. (Cambridge: 1967), 834.
1891 2 Dall. (2 U.S.) 419 (1793).
1892 Ogden v. Saunders, 12 Wheat. (25 U.S.) 213, 338 (1827).
1893 6 Cr. (10 U.S.) 87 (1810).
1894 B. Wright, The Contract Clause of the Constitution (Boston: 1938), 22. Professor Wright dates Hamilton’s pamphlet, 1796.
1895 6 Cr. (10 U.S.) 87, 139 (1810). Justice Johnson, in his concurring opinion, relied exclusively on general principles. “I do not hesitate to declare, that a State does not possess the power of revoking its own grants. But I do it, on a general principle, on the reason and nature of things; a principle which will impose laws even on the Deity.” Id., 143.
1896 7 Cr. (11 U.S.) 164 (1812). The exemption from taxation which was involved in this case was held in 1886 to have lapsed through the acquiescence for sixty years by the owners of the lands in the imposition of taxes upon these. Given v. Wright, 117 U.S. 648 (1886).
1897 Dartmouth College v. Woodward, 4 Wheat. (17 U.S.) 518 (1819).
1898 379 U.S. 497 (1965). See also Thorpe v. Housing Authority of City of Durham, 393 U.S. 268, 278–279 (1969).
1899 In 1806 Chief Justice Parsons of the Supreme Judicial Court of Massachusetts, without mentioning the contracts clause, declared that rights legally vested in a corporation cannot be “controlled of destroyed by a subsequent statute, unless a power [for that purpose] be reserved to the legislature in the act of incorporation,” Wales v. Stetson, 2Mass.142 (1806). See also Stoughton v. Baker, 4Mass.521 (1808) to like effect; cf. Locke v. Dane, 9Mass.360 (1812) in which it is said that the purpose of the contracts clause was to provide against paper money and insolvent laws. Together these holdings add up to the conclusion that the reliance of the Massachusetts court was on “fundamental principles,” rather than the contracts clause.
1900 4 Wheat. (17 U.S.), 577–595 (Webster’s argument); id., 666 (Story’s opinion). See also Story’s opinion for the Court in Terrett v. Taylor, 9 Cr. (13 U.S.) 43 (1815).
1901 4 Wheat. (17 U.S.) 518 (1819).
1902 Id., 627.
1903 Id., 637; see also Home of the Friendless v. Rouse, 8 Wall. (75 U.S.) 430, 437 (1869).
1904 4 Pet. (29 U.S.) 514 (1830).
1905 11 Pet. (36 U.S.) 420 (1837).
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