CRS Annotated Constitution
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For the first and only time, a majority of the Court abandoned the Chief Justice’s leadership. Speaking by Justice Washington, it held that the obligation of private contracts is derived from the municipal law—state statutes and judicial decisions—and that the inhibition of Article I, Sec. 10, is confined to legislative acts made after the contracts affected by them, subject to the following exception. By a curiously complicated line of reasoning, it was also held in the same case that when the creditor is a nonresident, then a State by an insolvency law may not alter the former’s rights under a contract, albeit one of later date.
With the proposition established that the obligation of a private contract comes from the municipal law in existence when the contract is made, a further question presents itself, namely, what part of the municipal law is referred to? No doubt, the law which determines the validity of the contract itself is a part of such law. Also part of such law is the law which interprets the terms used in the contract, or which supplies certain terms when others are used, as for instance, constitutional provisions or statutes which determine what is “legal tender” for the payment of debts, or judicial decisions which construe the term “for value received” as used in a promissory note, and so on. In short, any law which at the time of the making of a contract goes to measure the rights and duties of the parties to it in relation to each other enters into its obligation.
Remedy a Part of the Private Obligation.—Suppose, however, that one of the parties to a contract fails to live up to his obligation as thus determined. The contract itself may now be regarded as at an end, but the injured party, nevertheless, has a new set of rights in its stead, those which are furnished him by the remedial law, including the law of procedure. In the case of a mortgage, he may foreclose; in the case of a promissory note, he may sue; and in certain cases, he may demand specific performance. Hence the further question arises, whether this remedial law is to be considered a part of the law supplying the obligation of contracts. Origi[p.390]nally, the predominating opinion was negative, since as we have just seen, this law does not really come into operation until the contract has been broken. Yet it is obvious that the sanction which this law lends to contracts is extremely important—indeed, indispensable. In due course it became the accepted doctrine that that part of the law which supplies one party to a contract with a remedy if the other party does not live up to his agreement, as authoritatively interpreted, entered into the “obligation of contracts” in the constitutional sense of this term, and so might not be altered to the material weakening of existing contracts. In the Court’s own words: “Nothing can be more material to the obligation than the means of enforcement. Without the remedy the contract may, indeed, in the sense of the law, be said not to exist, and its obligation to fall within the class of those moral and social duties which depend for their fulfillment wholly upon the will of the individual. The ideas of validity and remedy are inseparable . . .”1955
This rule was first definitely announced in 1843 in the case of Bronson v. Kinzie.1956 Here, an Illinois mortgage giving the mortgagee an unrestricted power of sale in case of the mortgagor’s default was involved, along with a later act of the legislature that required mortgaged premises to be sold for not less than two–thirds of the appraised value and allowed the mortgagor a year after the sale to redeem them. It was held that the statute, in altering the preexisting remedies to such an extent, violated the constitutional prohibition and hence was void. The year following a like ruling was made in the case of McCracken v. Hayward,1957 as to a statutory provision that personal property should not be sold under execution for less than two–thirds of its appraised value.
But the rule illustrated by these cases does not signify that a State may make no changes in its remedial or procedural law that affect existing contracts. “Provided,” the Court has said, “a substantial or efficacious remedy remains or is given, by means of which a party can enforce his rights under the contract, the Legislature may modify or change existing remedies or prescribe new modes of procedure.”1958 Thus, States are constantly remodelling their judicial systems and modes of practice unembarrassed by the obligation of contracts clause.1959 The right of a State to abolish[p.391]imprisonment for debt was early asserted.1960 Again, the right of a State to shorten the time for the bringing of actions has been affirmed even as to existing causes of action, but with the proviso added that a reasonable time must be left for the bringing of such actions.1961 On the other hand, a statute which withdrew the judicial power to enforce satisfaction of a certain class of judgments by mandamus was held invalid.1962 In the words of the Court: “Every case must be determined upon its own circumstances;”1963 and it later added: “In all such cases the question becomes . . . one of reasonableness, and of that the legislature is primarily the judge.”1964
There is one class of cases resulting from the doctrine that the law of remedy constitutes a part of the obligation of a contract to which a special word is due. This comprises cases in which the contracts involved were municipal bonds. While a city is from one point of view but an emanation from the government’s sovereignty and an agent thereof, when it borrows money it is held to be acting in a corporate or private capacity and so to be suable on its contracts. Furthermore, as was held in the leading case of United States ex rel. Von Hoffman v. Quincy,1965 “where a State has authorized a municipal corporation to contract and to exercise the[p.392]power of local taxation to the extent necessary to meet its engagements, the power thus given cannot be withdrawn until the contract is satisfied.” In this case, the Court issued a mandamus compelling the city officials to levy taxes for the satisfaction of a judgment on its bonds in accordance with the law as it stood when the bonds were issued.1966 Nor may a State by dividing an indebted municipality among others enable it to escape its obligations. The debt follows the territory, and the duty of assessing and collecting taxes to satisfy it devolves upon the succeeding corporations and their officers.1967 But where a municipal organization has ceased practically to exist through the vacation of its offices, and the government’s function is exercised once more by the State directly, the Court has thus far found itself powerless to frustrate a program of repudiation.1968 However, there is no reason why the State should enact the role of particeps criminis in an attempt to relieve its municipalities of the obligation to meet their honest debts. Thus, in 1931, during the Great Depression, New Jersey created a Municipal Finance Commission with power to assume control over its insolvent municipalities. To the complaint of certain bondholders that this legislation impaired the contract obligations of their debtors, the Court, speaking by Justice Frankfurter, pointed out that the practical value of an unsecured claim against a city is “the effectiveness of the city’s taxing power,” which the legislation under review was designed to conserve.1969
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