ArtI.S10.C1.6.3 Evolution of Contract Clause's Use

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

During the 1800s, the Supreme Court often relied on the Contract Clause to strike down as unconstitutional state legislation that interfered with existing contract rights. In fact, the Court relied on the Contract Clause in one of the earliest cases in which it determined that a state law violated the Constitution: its 1810 decision in Fletcher v. Peck.1 In that case, the Court interpreted the Contract Clause to protect public contracts (i.e., those involving a state as a party to an agreement with one or more private entities) in addition to private agreements.2 The Court determined that a state could not breach its own contracts with private parties by revoking a grant of real estate.3 Almost a decade later, the Court held in Trustees of Dartmouth College v. Woodward that the Contract Clause barred a state from enacting legislation that substantially interfered with a private corporate charter established under state law.4 And with respect to contracts between private parties, in the 1819 decision, Sturges v. Crowninshield, the Court held that a bankruptcy law allowing insolvent debtors to obtain the discharge of their debts by surrendering their property violated the Contract Clause.5 But even during the early years of the Republic, the Court recognized that states retained some power to regulate contracts in order to further the public interest.6

The Supreme Court’s view of the Contract Clause changed significantly during the New Deal Era when the Court decided Home Building & Loan Ass’n v. Blaisdell, a case in which the Court declined to enforce strictly the Contract Clause’s prohibition on state legislation that altered private contracts.7 During the depths of the Great Depression, the Court upheld the constitutionality of the Minnesota Mortgage Moratorium Law, which allowed courts to extend temporarily the period of time during which a mortgagor (e.g., a homeowner) could redeem a home after the bank foreclosed on the property.8 Although the Minnesota law prevented the mortgagee from obtaining actual possession, the Court upheld the law as necessary and reasonable to address the economic crisis because it was appropriately tailored to address the emergency and was limited in duration.9 The Court determined that a state had the power to regulate existing contracts to “safeguard the vital interests of its people” 10 as an exercise of its sovereignty.11

The Supreme Court’s decision in Blaisdell marked a turning point in its Contract Clause jurisprudence, signaling that the Court would thereafter be more solicitous of states’ use of their police powers to regulate contracts to “protect the lives, health, morals, comfort and general welfare of the people,” 12 even when the exercise of such powers would substantially impact contract rights. Since Blaisdell, the Court has permitted states to alter contract rights legislatively to serve a legitimate public interest.13 But the Court has indicated that the Contract Clause still provides some protection for contracts.14 For example, in a 1978 case, the Court closely scrutinized state legislation affecting public contracts and held that the Contract Clause prohibited a state from breaching a legislative covenant it made with private bondholders.15 In the context of private contracts, although the Court continues to defer to the judgment of a state’s legislature when weighing the impairment of private contracts against the public purposes that allegedly motivated the challenged legislation’s enactment, the Court has held that the Clause prohibits a state from enacting legislation that regulates private contracts by imposing a substantial new and retroactive payment obligation on a narrow class of companies.16

10 U.S. (6 Cranch) 87, 127 (1810). back
Id. at 139. back
Id. back
Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (4 Wheat.) 518, 627, 644–45 (1819). back
Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 197, 208, 212 (1819). The Supreme Court’s early interpretations of the Contract Clause often drew a distinction between permissible state legislation that retroactively altered private contractual remedies and often forbidden state legislation that modified contractual obligations. See U.S. Trust Co. v. New Jersey, 431 U.S. 1, 19 n.17 (1977) (discussing early cases). For example, a state law that prohibited the imprisonment of debtors did not contravene the Contract Clause because it removed a remedy rather than modifying a contract’s terms. Id.; see also Sturges, 17 U.S. (4 Wheat.) at 200 ( “Without impairing the obligation of the contract, the remedy may certainly be modified as the wisdom of the nation shall direct.” ). However, the Court later rejected this distinction between contractual remedies and obligations, determining that even altering a contract’s obligations retroactively may not contravene the Contract Clause in some circumstances. See Bronson v. Kinzie, 42 U.S. 311, 317 (1843) ( “It is difficult, perhaps, to draw a line that would be applicable in all cases between legitimate alterations of the remedy and provisions which, in the form of remedy, impair the right. But it is manifest that the obligation of the contract, and the rights of a party under it, may, in effect, be destroyed by denying a remedy altogether; or may be seriously impaired by burdening the proceedings with new conditions and restrictions, so as to make the remedy hardly worth pursuing.” ); see also U.S. Trust Co., 431 U.S. at 19 n.17 ( “More recent decisions have not relied on the remedy/obligation distinction, primarily because it is now recognized that obligations as well as remedies may be modified without necessarily violating the Contract Clause.” ). back
See W. River Bridge Co. v. Dix, 47 U.S. (6 How.) 507, 535 (1848) (discussing a state’s exercise of its eminent domain power). back
See 290 U.S. 398, 442–43, 444–48 (1934). back
See id. at 415–18, 447. This right ran contrary to existing contracts, which granted the lender the right to foreclose. See id. at 424–25. back
See id. at 424–25, 444–48. back
Id. at 434–35. back
See id. ( “Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order.” ). back
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 241 (1978) (quoting Manigault v. Springs, 199 U.S. 473, 480 (1905)). back
See, e.g., Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 474–78, 506 (1987); Exxon Corp. v. Eagerton, 462 U.S. 176, 178–79, 196 (1983). back
See Allied Structural Steel Co. v. Spannaus, 438 U.S. at 242 (1978) ( “If the Contract Clause is to retain any meaning at all, however, it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power.” ). back
See U.S. Trust Co., 431 U.S. at 23–28, 32 ( “If a State could reduce its financial obligations [by breaching a legislative covenant to protect private bondholders] whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.” ). back
See Spannaus, 438 U.S. at 247–50. back